The Myth of the Self-Regulating Market: Theory, Political Power, and the Architecture of the Euro

Among the premises of the European order that emerged after 1989, the economic one—confidence in the market’s ability to regulate itself—is perhaps the most decisive, since the architecture of the single currency was also built upon it. This article traces its development in four stages: the theory and its empirical refutations; the historical assessment of the three major traditions that have vied for control of the economy; the actors who transformed neoliberalism into policy—and in some cases imposed it; and finally, its institutional implementation in the Eurozone, where the paradigm took on a specific form: the ordoliberal model.

I. The Theory and Its Refutations

The Premises and Conceptual Limits

The core of classical and neoclassical theory—from Adam Smith to the neoclassical synthesis of the twentieth century—holds that the market, left free to operate, automatically tends toward an optimal equilibrium: the “invisible hand” would coordinate millions of individual decisions into a socially efficient outcome, without the need for central planning. Prices are said to convey perfect information, while supply and demand—including the demand for labor—are said to find their own equilibrium.

This construct has four conceptual weaknesses that are difficult to circumvent. Information is never perfect or symmetrical: sellers typically know more than buyers, as George Akerlof demonstrated in his classic study of the “junk car market” (1970), and the result is adverse selection rather than efficiency—the subprime mortgage crisis of 2007–2008, in which securities were sold as safe by those who knew of their fragility, is a paradigmatic example of this. Externalities—pollution, climate change, systemic banking risk—are not incorporated into the price, which reflects only direct transactions between the parties and ignores the costs passed on to third parties or future generations. The full rationality of economic agents is an assumption, not a fact: behavioral economics—from Daniel Kahneman and Amos Tversky to Richard Thaler—has documented systematic biases—loss aversion, anchoring, herd behavior—that explain why financial markets amplify euphoria and panic, generating bubbles—such as the dot-com bubble of 2000 or the housing bubble that burst in 2007–2008—capable of diverging from fundamentals for extended periods. Finally, the labor market does not rebalance on its own: John Maynard Keynes showed that wages are sticky on the downside and that, during a recession, the decline in aggregate demand can become self-perpetuating—the so-called savings paradox—rather than spontaneously leading back to full employment.

Empirical Failures

The first major practical refutation was the Great Depression (1929–1939): the market did not correct itself spontaneously, and it took over ten years and massive public intervention—the New Deal and, later, wartime spending—to emerge from it. The 2008 crisis is the most instructive case for the current generation: the deregulation of the 1980s and 1990s, based precisely on confidence in self-regulation, produced a shadow banking system lacking adequate controls, opaque securitizations, and extreme financial leverage; the market failed to price in systemic risk until the collapse, and only extraordinary government intervention—bank bailouts, quantitative easing—prevented a total collapse. Since then, even the most free-market-oriented governments have resorted to fiscal and monetary intervention on an unprecedented scale, a pattern repeated in the response to the 2020–2021 pandemic. Italian wage stagnation fits into this same framework: three decades of essentially stagnant real wages disprove the idea that the labor market automatically redistributes efficiency gains.

The most incisive theoretical contribution to this critique remains that of Hyman Minsky, whose “financial instability hypothesis” overturns the neoclassical assumption: unconstrained financial markets do not tend toward equilibrium but generate cycles of increasing fragility, because periods of stability induce increasingly risky behavior—“stability is itself destabilizing”—until a crisis erupts. It is therefore not regulation that introduces instability into the system, but the market left to its own devices that produces it endogenously. This critique, it should be noted, does not amount to a rejection of the market as such: the allocative failure of Soviet-style planned economies demonstrates that prices remain an irreplaceable tool for coordinating decentralized information on a large scale. The real disagreement does not concern the “market yes or no” alternative, but rather the type and extent of the necessary public intervention—a question to which the major macroeconomic schools have offered different and often incompatible answers.

II. Three Traditions Put to the Test of History

A Necessary Distinction

Before making an overall assessment, it is necessary to distinguish between traditions that are often conflated in public debate. Classical liberalism (18th–19th centuries, from Smith to Ricardo) entrusts economic coordination to the market, private property, and free trade, reserving only minimal functions for the state. Keynesianism, which emerged after the Great Depression, instead assigns to fiscal and monetary policy the task of stabilizing aggregate demand through countercyclical measures. Neoliberalism, which emerged in the 1980s as a reaction to the crisis of the Keynesian compromise, is not simply “more liberalism,” but a historically specific doctrine—financial deregulation, privatization, capital liberalization, and independent central banks focused solely on price stability—spread on a global scale through the so-called Washington Consensus promoted by the International Monetary Fund and the World Bank; unlike nineteenth-century laissez–faire, it coexists, moreover, with a state that is anything but minimal, with public spending in Western countries ranging from about 35% to over 50% of GDP.

