European Monetary Integration and the Incompatibility of National Varieties of Capitalism

This is an author's peer-reviewed final manuscript, as accepted by the publisher. The published article is copyrighted by The Author(s) and JCMS: Journal of Common Market Studies and published by John Wiley & Sons Ltd., on behalf of University Association for Contemporary European Studies. It can be found at: http://www.wiley.com/WileyCDA/WileyTitle/productCd-JCMS.htmlAccess to this item has been restricted by repository administrators at the request of the publisher, John Wiley & Sons Ltd., until July 16, 2017.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 systems to co-exist. In this paper, 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 models 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)