Work in Progress

The state as a financial actor is commonly imagined to be a unitary entity that interacts with the wider financial system via its core budget operated by the treasury that generates inflows via taxes and outflows through government spending. However, an emerging literature places increasing emphasis on off-balance-sheet fiscal agencies (OBFAs)—financial entities that are separate from the treasury but carry out activities on behalf of the state which could also run via the core budget while often receiving explicit or implicit fiscal backstops. This gives rise to a “fiscal ecosystem” of national and sub-national treasuries and OBFAs that is different in each country, historically specific, and inherently opaque. Fiscal ecosystems are subject to constant transformation that is driven by political, economic, and legal concerns, with ample path dependencies. In this article, we use Germany as a case study to develop a methodology that combines scholarship in law and political economy to categorise and empirically map its contemporary fiscal ecosystem. Throughout its turbulent history, Germany has developed a highly complex web of OBFAs across various layers of its federal system. Their number ranges in the tens of thousands. We place them in a coordinate system and depict their proximity or distance to the core budget by drawing on their legal status, revenue model, and characteristics of their issued debt (if there is any). Moreover, we carve out the conditions under which OBFAs are subject to Germany’s constitutional debt brake and the EU fiscal rules. If and how OBFAs are affected by debt brakes has been notoriously opaque but is a matter of great political salience since Germany’s constitutional court has objected in November 2023 to the financial treatment of special funds (Sondervermögen), which created a budgetary crisis and a spending freeze.

Co-authors:
Gregor Laudage, Global Climate Forum, Berlin
Armin Haas, Global Climate Forum, Berlin
Andrei Guter-Sandu, University of Bath

Download link:
OBFA-TRANSFORM Working Paper No. 1-EN
OBFA-TRANSFORM Working Paper No. 1-DE

The political science literature has long turned its attention to fiscal governance as a core site of political contestation. Typically conceived of as legislative bodies battling it out over the level and distribution of spending through annual, formalized budgetary processes, this view of fiscal governance places at its centre the core treasury balance sheet as the aggregation of the outcomes of these political compromises. However, fiscal policymakers (and other relevant political agents) face two main constraints to advancing their policy aims through traditional budgetary politics and, more specifically, the main treasury balance sheet. First, formal fiscal rules. Governments may self-inflict such rules in the name of fiscal discipline, aiming to tie not only their hands but also those of future generations of policymakers. Germany, the country on which we focus, has been particularly amenable to such restrictions, where fiscal rules play out both at the federal and European Union (EU) levels. Second, policymakers face political opposition, a core component of democratic policy processes, but one that can result in fiscal winners and losers and in more extreme forms, fiscal gridlock. These constraints have the impact of restricting the effective fiscal space that policymakers have available to pursue their objectives, incentivizing new forms of fiscal governance. These different forms of fiscal governance take place off the core treasury balance sheet, through vast and varied network of off-balance-sheet fiscal agencies (OBFAs). Despite their significance to fiscal governance, OBFAs have only gotten limited attention in the political science literature. In this article, we investigate the impact that OBFAs have on fiscal governance in the long run. Put differently, what effect does the proliferation and transformation of OBFAs have on not only current generations of fiscal policymakers but also future ones? To answer these questions, we turn to the historical institutionalist literature, which has long studied the ways in which political agents interact with the structures that constrain them over extended periods of time. Looking at the particular case of Germany, we argue that OBFAs offer a paradox for fiscal governance: on the one hand, they offer both short-term flexibility and crisis responsiveness, making them capacity-enhancing from the operational perspective of the fiscal ecosystem. However, on the other hand, these same innovations can be capacity-constraining from a system reform perspective, as escalating complexity leads to a new set of structural rigidities.

Presentation at the “Spring Meeting” at Hertie School of Governance in Berlin (04/2025).

Co-authors:
Monica DiLeo, Hertie School of Governance
Andrei Guter-Sandu, University of Bath
Armin Haas, Global Climate Forum

This article contrasts the Sovereign Currency View (SCV) and the Global Credit View (GCV) on the monetary system in International Political Economy (IPE) regarding four crucial assumptions: endogenous credit creation versus transaction costs and loanable funds; the co-evolution of public and private credit rather than metallism vs. chartalism; interlocked balance sheets in global finance rather than a ‘triple coincidence’; and a focus on gross flows rather than net flows in global payments. By mobilizing a 2×2 “Matrix of Monetary Thought,” we show that the SCV’s monetary theory of credit leaves critical issues about the global money and credit system unexplained compared to the GCV’s credit theory of money. Viewing the credit money system as subject to a co-evolution of public and private liabilities/assets in which a central public actor repeatedly validates excess private credit creation explains the hierarchical structure of national credit systems connected through interlocked balance sheets, and crisis dynamics within those systems. This approach reverses our understanding of the current account deficits and net foreign debt that SCV authors identify as fundamental problems for the dollar, or more precisely, for dollar-based credit systems backed by a hegemonic US state. These are features, not bugs, of credit systems, and help offset capitalism’s inherent deflationary tendencies. The GCV also helps unify academic analyses that suffer from the fallacy of composition, an excessively unit-level analytic framework, or incoherence in their theoretical premises.

