The political economy of monetary solidarity

This chapter spells out the political market failures that collective action is up against, and argues that the by-product theory of public goods provision can explain how cooperative institutions emerge despite resistance and obstacles to cooperation. The governance of a monetary union, once established, can be analyzed in light of the collective action theory that Elinor Ostrom (1990) initiated, based on in-depth studies of how communities govern a common resource. This body of work examined the conditions that make it possible to prevent a “tragedy of the commons.” Insights into the management of common pool resources are completely absent from the mainstream theory of monetary integration (optimal currency area theory). An approach is outlined which is compatible with rational choice institutionalism in international relations and international political economy.