Currency Without a Sovereign: On the Causes of the Euro Crisis and Its Overcoming

Abstract

I argue that each currency needs a sovereign for stabilizing financial markets and the real economy. Failing this, a currency union would sooner or later decay. Therefore, I explain the ongoing crisis of the Euro area by the lack of a sovereign. The theory of optimum currency does not equip us with sufficient knowledge for overcoming the crisis for it separates money and the state, and gives reason for such reforms like the Fiscal Compact, where fiscal operations ought to depend on assessments made by financial markets. I demonstrate that the implementation of this pact will lead to a deeper crisis of the Euro area and to a deeper split into creditor and debtor countries. I also argue in favor of transforming the currency union into a sovereign currency area, in which monetary and fiscal policies are effectively coordinated between the central bank and a central financial authority in the sense of the concept of functional finance.