Presentations at the symposium “The Political Economy of International Money” in Berlin (01/2024), a special issue workshop in Lillehammer (05/2024), and at the annual convention of the International Studies Association (ISA) in Chicago (03/2025).

Co-author:
Herman Mark Schwartz, University of Virginia

Download link
OBFA-TRANSFORM Working Paper No. 5-EN

The European Monetary Union (EMU) is often seen as an attempt to shield Europe from USD dominance. However, as BIS data shows, the USD’s volume and share in EMU cross-border payments has been constantly rising for 15 years. To explain this puzzle, we adopt the New European View and posit that the EMU has systematically incorporated the USD into its monetary architecture rather than competing with it. We trace the origins of this setup by investigating the evolution of institutions for clearing and settlement of cross-border payments in Europe. We find that the USD’s integral role results from a process of “subordinate financial integration” after 1945 when the European Payments Union connected non-convertible European currencies and defined them as promises to pay USD on the BIS balance sheet. After 1958, a parallel structure emerged: The “domestic currency channel” allowed making cross-border payments in European currencies but subject to exchange rate fluctuations; private agents organized first resort clearing, central banks provided last resort clearing via the BIS. In contrast, the “key currency channel” facilitated cross-border payment in USD deposits created offshore; clearing shifted from London to New York in the 1960s after setting up CHIPS. The 1999 EMU introduction boosted the “domestic currency channel” by providing an integrated payment system and eliminating exchange rate fluctuations, but the Eurocrisis reinvigorated the legacy structure of the “key currency channel”. Handsomely backstopped via Federal Reserve swap lines, the USD currently has a revival in the EMU as a feature, not a bug.

It is an established assessment that since the Eurocrisis, the Euro area banking system has been fragmented. Representing the Eurozone’s monetary architecture as a web of interlocking balance sheets, we carve out four different types of fragmentation that pertain to different parts of banks’ balance sheets and a different set of counterparties. The first type affects the size, scope, and business model of EA banks; the second the cross-border interbank lending among EA banks; the third the monetary policy transmission via EA banks; and the fourth the harmonization of public backstops for EA banks. We argue that the first two types of fragmentation can in principle be mitigated by using ‘offshore channels’ for cross-border banking activities. Euro area banks are not restricted to using EUR-denominated instruments inside the Eurozone monetary jurisdiction but may carry out cross-border activities in other units of account than the EUR (notably the USD) and in other booking locations (notably via their branches in the United Kingdom and the United States). Using data derived from the BIS’s international debt securities and locational banking statistics, we analyse whether the use of these offshore channels warrants a re-assessment of established findings on the fragmentation of the Euro area banking system.

Presentations at the workshop “Offshore Finance in International Political Economy” at Freie Universität Berlin (09/2023) and the workshop “Continuity and Transformation in the (Shadow) Banking System since the Global Financial Crisis” at the European University Institute (10/2023).

Co-author:
Torsten Ehlers, Bank for International Settlements

This study analyzes the Primary Dealer model for the issuance and distribution of sovereign debt as a distinctive feature of today’s international monetary system, the Offshore US-Dollar System. Primary dealers are a group of private banks who have an oligopoly for purchasing sovereign debt on the primary market. Hence, not only do they form a transmission belt between central banks and treasuries, but they also control the distribution of sovereign debt within and across monetary jurisdictions, which is particularly relevant for sovereign debt with safe asset status that is in high demand, such as US and German bills and bonds. We argue that the Primary Dealer model is a historically specific and idiosyncratic institutional solution that originated in the US and by now has been adopted with only limited variation by most monetary jurisdictions around the globe. Combining institutionalist, legal and quantitative analysis of sovereign bond issuance, this study presents an in-depth analysis of the triangular structure between primary dealers, treasuries and central banks that exists in four quintessential cases: the United States, the United Kingdom, Japan, as well as Germany and the Eurozone.

