OBFA-TRANSFORM Working Paper No. 4: Rethinking Currency Internationalisation. Rethinking Currency Internationalisation. Offshore Money Creation and the EU’s Monetary Governance

Jens van ‘t Klooster and Steffen Murau

Internationalisation of the euro has for decades eluded EU policymakers. In this article, we develop a novel explanation of the subordinate position of the single currency. To this end, we build on the state of the art in International Political Economy (IPE) scholarship and develop a new conceptual framework for currency internationalisation. We argue that internationalising a currency requires actively fostering the offshore creation of private credit money denominated in the currency. By approaching internationalisation as an entirely market-driven process, EU policymakers have neglected offshore monetary governance. This has discouraged rather than incentivised the expansion of offshore euro creation and thereby undermined the objective of euro internationalisation. We use our conceptual framework to study the failure to recognize the importance of offshore euro creation in fostering cross-border value chains, the prohibitive provision of international lender of last resort facilities for offshore euros, as well as the undersupply of euro-denominated safe assets. Our new account of currency internationalisation emphasizes the crucial role of the state in successful internationalisation, in particular for fostering the offshore creation of private credit money denominated in its currency.

van ‘t Klooster, Jens and Murau, Steffen, Rethinking Currency Internationalisation. Offshore Money Creation and the EU’s Monetary Governance (January 31, 2025). OBFA-TRANSFORM Working Paper No. 4-EN

The OBFA-TRANSFORM Working Paper Series publishes ongoing research output by the group that applies the Monetary Architecture framework and the OBFA concept on various contemporary and historical subjects.

OBFA-TRANSFORM Working Paper No. 3: Schrödinger’s Off-Balance-Sheet Fiscal Agency. The Recovery and Resilience Facility and the Limits to Incremental Fiscal Integration in Europe

Friederike Reimer, Andrei Guter-Sandu, Armin Haas, and Steffen Murau

In the summer of 1931, Germany faced the nadir of the Great Depression. After the Machtergreifung of the Nazis in 1933, Hjalmar Schacht was appointed president of the Reichsbank and invented the “Mefo operation” to circumvent the Reichsbank’s legal constraints for credit expansion and finance German rearmament against the terms of the Treaty of Versailles. Mefo stands for “Metallurgische Forschungsgesellschaft”, a letterbox company set up by five German blue-chip companies and operated by staff from the Reichsbank and the military. Endowed with an equity of 1 million Reichsmark, Mefo was the debtor of commercial bills amounting to 12 billion Reichsmark. Despite its historical significance, the Mefo operation is still insufficiently theorised from a monetary theory perspective and is often explained away through the myth of “financial wizardry”. We approach the Mefo operation through the prism of the Monetary Architecture framework and perceive the Mefo company as an off-balance-sheet fiscal agency introduced to finance re-armament as a politically desired large-scale transformation of capital stock. We divide the Mefo operation into three distinct periods—the covert monetary financing stage (July 1933 to February 1936), the shadow money stage (February 1936 to March 1938), and the consolidation and war finance stage (April 1938 to May 1945)—and use balance sheet methodology to re-construct the underlying financial mechanics. On the one hand, we provide transactional balance sheets for an idealised depiction of flows and sketch stocks via snapshots of the monetary architecture as webs of interlocking balance sheets. On the other hand, we discuss how expansion, funding, backstopping, and contraction was planned ex ante and played out ex post. We find that against Schacht’s original plan, the Mefo bills ended up on the Reichsbank balance sheet where they were permanently funded until the collapse of German state structures in May 1945. We connect our balance sheet analysis to quantitative data of the Mefo company and the wider macro-financial environment in order to draw conclusions about the significance of the Mefo operation for the financial expansion after 1931.

Reimer, Friederike and Guter-Sandu, Andrei and Haas, Armin and Murau, Steffen (2024), Schrödinger’s Off-Balance-Sheet Fiscal Agency. The Recovery and Resilience Facility and the Limits to Incremental Fiscal Integration in Europe. OBFA-TRANSFORM Working Paper No. 3-EN

The OBFA-TRANSFORM Working Paper Series publishes ongoing research output by the group that applies the Monetary Architecture framework and the OBFA concept on various contemporary and historical subjects.

