Hierarchical and Hybrid Money on a Fractured Continent: Europe’s Monetary Architecture after the Eurocrisis

• Applicant: Dr. Steffen Murau
• Subject Area: Political Science ; Economic Policy, Applied Economics ; Economic Theory
• Term: from 2018 to 2021
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 415922179

In my research, I work on the development of a political-economic theory of institutional change in monetary systems using the conceptual tools of the Money View—an emerging functionalist literature on modern credit money systems. This project will continue my work of applying the Money View to the transformation of the European Monetary Union’s (EMU) architecture. This will bring out the unique hierarchical and hybrid structure of public and private, national and supranational money creation of the existing monetary architecture. Using a case study-based institutionalist research design in collaboration with a group of international researchers, the project traces the transformation of the Euro, the European Central Bank (ECB) and the wider Eurozone financial system through the 2007-9 Global Financial Crisis and the 2009-12 Eurocrisis onto today’s monetary reality.In the original design of the EMU architecture, the ECB was issuing supranational high-powered money while money creation in the private banking and shadow banking systems remained predominantly national. In 2009, after a decade of smooth sailing, the Eurocrisis brought the EMU at the brink of collapse. The endogenous crisis dynamics and the ensuing political reforms led to profound changes of the way in which money creation takes place within the multilayered currency bloc: Private credit money creation by banks and shadow banks via deposits and repos was sharply reduced, but automatically compensated by new forms of public credit money creation in the form of TARGET2 balances. At the same time, various political reforms were implemented within the boundaries of the EU decision-making mechanisms between member states and EU institutions. The ECB—initially conceived of as a rule-based and politically constrained institution—came out of the crisis as the dominant player in the EMU’s equilibrium of forces, with high discretionary powers that it used to embark on new forms of public money creation via Quantitative Easing (QE).In consequence, today’s EMU’s architecture differs profoundly from the one that had been initially planned. Yet, it does not remotely correspond to the expected European "super state" with a full-fledged EU government, treasury and public debt that many of the original policy-makers had expected as the result of a quasi-teleological development. After the institutional transformation driven by crisis and political intervention, the EMU is an idiosyncratic beast in which public and private credit money creation is organized across various national and international layers in a historically unprecedented way that has not yet been systematically captured. This project sets out to fill this gap. It will analyze how the mechanisms of private and public money creation have changed during and after the Eurocrisis and have thus transformed the EMU architecture in general. Subsequently, it will develop a political-economic explanation to theorize on this process.

• DFG Programme: Research Fellowships
• International Connection: USA
• Host: Professor Dr. Perry Mehrling