The Record of Neoliberalism

The arguments in favor of a negative assessment are solid. The share of national income allocated to labor has declined in nearly all advanced economies since the 1980s, to the benefit of capital, reversing the trend of the previous three decades; financial deregulation has produced a series of crises—the Asian crisis in 1997, the dot-com crisis in 2000, and the subprime crisis in 2008—that have occurred more frequently than during the regulated postwar period; and every systemic collapse has been averted by massive government intervention—that is, by the practical rejection of neoliberal principles, following the pattern of privatizing gains and socializing losses.

Counterarguments deserve equal consideration. Trade liberalization has coincided with the greatest reduction in extreme poverty in history, driven primarily by the integration of China and East Asia into the global economy; even progressive economists such as Dani Rodrik warn that “neoliberalism” has become such a flexible polemical label that it has lost its analytical value, lumping together disparate policies—trade liberalization, financial deregulation, fiscal austerity—that deserve separate evaluation; and no country has ever implemented it in its pure form, which allows its most radical supporters to argue that it has never truly been put to the test. One point, however, enjoys broad consensus even outside heterodox circles: the financial deregulation of the 1980s and 1990s underestimated systemic risk, to the extent that even the International Monetary Fund—a historic proponent of the Washington Consensus—acknowledged after 2008 that controls on short-term capital flows can be useful in certain circumstances—an admission that would have been unthinkable in the previous decade.

Classical Liberalism

For classical liberalism, the historical evidence is, if possible, even less favorable to its pure form. The U.S. financial panics of 1873, 1893, and 1907 show that instability is a structural feature of unregulated markets, not a recent invention; the social conditions of nineteenth-century capitalism—child labor, lack of protections, fourteen- to sixteen-hour workdays—were corrected not by the market, but by labor struggles and legislative interventions that pure laissez-faire regarded as illegitimate interference. No advanced economy today operates according to laissez-faire: all have a central bank acting as lender of last resort, antitrust legislation, labor protections, and progressive taxation. And the period of the most robust growth and lowest inequality in Western capitalism—the “Glorious Thirty,” 1945–1975—was also the least free-market-oriented, featuring capital controls, high progressive taxation, and regulated exchange rates under the Bretton Woods system.

This does not, however, justify rejecting the market: the most successful Asian economies—South Korea, Taiwan, Singapore, and, later, post-1978 China—grew through market mechanisms and trade liberalization, but always under strong strategic state guidance: neither pure liberalism nor pure statism. Property rights and the rule of law—institutions rooted in classical liberalism—demonstrate, moreover, a strong historical correlation with long-term prosperity, as even economists critical of neoliberalism, such as Daron Acemoglu and James Robinson, acknowledge.

Keynesianism: A Mirror Image of the Crisis

Keynesianism does not, for this reason, represent the simply “winning” alternative. It is true that it underpinned the “Glorious Thirty Years,” that the New Deal and the subsequent war effort restored full employment in the United States where the market had failed for a decade, and that the countercyclical responses to the 2008 crisis and the pandemic averted a collapse comparable to that of 1929—even by governments that were not ideologically Keynesian. But Keynesianism has experienced a crisis mirroring that of neoliberalism: the stagflation of the 1970s—high inflation and high unemployment occurring simultaneously—disproved the assumption of a stable trade-off between the two variables (the Phillips curve), leaving it without explanatory or problem-solving tools and opening the political space to neoliberalism. Furthermore, significant limitations remain to this day. Countercyclical spending should be symmetrical—deficits during recessions, surpluses during expansions—but political practice almost always applies only the first half of the prescription, generating structural debt; the monetarist school of Milton Friedman and rational expectations theorists such as Robert Lucas have raised objections—still debated today—regarding the effectiveness of deficit spending and the risk of “crowding out” private investment; and Keynesian tools, designed to address a shortfall in demand, are less effective against supply shocks, such as the post-pandemic inflation of 2021–2023, which forced even Keynesian-oriented central banks to implement orthodox monetary tightening.