OBFA-TRANSFORM Working Paper No. 2: The Mefo Operation. A Macro-Financial Analysis of Camouflaged Sovereign Borrowing through Off-Balance-Sheet Fiscal Agencies, 1933-1945

Armin Haas, Friederike Reimer, Andrei Guter-Sandu and Steffen Murau

In the summer of 1931, Germany faced the nadir of the Great Depression. After the Machtergreifung of the Nazis in 1933, Hjalmar Schacht was appointed president of the Reichsbank and invented the “Mefo operation” to circumvent the Reichsbank’s legal constraints for credit expansion and finance German rearmament against the terms of the Treaty of Versailles. Mefo stands for “Metallurgische Forschungsgesellschaft”, a letterbox company set up by five German blue-chip companies and operated by staff from the Reichsbank and the military. Endowed with an equity of 1 million Reichsmark, Mefo was the debtor of commercial bills amounting to 12 billion Reichsmark. Despite its historical significance, the Mefo operation is still insufficiently theorised from a monetary theory perspective and is often explained away through the myth of “financial wizardry”. We approach the Mefo operation through the prism of the Monetary Architecture framework and perceive the Mefo company as an off-balance-sheet fiscal agency introduced to finance re-armament as a politically desired large-scale transformation of capital stock. We divide the Mefo operation into three distinct periods—the covert monetary financing stage (July 1933 to February 1936), the shadow money stage (February 1936 to March 1938), and the consolidation and war finance stage (April 1938 to May 1945)—and use balance sheet methodology to re-construct the underlying financial mechanics. On the one hand, we provide transactional balance sheets for an idealised depiction of flows and sketch stocks via snapshots of the monetary architecture as webs of interlocking balance sheets. On the other hand, we discuss how expansion, funding, backstopping, and contraction was planned ex ante and played out ex post. We find that against Schacht’s original plan, the Mefo bills ended up on the Reichsbank balance sheet where they were permanently funded until the collapse of German state structures in May 1945. We connect our balance sheet analysis to quantitative data of the Mefo company and the wider macro-financial environment in order to draw conclusions about the significance of the Mefo operation for the financial expansion after 1931.

 

Haas, Armin and Reimer, Friederike and Guter-Sandu, Andrei and Murau, Steffen, ‘The Mefo Operation. A Macro-Financial Analysis of Camouflaged Sovereign Borrowing through Off-Balance-Sheet Fiscal Agencies’, 1933-1945 (August 18, 2024). OBFA-TRANSFORM Working Paper No. 2-EN
(German version soon available)

The OBFA-TRANSFORM Working Paper Series publishes ongoing research output by the group that applies the Monetary Architecture framework and the OBFA concept on various contemporary and historical subjects.

OBFA-TRANSFORM Working Paper No. 1: State Finance Beyond the Core Budget. Off-Balance-Sheet Fiscal Agencies in Germany’s Fiscal Ecosystem

