¹ Mundell, Robert, ‘The Euro and the Stability of the International Monetary System’, in Mundell, Robert and Clesse, Armand (eds), The Euro as a Stabilizer in the International Economic System (Dordrecht: Kluwer Academic Publishers, 2000), p. 57CrossRefGoogle Scholar.

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³ Cohen, Benjamin J., ‘Global Currency Rivalry: Can the Euro Ever Challenge the Dollar’, Journal of Common Market Studies, 41:4 (2003), pp. 575–95CrossRefGoogle Scholar; for an overview, see Helleiner, Eric and Kirshner, Jonathan (eds), The Future of the Dollar (Ithaca: Cornell University Press, 2009)Google Scholar.

⁴ Andrews, David M. (ed.), International Monetary Power (Ithaca: Cornell University Press, 2006)Google Scholar.

⁵ Andrews, International Monetary Power. See also Bergsten, Fred C., Dilemma's of the Dollar: The Economics and Politics of the United States International Monetary Policy (New York: New York University Press, 1996)Google Scholar; Kaelberer, Matthias, ‘Structural Power and the Politics of International Monetary Relations’, The Journal of Social, Political, and Economical Studies, 30:3 (2005), pp. 333–59Google Scholar; Kirshner, Jonathan, Currency and Coercion: The Political Economy of International Monetary Power (Princeton: Princeton University Press, 1995)Google Scholar; Webb, International Policy Coordination.

⁶ Although the monetary power literature distinguishes the ‘power to delay’ from the ‘power to deflect’ and the ‘power to rearticulate’, it should be noted that the protection of macroeconomic autonomy is the key purpose all these different forms of monetary power. The power to deflect, for instance, reflects influence yet ultimately supports the capacity to avoid the burden of adjustment – therefore autonomy.

⁷ Kaelberer, Matthias, Money and Power in Europe: The Political Economy of European Monetary Cooperation (Albany: State University of New York Press, 2001)Google Scholar.

⁸ Although there has been extensive debate about the extent of German monetary dominance, most economists agree that the other EMS countries overall tended to adjust to German monetary policies and not vice versa. See, for instance, von Hagen, Jürgen and Frattiani, Michele, ‘German Dominance in the EMS: Evidence from Interest Rates’, Journal of International Money and Finance, 9:4 (1990), pp. 358–75CrossRefGoogle Scholar; Herz, Bernard and Roger, Werner, ‘The EMS Is a Greater Deutschmark Area’, European Economic Review, 36:7 (1992), pp. 1413–25CrossRefGoogle Scholar.

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¹⁰ Howarth, David, The French Road to European Monetary Union (Basingstoke: Palgrave MacMillan, 2001)CrossRefGoogle Scholar; Kaelberer, Money and Power.

¹¹ Webb, International Adjustment, p. 216.

¹² Henning, Randall, ‘Systemic Conflict and Regional Monetary Integration: The Case of Europe’, International Organization, 52:3 (1998), pp. 537–73CrossRefGoogle Scholar; Henning, Randall, ‘The Exchange-rate Weapon and Macroeconomic Conflict’, in Andrews (ed.), International Monetary Power, pp. 117–38Google Scholar; see also Helleiner, Eric, States and the Reemergence of Global Finance: From Bretton Woods to the 1990s (Ithaca: Cornell University Press, 1994)Google Scholar; and Webb, International Policy Coordination.

¹³ Leyshon, Andrew and Thrift, Nigel, ‘European Financial Integration: The Search for and “Island of Monetary Stability” in the Seas of Global Financial Turbulence’, in Hardy, S. (ed.), An Enlarged Europe: Regions in Competition? (London: Jessica Kingsley Publishers, 1995), pp. 109–44Google Scholar; see also Jabko, Nicholas, ‘The Hidden Face of the Euro’, Journal of European Public Policy, 17:3 (2010), pp. 317–33CrossRefGoogle Scholar.

¹⁴ This is illustrated by the fact that there are no IPE analyses examining the intra-regional distribution of monetary power among EMU member states after the introduction of the euro: only examinations of the implications of the euro for ‘European’ monetary power can be found. The argument that the euro has strengthened the ‘European monetary power’ was very recently defended by Strange, Gerard, ‘The Euro, EU Social Democracy, and International Monetary Power: A Critique of New Constitutionalism’, Globalizations, 9:2 (2012), pp. 257–72CrossRefGoogle Scholar.

¹⁵ Randall Henning, ‘Exchange Rate Weapon’.

¹⁶ Jones, Eric, ‘Liberalized Capital Markets, State Autonomy, and European Monetary Union’, European Journal of Political Research, 42:2 (2003), pp. 111–36CrossRefGoogle Scholar; see also Baines, Adam, ‘Capital Mobility and European Financial and Monetary Integration: A Structural Analysis’, Review of International Studies, 28:2 (2002), pp. 337–57CrossRefGoogle Scholar.

