Cambridge Journal of Economics 2017, 41, 977–998 doi:10.1093/cje/bew065 Advance Access publication 31 January 2017 © The Author 2017. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved. Alternative interpretations of a stateless currency crisis Sergio Cesaratto* A number of economists warned that a political union was a prerequisite for a viable currency union. This paper disputes the feasibility of such a political union. A fully fedged federal union, which would likely please peripheral Europe, is impracticable since it implies a degree of fscal solidarity that does not exist. A Hayekian minimal federal state, which would appeal to core Europe, would be refused by peripheral members, since residual fscal sovereignty would be surrendered without any clear positive economic and social return. Even an intermediate solution based on coor- dinated Keynesian policies would be unfeasible, since it would be at odds with German ‘monetary mercantilism’. The euro area is thus trapped between equally unfeasible political perspectives. In this bleak context, austerity policies are mainly explained by the necessity to readdress the euro area balance-of-payments crisis. This crisis presents striking similarities to traditional fnancial crises in emerging economies associated with fxed exchange regimes. Therefore, the delayed response of the European Central Bank (ECB) to the sovereign debt crisis cannot be seen as the culprit of the euro area crisis. The ECB’s monetary refnancing mechanisms, Target 2 and the ECB’s belated Outright Monetary Transactions intervention impeded a blow-up of the currency union, but could not solve its deep causes. The current combination of austerity policies and moderate ECB intervention aims to rebalance intra-eurozone foreign accounts and to force competitive defation strategy. Key words: European crisis, Political and currency unions, ECB, Balance-of- payments crisis, Mercantilism JEL classifcations: E11, F33, N14 An economic transaction is a solved political problem. Economics has gained the title of queen of the social sciences by choosing solved political problems as its domain. (Lerner, 1972, p. 259) 1. Introduction A number of economists of different persuasions, including Nicholas Kaldor, Wynne Godley, Charles Goodhart and Martin Feldstein, warned that political and fscal union was a necessary premise for a viable monetary union. However, creation of the European Economic and Monetary Union (EMU) was actually infuenced, inter alia, by the then prevailing new classical macroeconomics (NCM) doctrine of the separation Manuscript received 19 July 2015; fnal version received 12 September 2016. Address for correspondence: Piazza San Francesco 7, 53100 Siena, Italy; email: Cesaratto@unisi.it * Università di Siena, Italy. Downloaded from https://academic.oup.com/cje/article/41/4/977/2964673 by guest on 04 May 2021