Gregor Laudage, Armin Haas, Andrei Guter-Sandu, and Steffen Murau

The state as a fiscal actor is commonly perceived to be a unitary entity that interacts with the wider financial system via its core budget operated by the treasury which generates inflows via taxes and outflows through government spending. However, an emerging literature places increasing emphasis on off-balance-sheet fiscal agencies (OBFAs)—financial entities that are separate from the treasury but carry out, on behalf of the state, activities that could also be run via the core budget, and often receive explicit or implicit fiscal backstops. This gives rise to a ‘fiscal ecosystem’ of national and sub-national treasuries and OBFAs that is different in each country, historically specific, and inherently opaque. Fiscal ecosystems are subject to constant transformation that is driven by political, economic, and legal concerns, with ample path dependencies. In this article, we use Germany as a case study to develop a methodology that combines scholarship in law and political economy to categorise and empirically map its contemporary fiscal ecosystem. Throughout its turbulent history, Germany has developed a highly complex web of OBFAs across various layers of its federal system. Their number ranges in the tens of thousands, possibly close to a hundred thousand. We place them in a coordinate system and depict their proximity or distance to the core budget by drawing on their legal status, revenue model, and characteristics of their issued debt (if there is any). Moreover, we carve out the conditions under which OBFAs are subject to Germany’s constitutional debt brake and the EU fiscal rules. If and how OBFAs are affected by debt brakes has been notoriously opaque but is a matter of great political salience since in November 2023 Germany’s constitutional court objected to the financial treatment of special funds (Sondervermögen), which created a budgetary crisis and a spending freeze.

Laudage, Gregor and Haas, Armin and Guter-Sandu, Andrei and Murau, Steffen (2024), State Finance Beyond the Core Budget. Off-Balance-Sheet Fiscal Agencies in Germany’s Fiscal Ecosystem. OBFA-TRANSFORM Working Paper No. 1-EN

 

The OBFA-TRANSFORM Working Paper Series publishes ongoing research output by the group that applies the Monetary Architecture framework and the OBFA concept on various contemporary and historical subjects.

(Deutsche Version)

Staatsfinanzen jenseits des Kernhaushalts. Bilanzexterne Fiskalagenturen im deutschen fiskalischen Ökosystem

Der Begriff der staatlichen Fiskalpolitik bezieht sich gemeinhin auf Einnahmen und Ausgaben, die über den staatlichen Kernhaushalt laufen. Dieser wird typischerweise vom Finanzministerium eines Staates verwaltet. In der wissenschaftlichen Literatur wird demgegenüber zunehmend die Bedeutung von ‚bilanzexternen Fiskalagenturen‘ (off-balance-sheet fiscal agencies, OBFAs) betont. Dies sind Institutionen, die im Namen des Staates finanzielle Aktivitäten durchführen, die zwar grundsätzlich über den Kernhaushalt laufen könnten, aber in der Praxis vom Kernhaushalt getrennt sind. Häufig erhalten bilanzexterne Fiskalagenturen dafür explizite oder implizite Absicherungen oder Garantien durch den Kernhaushalt. Daraus ergibt sich ein komplexes ‚fiskalisches Ökosystem‘ aus Kernhaushalten und bilanzexternen Fiskalagenturen, das aus historischen Gründen in jedem Land anders aussieht und häufig so unübersichtlich ist, dass es sich einer genauen Analyse entzieht. Fiskalische Ökosysteme unterliegt einem ständigen Wandlungsprozess, der durch politische, wirtschaftliche und rechtliche Erwägungen bestimmt wird und zahlreiche Pfadabhängigkeiten aufweist. In diesem Aufsatz verwenden wir Deutschland als Fallstudie, um eine interdisziplinäre Methodik zu entwickeln, die Rechtswissenschaft und politische Ökonomie kombiniert und es so erlaubt, das gegenwärtige fiskalische Ökosystem konzeptionell zu erfassen und empirisch abzubilden. Im Laufe seiner turbulenten Geschichte hat Deutschland auf den verschiedenen Ebenen seines föderalen Systems ein komplexes Netz an bilanzexternen Fiskalagenturen ausgeprägt. Nach unseren Schätzungen beläuft sich deren Anzahl auf mehrere Zehntausend, möglicherweise liegt sie sogar in der Nähe von Hunderttausend. Wir ordnen sie in ein Koordinatensystem ein, das es erlaubt, ihre Nähe oder Distanz zum staatlichen Kernhaushalt darzustellen. Dabei berücksichtigen wir die rechtliche Stellung, das Einnahmemodell sowie die Verschuldungsmöglichkeiten der jeweiligen Institution. Darüber hinaus zeigen wir auf, inwiefern bilanzexterne Fiskalagenturen der im Grundgesetz verankerten Schuldenbremse und den fiskalischen Regeln der EU unterworfen sind. Die Frage nach dem Zusammenhang von bilanzexternen Fiskalagenturen und der Schuldenbremse ist von großer politischer Bedeutung. So beanstandete etwa das Bundesverfassungsgericht im November 2023 die Nutzung eines bestimmten Sondervermögens, was zu einer Haushaltskrise und einem staatlichen Ausgabenstopp führte.