¹⁷ Hall, Peter and Soskice, David (eds), Varieties of Capitalism (Oxford: Oxford University Press, 2001)CrossRefGoogle Scholar; Hancké, Bob, Rhodes, Martik, and Thatcher, Mark (eds), Beyond Varieties of Capitalism: Conflict, Contradictions, and Complementarities in the European Economy (Oxford: Oxford university Press, 2007)CrossRefGoogle Scholar.

¹⁸ Amable, Bruno, The Diversity of Modern Capitalisms (Oxford: Oxford University Press, 2004)Google Scholar; Boyer, Robert and Saillard, Yves (eds), Regulation Theory: State of the Art (London: Routledge, 2002)Google Scholar; Boyer, Robert, ‘How and Why Capitalisms Differ’, Economy and Society, 34:4 (2005), pp. 509–57CrossRefGoogle Scholar.

¹⁹ Dyson, Kenneth, ‘Norman's Lament: The Greek and Euro Area Crisis in Historical Perspective’, New Political Economy, 15:4 (2010), pp. 597–608CrossRefGoogle Scholar. In a similar vein, Kaelberer argues that ‘strong currency countries are often in a superior bargaining position and, therefore, tend to yield stronger leverage over bargaining outcomes’. See Kaelberer, Money and Power.

²⁰ Cesaratto, Sergio and Stitarti, Antonella, ‘Germany and the European and Global Crisis’, International Journal of Political Economy, 39:4 (2010), p. 71CrossRefGoogle Scholar.

²¹ In Germany, the negotiation of a wage agreement in the leading sector – the metal industry – is then replicated by the social partners of the other industry sectors. On the German wage bargaining system, see Hall, Peter and Franzese, Robert, ‘Mixed Signals: Central Bank Independence, Coordinated Wage Bargainings and European Monetary Union’, International Organization, 52:3 (1998), pp. 505–35CrossRefGoogle Scholar; Soskice, David and Iversen, Torben, ‘Multiple Wage-Bargaining Systems in the European Single Currency Area’, Oxford Review of Economic Policy, 14:3 (1998)CrossRefGoogle Scholar.

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²³ See Hall and Soskice, Varieties of Capitalism, for a discussion.

²⁴ Bob Hancké, ‘Varieties of European Capitalism and their Transformation’, mimeo (2009), p. 7.

²⁵ Molina, Oscar and Rhodes, Martin, ‘The Political Economy of Adjustment in Mixed Market Economies: A Study of Spain and Italy’, in Hancké, Bob, Rhodes, Martin, and Thatcher, Mark (eds), Beyond Varieties of Capitalism: Conflict, Contradictions and Complementarities in the European Economy (Oxford: Oxford University Press, 2007), pp. 223–52CrossRefGoogle Scholar; Karamessini, Maria, ‘Still a Distinctive Southern European Employment Model?’, Industrial Relations Journal, 39:6 (2008), pp. 510–31CrossRefGoogle Scholar; Sebastian Royo, ‘Still Two Models of Capitalism? Economic Adjustment in Spain’, CES Working Paper No. 122 (2005).

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²⁸ For an analysis of the Dutch model of capitalism and its experience with the euro, see Paulette Kurzer, ‘The Dutch “Polder Model”: What Accounts for Its Surprising Resilience in the Wake of the Global Crisis?’, Paper presented at European Responses to Economic Crisis: Lessons for the US, Indiana University, Bloomington (7–8 April 2011).

²⁹ Respectively article 219(1) and 219(2) of the Lisbon Treaty.

³⁰ Salvatore, Dominique, ‘The Euro, the European Central Bank, and the International Monetary System’, Annals of the American Academy of Political and Social Science, 579 (2002), p. 160CrossRefGoogle Scholar.

³¹ Strange, ‘The Euro, EU Social Democracy, and International Monetary Power’, p. 264.

³² Kalthenthaler, Karl, ‘Managing the Euro: European Central Bank Exchange-rate Preferences’, European Union Politics, 4:3 (2003), pp. 329–49CrossRefGoogle Scholar; Kalthenthaler, Karl, Policymaking in the European Central Bank: The Masters of Europe's Money (Plymouth: Rowman & Littlefield Publishers, 2006), pp. 123–46Google Scholar; see also Taylor, Christopher, ‘An Exchange Rate Regime for the Euro’, Journal of European Public Policy, 11:5 (2004), pp. 871–89CrossRefGoogle Scholar.

³³ Henning, Randall, ‘Organizing Foreign Exchange Rate Intervention in the Euro Area’, Journal of Common Market Studies, 45:2 (2007), p. 329CrossRefGoogle Scholar.

³⁴ Quoted in R. Morarjee, ‘On Europe: Europe Feels Weight of Strong Euro’, Financial Times (14 March 2008).

