Meeting the world’s demand for safe assets? Macroeconomic policy and the international status of the euro after the crisis

Abstract

In this article, I engage with the chartalist literature to explore the political foundations of international currencies. Drawing on this literature as well as on recent scholarship on the shortage of safe assets in the world economy, I challenge a prevailing premise of the International Political Economy literature that international currency status needs to be based on conservative macroeconomic policy institutions and practices, which is deemed necessary to maintain foreign confidence in the stability of the real value of the international currency. I contend that international currency status in the post-crisis world economy hinges on the willingness and capacity of the currency provider to adopt accommodating monetary and fiscal policies. First, the central bank needs to offer a backstop to the market for sovereign debt securities by acting as a lender of last resort to the government, whereas fiscal policy expansion is necessary to sufficiently expand the stock of the only securities that can assume the function of genuinely safe assets: sovereign debt. Second, expansionary monetary and fiscal policies enable the international currency issuer to supply safe assets to the rest of the world by running deficits on its trade balance. This article analyses how the European Central Bank's monetary policy decisions in the wake of the crisis ran against these two prerequisites, constraining the Eurozone to become a large net provider of safe assets in the world economy. By linking these decisions to the creditor and export interests of the Northern Eurozone countries, it disputes the European Central Bank's 'neutral stance' regarding the internationalization of the euro.

The three phases of financial power: Leverage, infrastructure, and enforcement

“…Among public issuers, the government is usually the largest. Sovereign debt issued by governments in the Global North has assumed a pivotal role in the global financial system, providing the "safe assets" without which collateralized shadow banking could not operate on the scale it has achieved (Boy, 2015;Gabor and Ban, 2016;Gabor and Vestergaard, 2018;Thiemann, 2018;Vermeiren, 2019). The political economy of sovereign debt plays out differently in the Global South (Deforge and Lemoine, 2021).…”

Governing through financial markets: Towards a critical political economy of Capital Markets Union

“…Studying the causes of the crisis, economists have highlighted the financial instabilities built into market-based forms of (shadow) banking as the decisive proximate cause of both the US subprime crisis and Europe’s bank and sovereign crises (Adrian and Shin, 2010; Brunnermeier, 2009; Gabor and Ban, 2016; Gorton and Metrick, 2012). Political economists have located the drivers of this pre-crisis rise of shadow banking in banks’ search for new profit sources, often in combination with regulatory arbitrage (Fernandez and Wigger, 2016; Goldstein and Fligstein, 2017; Thiemann, 2014; Thiemann and Lepoutre, 2017), as well as in institutional investors’ search for yield and demand for safe assets (Gabor 2016a; Lysandrou and Nesvetailova, 2015; Sweeney, 2017; Vermeiren, 2017). Given how much of the blame for the crisis fell on these new forms of financial intermediation, many observers expected a political shift away from financial innovation and shadow banking.…”

“…Third, the special issue adds fresh insights to the debate on the long-term trajectory of institutional changes in European finance and capitalism in general, and on the role of shadow banking in particular (Gabor 2016a; Gabor and Ban 2016; Jackson and Deeg, 2012; Macartney, 2011; Sweeney 2017; Vermeiren 2017). Recent research has highlighted the role of private actors as key drivers of these changes (Gabor 2016b; Hardie et al., 2013a: 697; Lysandrou and Nesvetailova, 2015).…”