Laudage, Gregor and Haas, Armin and Guter-Sandu, Andrei and Murau, Steffen (2024), Staatsfinanzen jenseits des Kernhaushalts. Bilanzexterne Fiskalagenturen im deutschen fiskalischen Ökosystem. OBFA-TRANSFORM Working Paper Nr. 1-DE

New GCF study on climate change impacts on Pari island (Indonesia)

(German version below)

In a new study, scientists from the GCF examine the current and future effects of anthropogenic global warming on the Indonesian island of Pari. The focus is on sea level rise as this is responsible for much of the climate change impacts on low-lying coral reef islands as Pari. In particular, the study examines two questions:

Can it be determined whether there is an significant likelihood that human-caused global warming and associated sea-level rise have caused, and will cause, climate change-related impacts and damage in the future?
Can it be quantified what proportion of historical and future flood damage can be attributed to anthropogenic global warming?

The study was commissioned by the Swiss Evangelical Reformed Church (HEKS) and is intended to support decision-making processes with regard to the effects of climate change and sea level rise on small islands and specifically on the island of Pari in Indonesia. The background is a lawsuit by four Indonesians against the concrete producer Holcim.

The full study can be viewed here.


Neue GCF Studie zu Auswirkungen des Klimawandels auf der indonesischen Insel Pari

In einer neuen Studie untersuchen Wissenschaftler und Wissenschaftlerinnen vom GCF die heutigen und zukünftigen Auswirkungen der menschengemachten (anthropogenen) Klimaerwärmung auf die indonesische Insel Pari. Der Schwerpunkt liegt dabei auf dem Meeresspiegelanstieg, weil dieser für einen Großteil der klimawandelbedingten Auswirkungen auf niedrig gelegene Korallenriffinseln (wie Pari) verantwortlich ist. Insbesondere untersucht die Studie zwei Fragen:

Läßt sich feststellen, ob es eine überwiegende Wahrscheinlichkeit gibt, dass die menschengemachte Klimaerwärmung und der damit verbundene Meeresspiegelanstieg zu klimawandelbedingten Auswirkungen und Schäden geführt haben, und in der Zukunft zu Schäden führen werden?
Kann quantifiziert werden, welchen ursächlichen Anteil die menschengemachte Klimaerwärmung an historischen Flutschäden und zukünftig zu erwartenden Flutschäden hat?

Die Studie wurde vom Hilfswerk der Evangelisch-reformierten Kirche Schweiz (HEKS) in Auftrag gegeben und soll Entscheidungsprozesse im Hinblick auf die Auswirkungen des Klimawandels und des Meeresspiegelanstiegs für kleine Inseln und speziell für die Insel Pari in Indonesien unterstützen. Hintergrund ist eine Klimaklage von vier Indonesier:innen gegen den Betonproduzenten Holcim.

Die vollständige Studie kann hier eingesehen werden.

