Europe and the logic of hierarchy

Building on the view that financial systems from contract and trading structures through regulation are artifacts of law and politics, this paper analyzes the fundamental reasons for the observed hierarchy in all financial systems. Why are financial systems hierarchical? The answer offered here is mutualization at scale: balance sheets with access to larger economic catchment areas impart liquidity discipline or elasticity on smaller balance sheets, thereby setting the terms on which the latter operate. Hierarchy then sets the logical limit to the constructive power of law viz. finance. Yet because hierarchy is an abstract, functional requirement, the concrete institutional form that expresses this function is indeterminate a priori. This openness is a key predicate of the constructive power of law and politics in finance, allowing us to conceptualize systems that are democratic even while they attend to the specific logic of financial systems. These themes are explored in the context of the European Economic and Monetary Union and its recent crisis.