³⁵ André Cartapanis, ‘Pour une Politique de Change Contra-Cyclique de l'Euro’, Centre de Recherche en Developpement Economique et Finance Internationale (2005); Créel, Jérome, Laurent, Éloi, and Le Cacheux, Jacques, ‘La Politique de Change de la Zone Euro ou le Hold-Up Tranquille de la BCE’, Revue de l'OFCE 100 (2007), pp. 7–30CrossRefGoogle Scholar.

³⁶ Alan Ahearne and and Jürgen Von Hagen, ‘European Perspectives on Global Imbalances’, Paper prepared for the Asia-Europe Economic Forum Conference European and Asian Perspectives on Global Imbalances, Beijing (13–14 July 2006).

³⁷ As European Commissioner of Trade Peter Mandelson said in a November 2007 speech, ‘the number that preoccupies Europe these days is $20 million dollars. Because that is how fast the EU-China trade deficit is growing every single hour. Fast enough to catch up with the US-China trade deficit in the next year or so.’ Cited in Jean Pisani-Ferry, ‘The End of Europe's Long-Standing Indifference to the Renminbi’, Bruegel Policy Contribution (15 January 2008), p. 2. Although a European Troika – consisting of the president of the Eurogroup, the ECB and the Commissioner for Economic and Monetary Affairs – travelled to Beijing in November 2007 and December 2009 to discuss China's currency policy, these visits were unsuccessful.

³⁸ Jean Pisany-Ferry and Zsolt Darvas, ‘The Threat of “Currency Wars”: A European Perspective’, Bruegel Policy Contribution (December 2010); Uri Dadush and Vera Eidelman, ‘How to Avoid a Currency War’, Carnegie Endowment for International Peace, International Economic Bulletin (14 October 2010); Simon Tilford, ‘What Currency Wars Mean for the Eurozone’, Centre for European Reform (15 October 2010).

³⁹ Henning, ‘Exchange Rate Weapon’.

⁴⁰ Strange, ‘The Euro, EU Social Democracy, and International Monetary Power’, p. 265.

⁴¹ Randall Henning, ‘The Euro Shields Germany from Consequences of Fiscal Consolidation’, RealTime Economic Issues Watch, Peterson Institute for International Economics (21 June 2010); Adam Posen, ‘The Euro Payoff: Germany's Economic Advantages from a Large and Diverse Euro Area’, Internationale Politiek – Global Edition (March/April 2011).

⁴² Examples of overt criticism by French and Italian politicians reported by the financial press are innumerable. See, for instance, Raplh Atkins, ‘Exports Fears As Euro Surges Past $1.40’, Financial Times (20 September 2007); Ralph Atkins, ‘Rate Rise Hints Sends Euro to Fresh High’, Financial Times (22 April 2008); Roger Cohen, ‘Kicking the Euro When Europe Is Down’, New York Times (19 June 2005).

⁴³ Eurostat, External and Intra-European Trade, Statistical Yearbook – Data 1958–2007.

⁴⁴ Eurostat, External and Intra-European Trade, Statistical Yearbook – Data 1958–2007. Belgium, whose extra-EU trade deficit rose from €6.43 billion in 1998 to €12.93 in 2007, is an exception to this generalisation. The Netherland's extra-EU trade deficit, which rose from €34.96 billion to €91.20 should not be considered because of the specific role of the Netherlands as distributional gateway (via the Port of Rotterdam) to the European hinterland for extra-EU imports, especially from China. Nevertheless, both Belgium and the Netherlands have more than compensated their extra-EU trade deficit by running an even higher surplus with their European trading partners (see below).

⁴⁵ Henning, Randall, Currencies and Politics in the United States, Germany and Japan (Washington DC: Institute for International Economics, 1994)Google Scholar; Quaglia, Lucia, Central Banking in the European Union: A Comparative Analysis (Abingdon: Routledge, 2008)Google Scholar; Maes, Ivo and Quaglia, Lucia, ‘France's and Italy's Policies on European Monetary Integration: A Comparison of “Strong” and “Weak States”’, Comparative European Politics, 2:1 (2004), pp. 51–72Google Scholar; David Howarth, ‘French Aversion to Independent Monetary Authority and the Development of French Policy on the EMU Project’, mimeo (1999).

⁴⁶ Howarth, ‘French Aversion’. See also Henning, Randall, ‘Organizing Foreign Exchange Intervention in the Euro Area’, Journal of Common Market Studies, 45:2 (2007), pp. 315–42CrossRefGoogle Scholar; Dyson, Kenneth and Quaglia, Lucia, European Economic Governance and Policies: Volume II Commentary on Key Policy Documents (Oxford: Oxford University Press, 2011)Google Scholar.

⁴⁷ Quoted in Gabi Thesing and Christian Vits, ‘Merkel Backs Independent ECB; Sarkozy Seeks Rate Cut’, Bloomberg (21 September 2007).

⁴⁸ Taking into consideration that the ECB can always ignore the Eurogroup's exchange rate instructions on the basis of its price stability mandate, it should be noted that Eurogroup consensus is a necessary but not sufficient condition for thwarting the ECB's appreciation bias.

