Political Economy and the Constitution of Europe's Polity: Pathways for the common currency beyond ordo-liberal and neo-functionalist models

The Eurozone crisis has been variously described in financial or in fiscal terms, caused either by an over-leveraged banking system or by unsustainable budget deficits and national debt – or indeed both at once. But perhaps with the exception of Greece, neither holds true for individual euro-members or for the common currency area as a whole. The combined banking and sovereign debt crisis is symptomatic of a more fundamental set of structural problems such as trade imbalances, productivity differentials and the disconnection between financial flows and investment in productive activities that require a systemic analysis. By contrast with much of modern economics and political science that rest on rational choice and methodological individualism, this chapter seeks to develop an alternative political economy that can conceptualise the constitution of Europe’s polity – the complex economic, political and social space in which the Eurozone is inscribed. From this political economy perspective, I argue that the euro-area is characterised by the primacy of harmonisation over mutualisation – a legacy of the neo-functional model of integration and the ordo-liberal model of coordination, which privilege joint procedures and common rules rather than the sharing of risks, rewards and resources. Mutualisation – the search for cooperative arrangements based on a balance of interests – offers an as yet unrealised potential to transform the Eurozone in line with the constitution of Europe’s polity. The chapter charts a path beyond the current debate that portrays the European Monetary Union (EMU) either as a misconceived experiment which should be abandoned in favour of national currencies (e.g. Pissarides 2013; Flassbeck and Lapavitsas 2015a and 2015b), or as a project beset by design failures which require centralisation (e.g. Marsh 2013; Sinn 2014), or as an arrangement which can work better with a different policy mix (e.g. Sandbu 2015). My chapter runs as follows. First of a