The Eurozone crisis, decentralized bargaining and the theory of EU institutions

According to neoliberal institutionalism, sovereign states create centralized international organizations to limit information asymmetries, monitor compliance, and ensure the credibility of commitments to agreed-upon policies – in short, to minimize transaction costs in a world where the Coase theorem does not apply. Neoliberal institutionalism can thus help explain the delegation of powers to supranational bodies like the European Commission (‘Commission’) or the European Central Bank (‘ECB’). Yet, what we observe in the Eurozone in 2010-2013 is the emergence of a number of influential institutions of decentralized bargaining, such as the “Merkozy duumvirate” and the “Frankfurt Group”, whose creation reversed the logic of supranational delegation. To understand the causes and the consequences of these apparently anomalous institutions we develop a model of incomplete contracts. We demonstrate that, inasmuch as they receive monopolistic powers, centralized international organizations create potential problems of discrimination. Decentralized institutions are explained by their role in mitigating these problems.