New working paper: Klaus Hasselmann and Economics

Klaus Hasselmann has earned the 2021 Nobel prize in physics for his breakthroughs in analysing the climate system as a complex physical system. Since decades, as a leading climate scientist he is aware of the need for creative cooperation between climate scientists and researchers from other fields, especially economics. To facilitate such cooperation, he has designed a productive research program for economic analysis in view of climate change. Without blurring
the differences between economics and physics, the Hasselmann program stresses the complexities of today’s economy. This includes the importance of heterogeneous actors and different time scales, of making major uncertainties explicit and bringing researchers and practitioners in close interaction. The program has triggered decades of collaborative research, especially in the network of the Global Climate Forum, that he has founded for this purpose. Research inspired by Hasselmann’s innovative ideas has led to a farewell to outdated economic approaches: singleequilibrium models, a single constant discount rate, framing the climate challenge as a kind of prisoner’s dilemma and framing it as a problem of scarcity requiring sacrifices from the majority of today’s population. Instead of presenting the climate problem as the ultimate apocalyptic narrative, he sees it as a challenge to be mastered. To meet this challenge requires careful research in order to identify underutilisation of human, technical and social capacities that offer the keys to a climate friendly world economy. Climate neutrality may then be achieved by activating these capacities through investmentoriented climate strategies, designed and implemented by different actors both in industrialised and developing countries. The difficulties to bring global greenhouse gas emissions down to net zero are enormous; the Hasselmann program holds promise of significant advances in this endeavour.
Access the paper HERE or through the link in the title.

New GCF Working Paper (02/21): The Decision Theatre Triangle for societal challenges

The Decision Theatre Triangle for societal challenges

To support discussions about the challenge of a sustainable mobility transition between researchers and stakeholders, such as practice experts, decision makers, and citizens, we have developed and tested an agent-based model and a mobile Decision Theatre set-up. Due to the combination of three elements: a) mathematical modelling and simulation, b) socio-ecological, including socio-economic, data and understanding, and c) a dialogue format based on the former two elements for bringing together researchers and stakeholders — we refer to the method as the Decision Theatre Triangle. This paper presents insights gained with the sustainable mobility case and, based on these, outlines research needs for turning this method into an easy-to-set-up instrument of science communication, decision support, and co-production of research for societal challenges more generally.

Access the paper HERE or through the link in the title above.

New working paper: The European Green Deal, More than climate neutrality

The European Green Deal aims at climate neutrality of Europe by 2050, implying a significant acceleration of emission reductions. To gain the necessary support, at the same time it needs to reduce regional and social inequalities in Europe. We propose objectives in terms of jobs, growth, and price stability to complement the emission reduction targets and present a proof-of-concept investment profile for reaching these. Substantial additional public investments, of about 1.8% of last year’s GDP annually, are proposed for the next decade. Their allocation includes retrofitting the European building stock, consciously fostering a renewal of the European innovation system, and complementary measures such as education and health. The scenario thus outlined is meant as an input to the urgently needed discussion about how the European Green Deal can shift the EU economy to a new development path that realizes a carbon neutral Europe by 2050 while strengthening European cohesion much earlier.
This paper presents a new and substantially updated version of the previous GCF Working Paper no 1/2020.
Access the paper HERE or through the link in the title.

 

New GCF Working Paper (01/20): ABOUT THE EUROPEAN GREEN DEAL

Acess the full Working Paper on the European Green Deal here

With the personnel change at the top of both the European Commission and the European Central Bank, a Green Deal for Europe has been put on the agenda. To be politically feasible and socially acceptable, the European Green Deal needs to reduce not only emissions but also unemployment { especially youth unemployment { and regional as well as social inequality throughout Europe. This is possible if the Green Deal shifts the EU economy to a new development path. To provide an example showing feasibility, our paper presents a structure for the Green Deal based on large scale additional investments, in the order of 1% of GDP annually. It outlines how these can be funded, and estimates eff ects in terms of reaching the goals. An essential point is that the resources must be used in such a way as to trigger a renewal of the European innovation system; while being a challenge, the European Green Deal can thus also become an opportunity – and may be the only opportunity – to reach a carbon neutral European economy by 2050 and to revert the trend of decreasing social cohesion in Europe much earlier.

Acess the full Working Paper on the European Green Deal here

Updated Version of GCF Working Paper “Framing 1.5°C” on SSRN

[by S. Wolf, C. Jaeger, J. Mielke, F. Schuetze, R. Rosen] ||

An updated version of GCF Working Paper 2 / 2017 “Framing 1.5°C – Turning an investment challenge into a green growth opportunity” that reflects the current IPCC Special Report on 1.5°C is now published on SSRN under:
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3324509