It is a convention to say that the Eurozone architecture is ill-constructed and deficient. However, monetary architecture is not a well-defined term in monetary theory, and there is no consensus what the Eurozone architecture is beyond being a metaphor. By combining insights from the research strand of (critical) macro-finance, this GEGI Study develops a comprehensive definition of monetary architecture in general and presents an inductive, institutionalist model of the Eurozone architecture in particular.
The model portrays two monetary jurisdictions—the US and the Eurozone—which have a hierarchical relationship. Each monetary jurisdiction is subdivided into four segments of central banks, commercial banks, non-bank financial institutions and a ‘fiscal ecosystem’. Different institutions are located within these segments, represented as balance sheets. These have a hierarchical relationship with each other as well, and interlock through the instruments they hold as assets and liabilities. This adds up to a fully self-referential credit system. Each institution has its own respective elasticity space for balance sheet expansion that depends on available counterparties, stipulations for allowed on-balance-sheet activities and available contingent assets and liabilities which are provided by higher-ranking institutions and only become real once a crisis hits. A monetary architecture is thus defined a historically specific setup of segments, institutions, instruments and elasticity space within a monetary jurisdiction.
The model emphasizes the centrality of the TARGET2 system, shows how offshore US-Dollars are enmeshed in the Eurozone, and rejects the notion that a monetary architecture could ever be ‘finished’. It will serve as a starting point for future descriptive and policy-oriented research.
Presentations at Critical Macro Finance Workshop, London (09/2019), EAEPE conference, Warsaw (09/2019), Critical Macro Finance and the European Monetary Union Workshop, Boston (03/2020), the online conference ‘Crisis Capitalism. Shadow Banking, Central Banks, and New Configurations of State-Financial Market Entanglements’ (07/2020) and the Annual Conference of the European Banking Institute (EBI) Young Researchers Group (02/2021).
GEGI Study July 2020