Balance of Payments or Monetary Sovereignty? In Search of the EMU’s Original Sin

In a recent paper, Marc Lavoie (2015) criticized my interpretation of the Eurozone (EZ) crisis as a balance of payments (BoP) problem. He identifies the original sin “in the setup and self-imposed constraints of the European Central Bank.” This is referred to here as the monetary sovereignty view, which belongs to a more general view that sees the source of EZ troubles in its imperfect institutional design. According to the (prevailing) BoP view, sustained in different ways by a variety of economists from the conservative Sinn to the progressive Frenkel, the original sin lies in the current account (CA) imbalances brought about by abandoning exchange rate adjustments and in inducing peripheral countries to become indebted with core countries. An increasing number of economists would add German neomercantilist policies as an exacerbating factor. While the BoP crisis is a fact, better institutional design would perhaps have avoided the worst aspects of the current crisis and permitted more effective action by the European Central Bank (ECB). Leaving aside the political infeasibility of a more progressive institutional setup, it is doubtful that this would fix the structural imbalances exacerbated by the euro. Be that as it may, one can of course blame the flawed institutional setup and the lack of ultimate action by the ECB for the crisis, as Lavoie seems to argue. Yet, since this institutional set up is absent, the EZ crisis manifests itself as a balance of payment crisis.