Co-author:
Will Bateman, Australian National University

The Eurocrisis was a make-it-or-break-it moment for the EMU with a profound impact on the transformation of the Eurozone architecture. However, its underlying macro-financial causes remain insufficiently understood. While dominant narratives emphasize excessive sovereign debt issuance, weaknesses of the Stability and Growth Pact, or lacking supranational supervision, they cannot convincingly explain how and why the US-centric run on shadow money spilled over to some EMU treasuries and disregard the critical role of EMU repo markets and the Eurosystem’s collateral framework. Drawing on the macro-financial model developed in Murau (2020), this paper analyses the crisis-driven transformation of the Eurozone architecture from the Global Financial Crisis to the Asset Purchase Programmes in 2014. We argue that the contagion dynamics across private and public balance sheets of the Eurozone and US monetary architectures should be understood as “endogenous forces” that critically determined the EMU’s transformation towards its contemporary shape. We operationalize it with a novel methodology that combines structured process-tracing with balance sheet visualization of crisis dynamics. Drawing on primary and secondary sources as well as private and public sector data, we apply an analytical scheme that starts with on-balance-sheet contractions, followed by the activation of inbuilt elasticity provision mechanisms; where these fail, innovation occurs which can materialize via enhanced elasticity space, new instruments, or even new institutions. As a result, we provide a novel perspective on the process of financial integration in the EMU and derive hypotheses for a theory on the endogeneity of crisis-driven change in modern monetary architectures.

Presentations at the symposium “Crises Capitalism. Shadow Banking, Central Banks, and New Configurations of State-Financial Market Entanglements” in Hannover (06/2023), the workshop “Money in Open Economies” at Leeds Business School (09/2023), and at the Annual Conference of the Political Economy Section of the German Association for Political Science (09/2023).

Co-authors:
Alexandru-Stefan Goghie, Freie Universität Berlin
Matteo Giordano, School of Oriental and African Studies (SOAS)
Friederike Reimer, Global Climate Forum

This report studies the transformation of South Africa’s monetary architecture—understood as a complex web of balance sheets that interlock via different credit instruments—from 1983 to 2024. The purpose of this investigation is to provide a new conceptual lens to investigate two large paradoxes that shape the macro-financial the post-Apartheid state: First, why is there persistent poverty and inequality in South Africa despite continuous attempts to change course since the end of Apartheid? And second, why is there persistent underinvestment and lack of infrastructure development during the post-Apartheid era despite phases of economic growth, credit expansion and financial development?

To explore these questions, we compile four idealized ‘maps’ of South Africa’s monetary architecture at four historical points in time—during Apartheid in 1983, after the original post-Apartheid settlement in 1996, after the banking crisis  in 2014, and after the COVID-19 pandemic in 2024—and investigate the political-economic dynamics in between those moments. Our purpose is to get a sense of the specific ‘balance sheet configurations’ that characterized these different moments. This helps us unveil how the contemporary monetary architecture is still shaped by macro-financial path dependencies that persist despite the ‘Dawn of Democracy’ in 1994.

The report has been written with the help of a group of distinguished financial experts who have delivered working papers or given interviews. This has provided the basis to piece together the first systemic picture of the macro-financial dynamics that South Africa has been subject to. The approach involved piecing together—at a certain level of abstraction and with unavoidable simplification and idealization—how various balance sheets (and balance sheet categories—interconnect. To this end, we look at different classes of households (non-banked poor, banked poor, middle class, and elite), firms (small informal enterprises, small and medium formal enterprises, and different types of large firms), state-owned enterprises, banks, development finance institutions, pension funds, unit trusts and other shadow banks, the South African reserve bank, as well as the National Treasury.

We conclude that to alleviate poverty and inequality while triggering investment into gross fixed capital formation for the Just and Sustainable Transition, it will be necessary to reconfigure South African balance sheets in a way that overcomes the path dependencies inherited from Apartheid. As the way forward, we recommend a new policy approach to govern the monetary architecture as a complex adaptive system. We propose to start a process of ‘balance sheet reconfiguration negotiations’ with various public, private, and hybrid actors involved to generate a policy agenda that helps including more household categories into web of interlocking balance sheets; support the development of job-creating small and medium-sized enterprises; think of ways how existing cash pools can channel their funds to support domestic gross fixed capital formation as it was the case prior to the era of neoliberal financial globalization; and look for ways how existing (or new!) domestic balance sheets can positioned in a way that allows them to create credit instruments in a way that is conducive to the Just and Sustainable Transition.

