Whither European Economic Governance?

Abstract

This paper develops a new governance scheme for a stable and lasting European Monetary Union (EMU). I demonstrate that existing economic governance is based on flawed incentives especially due to insufficient macroeconomic coordination, failures of institutional enforcement and animal spirit in financial markets. All this caused the European sovereign debt crisis in 2010. Consequently, the EMU crisis is not a conundrum at all rather a failure of national and supranational governance. To tackle this problem, I propose a return to flexible but compulsory rules driven by market forces. The new governance principles shall promote the compliance and effective enforcement of rules.

Interdisciplinary Analysis of Luhmann’s Sociological Theory on the Euro-Crisis

“…Instead, markets overacted during turmoil due to faulty rules and incentives. The overreaction has also to do with animal spirits in financial markets (Herzog, 2013). The abrupt reversal during the euro crisis has produced a situation similar to a bank-run in the sovereign bond-markets.…”

“…Admittedly, a comprehensive economic analysis demonstrates that the euro crisis has several origins and is not just a simple debt crisis (Lane, 2012). There are multiple root causes and vulnerabilities, particularly the flawed European economic and fiscal governance (Herzog, 2013). However, as I establish in this paper, the euro crisis has a firm sociological underpinning at the same time.…”

“…Provided that policymakers are both unable and unwilling to establish either a political union or sufficient market forces in the near future, the EMU is doomed to fail. This demonstrates that the EMU is at a crossroads (Herzog, 2013). Herzog and Hengestermann (2013) demonstrate that the flawed macroeconomic structures and incentives are root causes of the euro crisis.…”

“…This mismatch is wellknown, however, not tackled in politics over the past nor will it be in the near future. Even in the past decade in the euro area -per definition a monetary union of highly integrated countries -you can observe how almost all political reforms conserve the national sovereignty instead of adapting it to a European or global communication system, especially in the fields of finance or public policy (Herzog, 2013).…”

A Behavioural Model of European Bond Markets

“…Thus, it result a demand shortage or a "liquidity aversion. " In this market environment investors start the search for safety [5]. Of course this is sometimes a gradual process and therefore animal spirits, the 3rd element in my model is important, too.…”