An Alternative Approach to the Institutional Economics of the Eurozone Crisis

Abstract

I argue that the Eurozone crisis is neither a crisis of European sovereigns in the sense of governmental over-borrowing, nor a crisis of sovereign debt market over-lending. Rather, it is a function of the “sovereign debt market” institution itself. Crisis, I argue, is not an occurrence, but an element fulfilling a precise technical function within this institution. It ensures the possibility of designating — in the market’s day-to-day mechanisms rather than analytical hindsight — normal (tranquil, undisturbed) market functioning. To show this, I propose an alternative view on the institutional economics of sovereign debt markets. First, I engage literature on the emergent qualities of the institutions “market” and “firm” in product markets, concluding that the point of coalescence for markets is the approximation of an optimal observation of consumer tastes. I then examine the specific institution “financial markets,” where the optimal observation of economic fundamentals is decisive. For the specific sub-institution “sovereign debt market,” I conclude that the fundamentals in question — country fundamentals — oscillate between a status of observable fundamentals outside of markets and operationalized fundamentals influenced by market movements. This, in turn, allows me to argue that the specific case of the Eurozone crisis is due to neither of the two causes mentioned above. Rather, the notion of “crisis” takes on a technical sense within the market structure, guaranteeing the separation of herd behavior and isomorphic behavior on European sovereign debt markets. By the same token, the so-called Eurozone crisis ceases to be a crisis in the conventional sense.

Keywords:

• crisis
• economic fundamentals
• emergent institutions
• European sovereign debt crisis

JEL Classification Codes:

• B52
• G11
• H12
• H63

Notes

¹ Paul DiMaggio and Walter Powell (1983, 148) give four indicators for organizational coherence. However, these can all be reduced to mutual awareness or recognition. The “increase in the extent of interaction among organizations in the field,” as well as the “sharply defined interorganizational structures of domination and patterns of coalition” will trivially depend on the pre-established recognition of firms as competing with one another in a given field. Cooperation and competition between organizations not on the same market (or within the same organizational field in general) is practically an additional cost factor, thus going against the purpose of markets to reduce transaction costs, and it is theoretically irrelevant for the purposes of the theory of market emergence. The “increase in the information load” organizations face depends on what information is to be considered relevant by the actors in the organizational field that, in turn, depends on recognizing who/what belongs to the field in question (DiMaggio and Powell 1983, 148).

² In the U.S. subprime mortgage crisis, a similar ascription of market over-lending to borrowers occurred when subprime borrowers were faulted to have caused the “crisis“ (for a rebuttal of this argument, see Heintz and Balakrishnan 2012).

Additional information

Notes on contributors

Sascha Engel

Sascha Engel is a Ph.D. candidate (ABD) in the Alliance for Social, Political, Ethical, and Cultural Thought (ASPECT) at Virginia Tech. He holds an M.A. in Political Theory from the Goethe University, Frankfurt (Germany) and Darmstadt University of Technology (Germany). Sascha teaches heterodox economics and international political economy in the Department of Political Science at Virginia Tech.