European Monetary Integration and the Incompatibility of National Varieties of Capitalism

• Published in: Journal of common market studies 2016-03, Vol.54 (2), p.318-336
• Main Authors: Johnston, Alison, Regan, Aidan
• Format: Article
• Language: English
• Subjects: Accession; Analysis; Banking; Capitalism; Center and periphery; Central banks; Comparative political economy; Economic theory; European monetary union; eurozone crisis; Foreign exchange; Foreign exchange rates; Globalization; Growth models; growth regimes; Inflation; Literature; models of capitalism; Monetary unions; Money; Neoliberalism; Political integration; Studies
• ISSN: 0021-9886; 1468-5965
• DOI: 10.1111/jcms.12289

The Varieties of Capitalism literature offers two competing hypotheses on institutional resilience. One argues that globalization promotes convergence towards a neo‐liberal system. Another stipulates that diverse capitalist regimes promote different comparative advantages, enabling diverse political economies to co‐exist. In this article, we argue that the compatibility of diverse models of capitalism is contingent upon monetary regime. We examine how different currency regimes influence the mutual co‐existence of export‐led growth models (euro core) and domestic demand‐led growth models (euro periphery). Under EMU, we find that these two models have become increasing incompatible, as unsustainable divergences in external balances have emerged between them. We hypothesize that external imbalances between these two growth regimes did not emerge prior to EMU because of the presence of two inflation adjustment mechanisms in the real exchange rate; the nominal exchange rate (in soft currency regimes) and national central banks’ promotion of inflation convergence (in hard currency regimes).