⁴⁹ Howarth, David, ‘Making and Breaking the Rules: French Policy on EU “Gouvernement Economique”’, Journal of European Public Policy, 14:7 (2007), pp. 1061–78CrossRefGoogle Scholar.

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⁵¹ Hancké, Bob and Herrmann, Andrea M., ‘Wage Bargaining and Comparative Advantage in EMU’, in Hancké, et al. (eds), Beyond Varieties of Capitalism, pp. 122–44Google Scholar.

⁵² Streeck, ‘German Capitalism’; see also Thelen, Kathleen, How Institutions Evolve: The Political Economy of Skills in Germany, Britain, the United States and Japan (New York: Cambridge University Press, 2004)CrossRefGoogle Scholar.

⁵³ Indeed, ‘it is the quality of a differentiated good that responds to an income change: richer people buy fancier cars rather than more cars’ (Copeland, Brian R. and Kotwal, A., ‘Product Quality and the Theory of Comparative Advantage’, European Economic Review, 40 (1996), p. 1746CrossRefGoogle Scholar).

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⁵⁵ Ansgar Belke, Matthias Goecke, and Martin Guenther, ‘When Does It Hurt? The Exchange Rate “Pain Threshold” for German Exports’, Ruh Economic Papers No. 148, Rühr-Univesität Bochum (2008).

⁵⁶ Rey, Serge, ‘Exchange Rate Fluctuations and Extra-Eurozone Exports: A Comparison of Germany and France’, Economics Bulletin, 31:2 (2011), pp. 1131–50Google Scholar.

⁵⁷ Virginia Di Nino, Barry Eichengreen, and Massimo Sbracia, ‘Real Exchange Rates, Trade, and Growth: Italy 1861–2011’, Banca d'Italia: Quaderni di Storia Economica, Economic History Working Papers No. 10 (2011).

⁵⁸ Filippo di Mauro and Katrin Forster, ‘Globalization and the Competitiveness of the Euro Area’, ECB Occasional Paper Series No. 97 (2008).

⁵⁹ Herman Bennett, Julio Escolano, Stefania Fabrizio, Eva Gutiérrez, Iryna Ivaschenko, Bogdan Lissovolik, Marialuz Moreno-Badia, Werner Schule, Stephen Tokarick, Yuan Xiao, and Ziga Zarnic, ‘Competitiveness in the Southern Euro Area: France, Greece, Italy, Portugal and Spain’, IMF Working Paper WP/08/112 (2008), p. 39.

⁶⁰ Stephan Danninger and Fred Joutz, ‘What Explains Germany's Rebounding Export Market Share?’, IMF Working Paper WP/07/24 (2007); Rolf J. Langhammer, ‘Rising Import Demand in China: Cui Bono and Why?’, Kiel Working Papers No. 1672, Kiel Institute for the World Economy (January 2011); Jean Pisani-Ferry and André Sapir, ‘Seven Potential Roadblocks to EU–China Relations’, Forum for Economic Development Working Paper Series No. FE20060106 (2005).

⁶¹ Johnston, Alison and Hancké, Bob, ‘Wage Inflation and Labour Unions in EMU’, Journal of European Public Policy, 16:4 (2009), pp. 601–22CrossRefGoogle Scholar.

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⁶³ As France exerted more wage restraint than the Netherlands, this cleavage between CMEs and MMEs cannot be considered as absolute. Nevertheless, the relatively higher increase in unit labour costs in the Netherlands was probably a contingent and temporary phenomenon related to tight labour market conditions and should not be seen as a sign that the Dutch CME has structurally deviated from its triangular objectives of low inflationary-growth, wage restraint and export competitiveness. Alison Johnston explains the temporarily REER appreciation of the Netherlands by the more ‘reactive’ nature of the Dutch coordinated wage-setting system, which maintains international cost competitiveness cyclically rather than constantly. For a discussion, see Alison Johnston, ‘Wage policy in Austria and the Netherlands under EMU: A change in performance or the continuation of the status-quo?’, ETUI Working Paper 2009.7 (2009); Becker, Uwe and Hendriks, Corina, ‘As the Central Planning Bureau Says: The Dutch Wage Restraint Paradigm, Its Sustaining Epistemic Community and Its Relevance for Comparative Research’, Review of International Political Economy, 15:5 (2008), pp. 826–50CrossRefGoogle Scholar; Kurzer, ‘The Dutch Polder Model’.

⁶⁴ Carlin, Wendy, Glyn, Andrew, and Van Reenen, John, ‘Export Market Performance of OECD Countries: An Empirical Examination of the Role of Export Competitiveness’, The Economic Journal, 111 (2001), p. 134CrossRefGoogle Scholar.

⁶⁵ Della Sella, ‘Italian Model of Capitalism’, p. 1053.

