Creating the European monetary union is arguably one of the biggest experiments in social history. But we lack a theoretical account that can make sense of creating a union between an ever expanding number of diverse and unequal nation states. My point of departure is that integration generally allows for risk-sharing between states. Diversity of member states makes risk-sharing in a monetary union possible and potentially beneficial, but at the same time ripe with political conflict and economic strains. In this talk, I will give an overview of this novel theory. Then I present empirical research on how financial integration in the Euro area was meant to contribute to income and consumption smoothing and explain why this has not worked out as expected.
