Diverse Models of Capitalism and Synchronization of Business Cycles

We explore the nexus between varieties of capitalism and optimum currency area theory and analyze the impact of institutional architecture on business cycle synchronization between the euro area and each of the 25 EU countries. We find that the economies with greater institutional resemblance to the German cluster show stronger business cycle synchronization with the euro area. We corroborate the conclusions from previous studies, stating that without limiting institutional heterogeneity in the euro area its sustainability is at risk. Our results are a strong argument for going beyond the theory of optimum currency areas while evaluating the long-term costs of monetary integration.