A Synthesis, Not a Verdict

None of the three schools, therefore, has functioned for long in its pure form: each has experienced a defining historical crisis—19th-century laissez-faire in the recurring panics and social conditions of early industrial capitalism, Keynesianism in stagflation, and neoliberalism in 2008—and each, after its crisis, has had to incorporate elements of its rivals. In the practices of central banks and Western governments today, a neo-Keynesian synthesis prevails: Keynesian-style stabilization tools, tempered by the discipline learned in the 1970s—independent central banks, attention to inflation expectations—and by greater caution, at least in theory, regarding structural debt. Those who defend one of the three schools in its original form with absolute certainty are, rather than defending it, ignorant of its history.

III. From Ideas to Power: Who Promoted Neoliberalism

Mont Pèlerin, Chile, Thatcher, and Reagan

Economic theories do not spread on their own: they require actors to develop them, finance them, and, at times, impose them. The intellectual origin of neoliberalism was an explicit project. In April 1947, Friedrich Hayek gathered about forty scholars—including Ludwig von Mises, Karl Popper, and a young Milton Friedman—to defend economic liberalism against postwar “collectivism”: thus was born the Mont Pèlerin Society, which historians consider the first organized “think tank” of neoliberalism, equipped with funding networks and affiliated think tanks. For about three decades, these ideas remained politically marginal; the stage was set by the crisis of the Bretton Woods system (1971) and, above all, by the stagflation of the 1970s mentioned above.

The first nationwide experiment was not a democracy. Following General Augusto Pinochet’s coup d’état against socialist President Salvador Allende (1973), a group of Chilean economists trained at the University of Chicago—the “Chicago Boys,” the product of an academic exchange program funded by the U.S. government since the mid-1950s—convinced the regime to implement “shock therapy” consisting of liberalization, privatization, and deregulation. David Harvey defines Pinochet’s Chile as the first true laboratory for neoliberal state-building: an implementation that took place under a dictatorship, with union repression and political violence, without any democratic mandate—a case in which the word “imposition” must be taken literally.

In the United Kingdom and the United States, on the other hand, Margaret Thatcher (1979) and Ronald Reagan (1980) came to power through regular elections: here, one cannot speak of imposition in the strict sense. Both, however, were supported by a network of think tanks and financiers, partly linked to the Mont Pelerin Society, which had worked for years to make those policies presentable as common sense following the perceived failure of Keynesianism: a cultural imposition rather than an electoral one.

Conditionality in Developing Countries

The most controversial case concerns developing countries. During the Latin American debt crisis of the 1980s, the International Monetary Fund and the World Bank granted emergency loans, making them contingent on the adoption of Structural Adjustment Programs—trade liberalization, privatizations, and cuts to public spending—as a condition for avoiding default. Countries lacking viable alternatives did not freely choose among different policies but accepted conditions dictated by those who held the financial leverage; even scholars not hostile to the neoliberal project now acknowledge that those programs, in many cases, worsened rather than improved the conditions of the countries involved.

A Creation of Capitalism? The Debate on Harvey

In light of this analysis, it is legitimate to ask whether neoliberalism is not, quite simply, a necessary product of capitalism as such. The most rigorous formulation of this thesis comes from the Marxist historian David Harvey (A Brief History of Neoliberalism, 2005): neoliberalism is not a neutral theory applied for technical reasons, but a political project aimed at restoring the power of the economic elites, which had been eroded during the Glorious Thirty Years. Harvey draws on John Ruggie, who coined the term in 1982 to describe the Bretton Woods compromise: the notion of “embedded liberalism”—a class compromise in which the market operated within social and political constraints imposed by an interventionist state. When that compromise entered a crisis in the late 1960s—with the income share of the wealthiest strata at a historic low, according to data from Gérard Duménil and Dominique Lévy— the ruling classes reportedly reacted with a counteroffensive in which neoliberalism served as the instrument: defunding of the welfare state, privatizations, financialization, and “accumulation by dispossession”—that is, the use of financial crises and debt to transfer public wealth into private hands, as in the Structural Adjustment Programs. The most frequently cited data in support of this is the share of income held by the richest 0.1% in the United States, which declined through the 1970s and rose sharply beginning in the Reagan era—a trend that Harvey significantly titles “the restoration of class power.”