⁶⁶ On the positive impact of EMU on European financial integration, see Philip Lane, ‘EMU and Financial Market Integration’, IIIS Discussion Paper No. 248 (April 2008); Schmitz, Birgit and von Hagen, Jürgen, ‘Current Account Imbalances and Financial Integration in the Euro Area’, Journal of International Money and Finance, 30:8 (2011), pp. 1676–95CrossRefGoogle Scholar; Claire Waysand, Kevin Ross, and John de Guzman, ‘European Financial Linkages: A New look at Imbalances’, IMF Working Paper WP/10/295 (2010).

⁶⁷ Sergio de Nardis, ‘German Imbalance and European Tensions’ (2 December 2010), {www.VoxEU.org}. Dalia Marin attributes the rise in productivity to increasing off-shoring to Eastern Europe. See Dalia Marin, ‘Germany's Super Competitiveness: A Helping Hand from Eastern Europe’ (20 June 2010), {www.VoxEU.org}.

⁶⁸ Carlin, Wendy and Soskice, David, ‘German Economic Performance: Disentangling the Role of Supply-side Reforms, Macroeconomic Policy and Coordinated Economy Institutions’, Socio-Economic Review, 7:1 (2009), pp. 67–99CrossRefGoogle Scholar; Anke Hassel, ‘The Paradox of Liberalization – Understanding dualism and the Recovery of the German Political Economy’, LSE ‘Europe in Question’ Discussion Paper Series No. 42/2011 (September 2011).

⁶⁹ Fritz Scharpf, ‘Monetary Union, Fiscal Crisis and the Preemption of Democracy’, MPIfG Discussion Paper 11/11, 2011, p. 14.

⁷⁰ Werner Eichhorst and Paul Marx, ‘Reforming German Labour Market Institutions: A Dual Path to Flexibility’, IZA Discussion Paper No. 4100 (March 2009). The most important elements of the Hartz reform package include: (1) lowering the level of employment protection primarily by deregulating temporary and part-time employment in the service sector; and (2) reducing benefits to the long-term unemployed in order to reduce the reservation wage of job seekers While lack of space precludes a deeper and more detailed discussion of these labour market developments in this article, two key points should be stressed. First, labour market restructuring has been carried out by the private sector using CME institutions – such as union participation – and have, accordingly, promoted a dualisation of the German labour market between an ‘insider’ core of protected, skilled workers and ‘outsider’ segment of low-paid and flexible workers (especially in the service sector). Second, flexibilisation of the ‘outsider’ labour market section served to protect the interests of the core workers in the export-oriented manufacturing sectors. For a discussion, see Carlin and Soskice, ‘German Economic Perfomance’; Hassel, ‘Paradox of Liberalization’.

⁷¹ Carlin and Soskice, ‘German Economic Performance’.

⁷² See AMECO database.

⁷³ Denis Leythienne and Tatjana Smokova, ‘Business Profit Share and Investment Rate Higher in the EU than the US: Profits and Investment of Non-financial Corporations, 1995–2007’, Eurostat Statistics in Focus, 28/2009.

⁷⁴ Wendy Carlin, ‘Stabilization Policy in a Common Currency Area with Heterogeneous National Wage-Setters: The Eurozone's First Decade’, mimeo (2011), p. 4. Many economists support the view that the exertion of wage restraint allowed Germany to regain competitiveness under EMU by realising real exchange rate depreciation. See, for instance, Flassbeck, Heiner, ‘Wage Divergences in Euroland: Explosive in the Making’, in Bibow, Jörg and Terzi, Andrea (eds), Euroland and the World Economy: Global Player or Global Drag? (New York: Palgrave MacMillan, 2007)Google Scholar; Lapavitsas, Costas et al., Eurozone Crisis: Beggar Thyself and Thy Neighbour, RMF Occasional Report (March 2010); Hein, Eckhard and Trugert, Achim, ‘Finance-dominated Capitalism in Crisis – The Case For a Global Keynesian New Deal’, Journal of Post-Keynesian Economics (2011)Google Scholar.

⁷⁵ Waysand et al., ‘European Financial Linkages’.

⁷⁶ Patrick M. Crowley and Jim Lee, ‘Do All Fit One Size? An Evaluation of the ECB's Policy Response to the Changing Economic Conditions in Euro Area Member States’, mimeo (2008); Van Poeck, André, ‘One Money and Sixteen Needs: Has the ECB's Monetary Policy Become More Balanced towards the Needs of the Member States?’, De Economist, 158 (2010), pp. 43–60CrossRefGoogle Scholar.

⁷⁷ As Kevin Featherstone notes, ‘[t]he Greek case reflects a “statism” but is one of weakness, poor coordination, limited resources and low skill.’ See Kevin Featherstone, ‘“Varieties of Capitalism” and the Greek Case: Explaining Constraints on Domestic Reform?’, GreeSE Paper No. 11, Hellenic Observatory Papers on Greece and Southeast Europe (February 2008), p. 19.

⁷⁸ Kouretas, Georgios P. and Vlamis, Prodromos, ‘The Greek Crisis: Causes and Implications’, Panoeconomicus, 4 (2010), p. 394Google Scholar.

