Here’s an interesting recording of a public lecture at LSE by Peter Hall about the euro crisis from the perspective of the varieties-of-capitalism approach in political science.
Put simply, this approach states that in order to fully understand the functioning of a capitalist economy one has to look beyond the mere theory of market liberalism. The economy is not all about abstract technicalities of equilibria of supply and demand mediated by the price mechanism in free markets. Rather the whole institutional configuration, rooted in far-reaching historical developments, of any given society has to be part of the analysis.
So Hall identifies different types of economies within the European Monetary Union (EMU) which pursue different kinds of midterm growth strategies. The ‘northern’ types, exemplified by Germany, follow an export led strategy while the ‘southern’ types, exemplified by Spain, follow a (domestic) demand led strategy.
That it will be quite problematic to put those distinct economies under the umbrella of a single currency, because now they lack the former balancing mechanism of (national) currency appreciation/depreciation, is evident today in the midst of the euro crisis.
But the interesting question Hall asks is, why at all was the EMU created and why was it created in it’s particular form? The main interest of the states that established the EMU in the 1990s, Hall argues, was to escape the torturous process of coordinating the monetary mechanism that was in place at the time. Secondly, he thinks that it was not seen important for the design of the EMU to have some sort of coordinated midterm fiscal policy because the prevailing economic doctrine was dominated by rational expectations theory, which holds fiscal policy to only have negative effects anyway.
Today, the survival of the EMU will depend on the possibility to reach an agreement for the establishment of an institutional framework that could guarantee the coordination of such a midterm fiscal policy to bring about a certain economic balance again. However, Hall sees a bumpy road ahead, because there is no common diagnosis about what are the root causes of the euro crisis. Thus the prescription for a cure is different too.
I fear the German ‘doctor’ went on vacation (ie. election campaign trail) and will return not until September.