Centralization, Decentralization and Contingency Dependent Governance in the European Union: A Game Theoretical Analysis

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We used a Contract& Game Theory framework to analyze the mechanisms of Eurozone Financial Governance, with a focus on centralization vs. decentralization and incentive problems. We derived the conditions for optimizing the EU's current allocation of authority, Monetary Centralization and Fiscal Decentralization, and found that what is effective is "contingency dependent governance" based on "relative sovereignty," where there is a division of authority as the basic structure and the main body governs the EU with leading sovereignty depending on the contingency. We focused on how financial markets put pressure on the EU in the euro crisis and how this led the EU to build more robust institutions, and approached this by applying the Coase's theory of externalities. Further, applying the framework of an entry deterrence game conceptually, we analyzed how the EU, facing challenges from the markets, moved to build fiscal and monetary institutions such as the European Stability Mechanism.