⁷⁹ Featherstone, Kevin, ‘The Greek Sovereign Debt Crisis and EMU: A Failing State in a Skewed Regime’, Journal of Common Market Studies, 49:2 (2011), p. 198CrossRefGoogle Scholar. This is related to Greece's ‘disjointed corporatism’ of interest representation, involving an overrepresentation of the public sector on the union side and an underrepresentation of small and medium enterprises and the self-employed. On Greece's ‘disjointed corporatism’, see Lavdas, Kostas A., ‘Interest Groups in Disjointed Corporatism: Social Dialogue in Greece and European “Competitive Corporatism”’, West European Politics, 28:2 (2005), pp. 297–316CrossRefGoogle Scholar.

⁸⁰ Although household debt reached only 44 per cent in 2007, Theodore Pelagidis believes ‘the expansion of private credit replaced, since the early 1990s, the government deficit spending as the main way to finance the expansion of consumption in Greece’. See Theodore Pelagidis, ‘The Greek Paradox of Falling Competitiveness and Weak Institutions in a High GDP Growth Rate Context (1995–2008)’, GreeSE Paper No. 38, Hellenic Observatory Papers on Greece and Southeast Europe (August 2010).

⁸¹ Ioannou, Christos A., ‘“Odysseus or Sisyphus” Revisited: Failed Attempts to Conclude Social-Liberal Pacts in Greece’, in Pochet, Phillipe, Keunen, Maarten, and Natali, David (eds), After the Euro and Enlargement: Social Pacts in the EU (European Trade Union Institute, 2010)Google Scholar.

⁸² Blanchard, Olivier, ‘Adjustment Within the Euro: The Difficult Case of Portugal’, Portugese Economic Journal, 8 (2007), pp. 11–56Google Scholar; Royo, Sebastian, ‘Portugal and Spain in the EU: Paths of Economic Divergence (2000–2007)’, Analise Social, 45 (2010), pp. 209–54Google Scholar.

⁸³ Royo, Sebastian, ‘After the Fiesta: The Spanish Economy Meets the Financial Crisis’, South European Society and Politics, 14:1 (2009), p. 22CrossRefGoogle Scholar.

⁸⁴ On the anatomy of the Spanish bubble, see Salmon, Keith, ‘Boom to Bust – reconstructing the Spanish Economy. Part one: Into the Recession’, International Journal of Iberian Studies, 23:1 (2010), pp. 39–52CrossRefGoogle Scholar.

⁸⁵ Johnston and Hancké, ‘Wage Inflation and Labour Union in EMU’.

⁸⁶ Peadar Kirby, ‘Explaining Ireland's Development: Economic Growth With Weakening Welfare’, United Nations Research Institute for Social Development Program Paper (2008); Antoine Murphy, ‘The Celtic Tiger: An Analysis of Ireland's Economic Growth Performance’, EUI Working Papers RSC 2000/16 (2000).

⁸⁷ Hardiman, Niamh, ‘Bringing Domestic Institutions Back into an Understanding of Ireland's Economic Crisis’, Irish Studies in International Affairs, 21 (2010), pp. 76–7CrossRefGoogle Scholar.

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⁸⁹ Aidan Regan, ‘The Political Economy of Social Pacts in the EMU; Irish Liberal Market Corporatism in Crisis’, New Political Economy (2011); Hardiman, Niamh, Murphy, Patrick, and Burke, Orlaith, ‘The Politics of Economic Adjustment in a Liberal Market Economy: The Social Compensation Hypothesis Revisited’, Irish Political Studies, 23:4 (2008), pp. 599–626CrossRefGoogle Scholar.

⁹⁰ Bob Hancké, ‘World's Apart? Labour Unions, Wages and Monetary Integration in Continental Europe’, Political Science Series 128, Institute for Advanced Studies, Vienna (February 2012). For a discussion of the Dutch exception, see endnote 59.

⁹¹ Scharpf, ‘Monetary Union’, p. 18.

⁹² Matthias Matthijs and Mark Blyth point to the responsibility of Germany in this respect: ‘During the economic boom of 2003–2008 Germany extended credit on a massive scale to the Eurozone's Mediterranean countries … [A]s the financial crisis began to escalate in 2009, Germany abruptly closed its wallet. Now Europe's periphery needs long-term loans more than ever, but Germany's enthusiasm for extending credit seems to have collapsed.’ See Matthias Matthijs and Mark Blyth, ‘Why Only Germany Can Fix the Euro’, Foreign Affairs (17 November 2011). For empirical support, see Fabian Bornhorst and Ashoka Mody, ‘TARGET Imbalances: Financing the Capital Account Reversal in Europe’ (7 March 2012), {www.VoxEu.org}.

