The Eurozone crisis and the rise of China in the global monetary and trading system: The political economy of an asymmetric shock

In this article we examine the role of EMU-China monetary and trade relations in the divergent evolution of the extra-regional trade balance of Germany and the GIPS countries (Greece, Italy, Portugal, Spain). These deepening relations generated an asymmetric shock in the Eurozone: while Germany largely benefited from the rise of China in the global monetary and trading system, the GIPS countries have been much less adapted. Drawing on the insights of the varieties of capitalism literature, we argue that the institutional adaptability of these countries to these deepening relations has been a function of the presence of particular labor market institutions that allow manufacturing firms to maintain their competitiveness. Coordinated labor market institutions supported Germany's extra-regional trade balance performance by bestowing its manufacturing firms with comparative institutional advantages, whereas the absence of these labor market institutions in the GIPS rendered their manufacturing firms much less institutionally adjusted to deal with the competitiveness pressures associated with the rise of China. As such, EMU-China monetary and trade relations have been a contributing factor in the Eurozone debt crisis by forcing the GIPS countries to run increasing extra-regional trade deficits.