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International credit, financial integration and the euro

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  • Jan Toporowski

Abstract

Prospects for the European Monetary Union are inevitably affected by the theoretical presuppositions of the observer. The most common approach, the theory of optimal currency areas, postulates that traded goods are produced by labour and the exchange rate between 'national' currencies is the ratio of commodity wages, expressed in monetary units, in different countries. In this analysis the exchange rate and wages are substitutes for obtaining international 'competitiveness'. Such a view is the basis for current reflections about the future of the euro and the reduction of its difficulties to relative wages rates in different countries of the eurozone. The theory has two important limitations. First, it takes no account of the import intensity of exports, which would require wage adjustments to reinforce exchange rate adjustments, so that wages and exchange rates are necessarily complementary parameters, rather than being substitutes for each other. Hence, exit from the eurozone as a means of closing trade deficits would require additional austerity. Even more importantly, it is a commodity money theory, in which imbalances are accommodated by accumulations of specie or fiat money. However, in a credit economy, banking systems absorb trade imbalances into their balance sheets. Moreover, financial integration means that banking systems throughout Europe are vulnerable to balance sheet risks from exchange rate depreciation in any country in Europe. Copyright , Oxford University Press.

Suggested Citation

  • Jan Toporowski, 2013. "International credit, financial integration and the euro," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 37(3), pages 571-584.
  • Handle: RePEc:oup:cambje:v:37:y:2013:i:3:p:571-584
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    File URL: http://hdl.handle.net/10.1093/cje/bet008
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    1. Hyman P. Minsky, 1989. "Financial Structures: Indebtedness and Credit," Palgrave Macmillan Books, in: Alain Barrère (ed.), Money, Credit and Prices in Keynesian Perspective, chapter 3, pages 49-70, Palgrave Macmillan.
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    Cited by:

    1. Ignacio Ramirez Cisneros, 2020. "The odd fiscal ‘implicit bargain’ in the Eurozone. A continental view of sovereignty: List, Chartalism, and Keynes’ international economics," Working Papers PKWP2013, Post Keynesian Economics Society (PKES).
    2. Martin Watts & Timothy Sharpe & James Juniper, 2014. "Reformation or exodus: Assessing the future of the Euro," The Economic and Labour Relations Review, , vol. 25(3), pages 465-483, September.
    3. Giovanni Covi, 2021. "Trade imbalances within the Euro Area: two regions, two demand regimes," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 48(1), pages 181-221, February.
    4. Bill Lucarelli, 2017. "Intra-eurozone Payments Imbalances: Implications for the TARGET2 Payments System," Review of Radical Political Economics, Union for Radical Political Economics, vol. 49(3), pages 343-357, September.

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