⁹³ For empirical support for this link, see Ashoka Mody and Damiano Sandri, ‘The Eurozone Crisis: How Banks and Sovereigns Came to Be joined at the Hips’, IMF Working paper WP/11/269 (November 2011); Maria-Grazia Attinasi, Cristina Checherita, and Christina Nickel, ‘What Explains the Surge in Euro Area Sovereign Spreads During the Financial Crisis of 2007–2009?’, ECB Working Paper Series No. 1131 (2009).

⁹⁴ It is in this sense that Paul De Grauwe argues that EMU member states are downgraded to the status of emerging market economies, which have similarly issued debt in foreign currencies over which they have no control. See Paul De Grauwe, ‘The Governance of A Fragile Eurozone’, CEPS Working Document No. 346 (May 2011). Similar arguments can be found in Yeva Nersisyan and Randall L. Ray, ‘Does Excessive Sovereign Debt Really Hurt Growth? A Critique of This Time Is Different by Reinhart and Rogoff’, Levy Institute Working Paper No. 603 (June 2010); Daniel Gros and Cinzia Alcidi, ‘Adjustment Difficulties and Debt Overhang in the Eurozone Periphery’, CEPS Working Document No. 347 (May 2011); Giancarlo Corsetti, ‘The “Original Sin” in the Eurozone’ (9 May 2010), {www.VoxEu.org}.

⁹⁵ Scharpf, ‘Monetary Union’. For an overview of the macroeconomic conditionalities linked to the bail-out loans, see the European Commission, ‘The Economic Adjustment Programme for Greece’, Occasional Paper No. 61, Directorate-General for Economic and Financial Affairs (May 2010); European Commission. ‘The Economic Adjustment Programme for Ireland’, Occasional Paper No. 76, Directorate-General for Economic and Financial Affairs (February 2011); European Commission, ‘The Economic Adjustment Programme for Portugal’, Occasional Paper No. 79, Directorate-General for Economic and Financial Affairs (June 2011).The details of the conditionalities can be found in these programme's associated ‘Memorandum of Understanding on Specific Economic Policy Conditionality’.

⁹⁶ Young, Brigitte, ‘Economic Governance in the Eurozone: A New Dawn?’, Economic Sociology, 12:2 (2011), p. 12Google Scholar.

⁹⁷ GIIPS stands for the GIPS as well as Italy, which experienced increasing sovereign debt troubles over the course of 2011. Despite mounting refinancing difficulties, Spain and Italy have so far not made use of the EFSF.

⁹⁸ Ben Hall, ‘Lagarde Criticises Berlin Policy’, Financial Times (14 March 2010).

⁹⁹ Tmar Issing, ‘Higher German Wages Are Not the Solution’, Financial Times (18 March 2010).

¹⁰⁰ Weber, Axel, ‘Securing Stability and Growth in a Post-Crisis World’, Financial Stability Review, 15 (Paris: Banque de France, 2011), pp. 151–7Google Scholar.

¹⁰¹ European Commission, ‘Wage Trends in Europe in Perspective’, Directorate-General for Employment, Social Affairs and Inclusion, Report presented at the High-Level Conference on Wage Trends in Europe, Brussels (7 September 2011).

¹⁰² The unemployment rate in France, Greece, Italy, Portugal, Spain, and Ireland increased from respectively 8.4 per cent, 8.3 per cent, 6.1 per cent, 8.9 per cent, 8.3 per cent, and 4.6 per cent in 2007 to 9.8 per cent, 16.6 per cent, 8.1 per cent, 12.6 per cent, 20.9 per cent and 14.4 per cent in 2011, whereas in Belgium, Finland, and the Netherlands only from 7.5 per cent, 6.9 per cent and 3.6 per cent to 7.6 per cent, 7.8 per cent and 4.5 per cent. In Germany and Austria the unemployment rate even decreased over the same period from 8.7 per cent and 4.4 per cent to 6.1 per cent and 4.2 per cent.

¹⁰³ Fernanda Nechio, ‘Monetary Policy When One Size Does Not Fit All’, Federal Reserve Bank of San Francisco Economic Letter (13 June 2011).

¹⁰⁴ In November and December 2011 these two interest rate rises were later reversed by the newly appointed ECB president Mario Draghi after a worsening of the Eurozone sovereign debt crisis depressed economic growth prospects of the core.

¹⁰⁵ Paul de Grauwe, ‘The European Central Bank: Lender of last Resort in the Government Bond Markets?’, CESifo Working paper No. 3569 (September 2011).

¹⁰⁶ It should be noted that private banks from the peripheral countries – being cut off the private interbank market as a result of the sovereign debt crisis – have benefitted from the ESCB's liquidity injections, as a result of which domestic demand has not dramatically collapsed in these countries. The ECB's three-year Long-Term Refinancing Operations (LTRO) – which have flooded the Eurozone banking system with €1.018 trillion since December 2011 – are an indirect way to encourage Eurozone banks to buy sovereign bonds of distressed member states – a strategy that critics believe is bound to fail. In general, the ECB's monetary policy stance makes no mistake about the need of deficit countries to deflate their economies back to sustainable current account positions. For a critique of the LTRO as a crisis management strategy, see Paul De Grauwe, ‘How Not to Be a Lender of Last Resort’, CEPS Commentary (23 March 2012).