Co-author:
Mark Swilling, Stellenbosch University

It is an established narrative in the literature that the German Empire financed World War I through an extensive issuance of sovereign debt with support of the central bank, the Reichsbank. Indeed, the sovereign debt burden of the Reich and the states combined increased from around 5 billion marks in 1914 to approximately 156 billion marks in 1918 at the end of the war. Despite these staggering numbers, an understanding of war finance that merely focuses on the balance sheets of the treasury and the central bank cannot provide an accurate picture of how an initial expansion and funding of war-related debts was carried out in the German monetary architecture as it misses out on the paramount role that off-balance-sheet fiscal agencies played at the time. In this paper, we trace the activities of six types of OBFAs along three stages of the war finance operations: from the outbreak of the war in summer 1914 to spring 1915; from spring 1915 to spring 1916; and from spring 1916 to the end of the war in November 1918. First, the Darlehnskassen (Loan Societies) were sub-balance sheets of the Reichsbank that supported expansion of the war economy by issuing Darlehnskassenscheine as a parallel currency and acted as market-maker for sovereign debt. Second, the Seehandlung was Prussia’s state-bank that stimulated expansion and helped with funding throughout the war. Third, Kriegskreditbanken were financial institutions that played an important role in the expansion phase of the first two months of war. Fourth, Kriegsgesellschaften (War Societies)were private sector institutions that became increasingly entangled with the state during the war and operated at an accelerated pace in the third stage as the war economy increasingly faced shortages. A similar dynamic was exhibited, fifth, by state-owned enterprises. Finally, industrial associations played an important role in the governance of the German war economy. To carve out the role of OBFAs in the war finance activities, we reconstruct the monetary architecture of the German war economy and translate the activities of the treasury, the Reichsbank, and key OBFAs into flow charts that analytically distinguish between initial expansion and long-term funding.

Co-authors:
Armin Haas, Global Climate Forum
Andrei Guter-Sandu, University of Bath
Olan McEvoy, Global Climate Forum

While the concept of asset stranding has become a common place in the literature on the Green Transition, there is a lack of historical case studies that investigate at a large-scale level through which mechanisms asset stranding can actually manifest itself in real-world context and what the wider political-economics implications are. To remedy this gap, we interpret the Treaty of Versailles—concluded in June 1919 as the peace agreement for the First World War—as the ‘mother of all asset stranding’ in the 20^th century as they rendered the outstanding sovereign debts of the defeated German Empire impossible to be repaid. We adopt the ‘Monetary Architecture’ framework to trace how the contraction of the outstanding debt burden has been managed. To this end, we investigate three types of debt that according to our definition got stranded after the war: German war bonds, German reparation debt, and inter-allied war debts. We trace the ways and mechanisms how policymakers sought to maintain funding or bring about contraction of these financial instruments and derive implications for the literature on asset stranding in the context of the Green Transition.

Presentation at the “Spring Meeting” at Hertie School of Governance in Berlin (04/2025).

Co-authors:
Armin Haas, Global Climate Forum
Verena Gradinger, Global Climate Forum
Andrei Guter-Sandu, University of Bath

In the summer of 1931, Germany faced the nadir of the Great Depression. After the Machtergreifung of the Nazis in 1933, Hjalmar Schacht was appointed president of the Reichsbank and invented the “Mefo operation” to circumvent the Reichsbank’s legal constraints for credit expansion and finance German rearmament against the terms of the Treaty of Versailles. Mefo stands for “Metallurgische Forschungsgesellschaft”, a letterbox company set up by five German blue-chip companies and operated by staff from the Reichsbank and the military. Endowed with an equity of 1 million Reichsmark, Mefo was the debtor of commercial bills amounting to 12 billion Reichsmark. Despite its historical significance, the Mefo operation is still insufficiently theorised from a monetary theory perspective and is often explained away through the myth of “financial wizardry”. We approach the Mefo operation through the prism of the Monetary Architecture framework and perceive the Mefo company as an off-balance-sheet fiscal agency introduced to finance re-armament as a politically desired large-scale transformation of capital stock. We divide the Mefo operation into three distinct periods—the covert monetary financing stage (July 1933 to February 1936), the shadow money stage (February 1936 to March 1938), and the consolidation and war finance stage (April 1938 to May 1945)—and use balance sheet methodology to re-construct the underlying financial mechanics. On the one hand, we provide transactional balance sheets for an idealised depiction of flows and sketch stocks via snapshots of the monetary architecture as webs of interlocking balance sheets. On the other hand, we discuss how expansion, funding, backstopping, and contraction was planned ex ante and played out ex post. We find that against Schacht’s original plan, the Mefo bills ended up on the Reichsbank balance sheet where they were permanently funded until the collapse of German state structures in May 1945. We connect our balance sheet analysis to quantitative data of the Mefo company and the wider macro-financial environment in order to draw conclusions about the significance of the Mefo operation for the financial expansion after 1931.

