A Macro-Financial Model of the Eurozone Architecture Embedded in the Global Offshore US-Dollar System

European Central Bank Headquarters, Frankfurt, Germany.

By Steffen Murau

It is a convention to say that the Eurozone architecture is ill-constructed and deficient. However, monetary architecture is not a well-defined term in monetary theory, and there is no consensus what the Eurozone architecture is beyond being a metaphor.

By combining insights from the research strand of (critical) macro-finance, this study from the Global Economic Governance Initiative at the Global Development Policy Center develops a comprehensive definition of monetary architecture in general and presents an inductive, institutionalist model of the Eurozone architecture in particular.

The model portrays two monetary jurisdictions—the US and the Eurozone—which have a hierarchical relationship. Each monetary jurisdiction is subdivided into four segments of central banks, commercial banks, non-bank financial institutions and a ‘fiscal ecosystem.’ Different institutions are located within these segments, represented as balance sheets. These have a hierarchical relationship with each other as well, and interlock through the instruments they hold as assets and liabilities. This adds up to a fully self-referential credit system. Each institution has its own respective elasticity space for balance sheet expansion that depends on available counter-parties, stipulations for allowed on-balance-sheet activities and available contingent assets and liabilities which are provided by higher-ranking institutions and only become real once a crisis hits. A monetary architecture is thus defined as a historically specific setup of segments, institutions, instruments and elasticity space within a monetary jurisdiction.

The model emphasizes the centrality of the TARGET2 system, shows how offshore US-Dollars are enmeshed in the Eurozone, and rejects the notion that a monetary architecture could ever ‘finished’. It will serve as a starting point for future descriptive and policy-oriented research.

This study is the first in a series focusing on the Offshore USD System. The second study was released in February 2021 and the final study will be published in Nov. 2021.

Read the Study