¹⁰⁷ See José Manuel González-Páramo, ‘The Conduct of Monetary Policy – Lessons from the Crisis and Challenges for the Coming Years’, Speech delivered at the SEACEN-CEMLA Conference, Kuala Lumpur (13 October 2011).

¹⁰⁸ Blanchard, ‘Adjustment within the Euro’.

¹⁰⁹ Tombazos, Stavros, ‘Centrifugal Tendencies in the Euro Area’, Journal of Contemporary European Studies, 19:1 (2011), p. 37CrossRefGoogle Scholar.

¹¹⁰ Regan, ‘Irish Liberal Market Corporatism’. As I have shown above, Ireland indeed managed to decrease it labour costs vis-à-vis all the other EMU member states over the period 2008–10 – even compared to Germany.

¹¹¹ As Martin Feldstein argues, one possible solution to the balance-of-payment troubles of the deficit countries is ‘to expand the net exports of those trade deficit countries to the world outside the Eurozone’ through a much weaker euro. See Martin Feldstein, ‘Weaker Euro Will Help Solve Europe Deficit Woes’, Financial Times (19 December 2011).

¹¹² ECB, ‘The European Stability Mechanism’, Monthly Bulletin (July 2011), p. 71.

¹¹³ Draft of the International Agreement on a Reinforced Economic Union.

¹¹⁴ Tough – in sharp contrast to the SGP – no

¹¹⁵ John Grahl, ‘Towards the Surveillance Union’, Eurozine (1 December 2011).

¹¹⁶ European Council, ‘Conclusions of the Heads of State or Government of the Euro Area of 11 March 2011’, Brussels (11 March 2011).

¹¹⁷ Scharpf, ‘Monetary Union’, p. 34.

¹¹⁸ Wolgan Munchau, ‘France and Germany Look Set to Fudge It Yet Again’, Financial Times (4 December 2011).

¹¹⁹ Howarth, David, ‘France and the Euro: The Political Management of Paradoxical Interests’, in Dyson, Kenneth (ed.), The Euro at Ten: Europeanization, Power and Convergence (Oxford: Oxford University Press, 2008), pp. 111–32Google Scholar.

¹²⁰ Belgium, which has a public debt exceeding 100 per cent of its GDP, is more open to discuss these unorthodox reforms than the other CMEs.

¹²¹ It is important to note that during the EMS deficit member states were able to mitigate balance-of-payments imbalances through external adjustment – the only area in which Germany was prepared to bear part of the burden of adjustment. See Kaelberer, Money and Power. As Kaelberer notes, ‘In [the area of external adjustment], Germany accepted a number of bargaining compromises with weak currency countries during EMS negotiation.’ This meant the acceptance of periodic nominal devaluations as well as the supply of short-term balance-of-payment financing.

¹²² This paradoxical aspect of power has been noticed by Susan Strange, who remarked that ‘the power to exploit others, whether the exploitation is primarily economic or political, is not inconsistent with the possibility that taking advantage of that power will ricochet back on its possessors to their ultimate disadvantage’. See Strange, Susan, ‘Finance, Information and Power’, in Tooze, Roger and May, Christopher (eds), Authority and Markets: Susan Strange's Writings on International Political Economy (Basingstoke: Palgrave McMillan, 2002), p. 8Google Scholar.

¹²³ Jesus Felipe and Utsav Kumar, ‘Unit Labour Costs in the Eurozone: The Competitiveness Debate Again’, Levy Economics Institute Working Paper No. 651.

¹²⁴ Hancké and Herrman, ‘Wage Bargaining and Comparative Advantage in EMU’; In case the peripheral countries will be pushed to pursue flexibilisation of the labour markets and decentralisation of their wage bargaining institutions, they will risk gaining merely a comparative advantage in low-productivity and low-quality production. See Herrmann, Andrea, ‘Converging Divergence: How Competitive Advantages Condition Institutional Changes under EMU’, Journal of Common Market Studies; 43:2 (2005), pp. 287–310CrossRefGoogle Scholar.

¹²⁵ Robert A. Blecker, ‘The Diminishing Returns to Export-led Growth’, A Council on Foreign Relations Paper (2000).

¹²⁶ Terzi, Andrea, ‘International Payments Imbalances and the Prospective Role of the Euro’, in Bibow, Jorg and Terzi, Andrea, Euroland and the World Economy: Global Player or Global Drag? (Basingstoke: Palgrave Macmillan, 2007), pp. 300–1Google Scholar. See also Paola Subacchi, ‘Macroeconomic Performance and Global Capital Flows: Is There a Role for Europe to Play?’, Draft Paper prepared for the Conference ‘The Future Structure of International Capital Flows’, Tokyo Club Foundation for Global Studies, Kyoto (21–2 November 2005).