Presentations at the workshop ‘Building a Dataset for the OBFA-TRANSFORM project’ at Global Climate Forum, Berlin (07/2023), the workshop ‘Creative Accounting to Finance the Transformation? Exploring the Mefo scheme’ at Forum New Economy, Berlin (03/2024), the annual convention of the German Keynes Gesellschaft in Chemnitz (03/2025), and the World Economic History Conference (WEHC) in Lund (08/2025).

Co-authors:
Armin Haas, Global Climate Forum, Berlin
Friederike Reimer, Global Climate Forum, Berlin
Andrei Guter-Sandu, University of Bath

Download link:
OBFA-TRANSFORM Working Paper No. 2-EN

This paper examines the UK’s Exchange Equalisation Account (EEA) as a foundational but overlooked case of sovereign financial engineering through an off-balance-sheet fiscal agency (OBFA). Established in 1932 following Britain’s abandonment of the gold standard, the EEA is a Treasury-controlled fund operated via the Bank of England, initially tasked with stabilising the external value of sterling through secret foreign exchange and gold market interventions. With the onset of the Second World War, its mandate expanded dramatically: the EEA absorbed the nation’s gold reserves, commandeered foreign securities, and underpinned Britain’s issuance of sterling-denominated liabilities to finance wartime imports and expenditures, all the while keeping these activities outside the official government balance sheet. Drawing on extensive archival sources and original time-series data, the paper situates the EEA within the Critical Macro-Finance (CMF) framework, which conceptualises the international monetary and financial system as a hierarchical web of interlocking balance sheets—shaped by political and institutional power—through which liquidity and credit are distributed and contested. From this perspective, the EEA operated as a critical sovereign liquidity facility, enabling Britain to fund large-scale war mobilisation without overtly breaching norms of fiscal orthodoxy or destabilising sterling’s international position. In doing so, it exemplifies how states deploy hidden financial infrastructures to manage monetary-fiscal boundaries and navigate systemic shocks. The analysis contributes to three debates central to contemporary political economy: the historical lineage of off-balance-sheet state interventions; the opacity and flexibility of wartime monetary architectures; and the evolution of sovereign balance sheet management under conditions of external constraint. By recovering the EEA’s wartime role, the paper sheds new light on the critical infrastructures underpinning sovereign financial resilience, a theme that resonates with today’s renewed reliance on unconventional fiscal mechanisms in the face of environmental and geopolitical crises.

Co-authors:
Andrei Guter-Sandu, University of Bath
Verena Gradinger, Global Climate Forum
Olan McEvoy, Global Climate Forum

Following the Second World War, the United Kingdom faced a reconstruction challenge of mammoth proportions – approximately 30% of its housing stock and much of its infrastructure was damaged or destroyed, its industries were unable to meet the demand of the domestic economy, and its national debt amounted to over two and a half years’ worth of economic output. While the conventional story of Britain’s post-war recovery rightly emphasises the ambitions of postwar planners to reconstruct British society through direct public investment, Keynesian demand management, and by building the welfare state, little attention has been paid to institutions operating outside of the state’s core budget, or off-balance sheet fiscal agencies (OBFAs). By utilising the Monetary Architecture framework – a political-economic lens which views the global economy as a web of hierarchically-ordered interlocking balance sheets – this paper uses archival sources and original time series data to explore how elasticity space in Britain’s fiscal and monetary ecosystem was created for developmental ends outside of the core balance sheets of the Treasury and the Bank of England. We focus on two policy areas where the state sought to spur development without adding additional pressure on its already stressed core state finances – industrial policy, with institutions such as the Industrial & Commercial Finance Corporation, and housing policy, with institutions such as New Town Development Corporations. Our contribution on the use of OBFAs in Britain’s post-war economy is relevant to three strands of literature: on the historical use of off-balance-sheet financing mechanisms; on the institutional evolution of economic governance in Britain during the 20th century; and, on how state-led development interacts with different macro-financial regimes.

Co-authors:
Olan McEvoy, Global Climate Forum
Moritz Kapff, Global Climate Forum
Andrei Guter-Sandu, University of Bath