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, Universität Göttingen
Armin Haas, Global Climate Forum, Berlin
Andrei Guter-Sandu, University of Bath

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OBFA-TRANSFORM Working Paper No. 1-EN
OBFA-TRANSFORM Working Paper No. 1-DE

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

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.

Presentations at the symposium “The Political Economy of International Money” in Berlin (01/2024) and a special issue workshop in Lillehammer (05/2024).

Co-author:
Torsten Ehlers, Bank for International Settlements and International Monetary Fund

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 and International Monetary Fund

Despite the paramount centrality of repurchase agreements (repos) in today’s market-based finance regime, both conceptual and empirical questions about European repo markets are insufficiently explored as contradictory legal and accounting treatments make their on-balance-sheet representation intricate. Drawing on the literature on monetary hierarchy, we make three connected conceptual arguments: First, we argue that the balance sheet mechanics of repos vary if the counterparties involved are on hierarchically different levels (“vertical repos”) or on the same hierarchical level (“horizontal repos”). While the vertical repo mechanism implies money creation, the horizontal repo mechanism only lends on pre-existing money. Second, we provide a coherent representation of the security posted as repo collateral, which—as to contemporary regulations—does not leave the balance sheet of the repo borrower but changes its status from being held outright to being “encumbered”. Third, we introduce an on-balance-sheet notation of the collateral framework as a means of the repo lender to alter the elasticity of the funding provided. Applying our methodology on two cases—vertical repos created by the Eurosystem for monetary policy implementation and horizontal repos used in the European interbank market—offers an innovative and consistent way to represent changes in the collateral frameworks that affect the elasticity space in the Euro area’s monetary architecture. Our analysis yields two main contributions: We offer an innovative understanding of different mechanisms for repo creation based on monetary hierarchy, and we put forth a data-driven empirical analysis of repos in Europe aimed at supporting our conceptual elaborations.

Presentations at the Third Money View Symposium (01/2023), the Financial Market Infrastructure workshop at Goethe Universität, Frankfurt am Main (06/2023), and the 26th Annual Conference of the Association for Heterodox Economics in Bristol (07/2024).

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

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SOAS Economics Working Paper 262

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

Internationalisation of the euro has for decades eluded EU policymakers. In this article, we develop a novel explanation of the subordinate position of the single currency. To this end, we build on the state of the art in International Political Economy (IPE) scholarship and develop a new conceptual framework for currency internationalisation. We argue that internationalising a currency requires actively fostering the offshore creation of private credit money denominated in the currency. By approaching internationalisation as an entirely market-driven process, EU policymakers have neglected offshore monetary governance. This has discouraged rather than incentivised the expansion of offshore euro creation and thereby undermined the objective of euro internationalisation. We use our conceptual framework to study the failure to recognize the importance of offshore euro creation in fostering cross-border value chains, the prohibitive provision of international lender of last resort facilities for offshore euros, as well as the undersupply of euro-denominated safe assets. Our new account of currency internationalisation emphasizes the crucial role of the state in successful internationalisation, in particular for fostering the offshore creation of private credit money denominated in its currency.

Presentations at the Annual Convention of the International Studies Association (ISA) in Montreal (03/2023), the Annual Conference of the Political Economy Section of the German Association for Political Science in Witten (09/2023), and the symposium ‘The Political Economy of International Money’ in Berlin (01/2024).

Co-author:
Jens van ‘t Klooster, University of Amsterdam

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OBFA-TRANSFORM Working Paper No. 4-EN

The Recovery and Resilience Facility (RRF), introduced as the EU’s main macro-financial response to the COVID-19 pandemic, is an off-balance-sheet fiscal agency (OBFA) that has been hailed as Europe’s Hamiltonian moment and raised great expectations for future fiscal integration. Building on the emerging Critical Macro-Finance literature, we scrutinise both the RRF and the debt instruments it issues. We find that its innovative legal construction yielded ‘Schrödinger’s OBFA’: The RRF has an ‘institutional ambiguity’ which places it simultaneously on and off the EU budget to mitigate the EU fiscal rules. Moreover, as it lacks ‘immortality’ due to its exceptional and temporary nature, it is alive and already dead from a financial market perspective. As Schrödinger’s OBFA, the RRF’s institutional status places inherent limitations to the EU’s ongoing process of incremental fiscal integration and make it incapable of issuing securities that could assume the status of European safe assets.

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

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OBFA-TRANSFORM Working Paper No. 3-EN

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

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OBFA-TRANSFORM Working Paper No. 2-EN

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