Even non-hostile observers, however, point out a methodological limitation: the thesis risks functioning as an assumption rather than a hypothesis to be tested, interpreting every event as confirmation rather than comparing it with alternative explanations; and while it explains well who benefited from neoliberalism, it explains less why that ruling class chose precisely that strategy, at that moment, among the others available.

There is also a crucial conceptual clarification: the period from 1945 to 1975 was, too, capitalism. A market economy, private ownership of the means of production, and profit as the engine of economic activity were also present in the Keynesian era, which nonetheless produced much lower levels of inequality, strong unions, and an extensive welfare state. Reducing neoliberalism to the “creation of capitalism” confuses the general system—which allows for very different variants—with a specific, politically chosen variant of it. The framework of “varieties of capitalism” by Peter Hall and David Soskice (2001) documents this: liberal market economies (the United States, the United Kingdom) and coordinated market economies (Germany, Japan, Sweden) are all fully capitalist, but with profoundly different distributional trajectories—and even Rhenish capitalism, with its co-determination on supervisory boards, remains a distinct framework from the Nordic model, though related to it in the tradition of the strong welfare state.

The most honest conclusion, therefore, distinguishes between two levels. It is likely that neoliberalism served the interests of concentrated capital more than Keynesianism did: it is difficult to read the history of inequality after 1980 without seeing a link between the political victory of those ideas and the resulting upward redistribution of wealth. That capitalism as such necessarily generates neoliberalism, however, is far less tenable, since during the same period and in the same West it produced very different variants. The decisive variable is the political and social balance of power within each national capitalist system—unions, the electoral system, political culture, institutional architecture—: capitalism sets the constraints within which conflict unfolds, but does not mechanically determine its outcome.

IV. The Architecture of the Euro: An Ordoliberal Imprint

A Specific Genealogy

The European Union did not originate as a neoliberal project: the ECSC (1951) and the Treaty of Rome (1957) predate the political rise of neoliberalism by thirty years, and the Common Agricultural Policy remains one of the most interventionist policies ever conceived in the West. The architecture of Economic and Monetary Union, built primarily between 1986 and 1992, bears the imprint of a distinct tradition, albeit one related to Anglo-American neoliberalism: the ordoliberalism of the Freiburg School (Walter Eucken, Franz Böhm, 1930s), which entrusts the state with the task of establishing and enforcing a rigid framework of rules within which competition operates without distortions—a “third way” between planning and laissez-faire.

Strict rules, monetary independence from politics, and each state’s responsibility for its own imbalances: this is the thread linking the Eurozone’s flaws—the ECB’s mandate centered on price stability, the ban on state aid, and fiscal rules lacking a common fiscal capacity—which reflect ordoliberal logic more than the neoliberalism of Hayek and Friedman. It remains a matter of debate whether this influence was a coherent project or the result of compromises between divergent national traditions, primarily French and German; however, the consistency between ordoliberal principles and institutional outcomes is hardly coincidental, as the seven structural flaws outlined below demonstrate.

A Non-Optimal Currency Area

The most fundamental flaw is theoretical in nature and predates the ordoliberal shift itself. Robert Mundell (1961) and Peter Kenen (1969) defined the conditions under which multiple countries can share a currency without recurring crises: labor mobility, fiscal transfers capable of absorbing asymmetric shocks, and synchronized economic cycles. The literature generally agrees—as summarized, among others, in a CEPR paper on the Eurozone’s design flaws—that the European monetary union does not adequately meet any of these conditions: labor mobility remains low due to linguistic, cultural, and qualification recognition barriers; there is no system of common transfers comparable to the U.S. federal system, precisely because the ordoliberal framework prioritizes the responsibility of individual states over risk mutualization; and the industrial specialization of member countries, rather than decreasing, has increased since the introduction of the euro, heightening vulnerability to asymmetric shocks.

No Lender of Last Resort for Member States

By relinquishing control of its own central bank, each member state has lost a lender of last resort capable of guaranteeing sovereign debt in its own currency—a role that no European institution has fully assumed, partly due to the ordoliberal reluctance toward discretionary central bank interventions in support of individual states. Transitory liquidity crises can thus turn into solvency crises, as happened in Greece between 2010 and 2015. Only the ECB’s Outright Monetary Transactions, announced in 2012 following Mario Draghi’s pledge to do “whatever it takes” to save the euro, stemmed the crisis of confidence—amid objections from the more orthodox sectors of the German ordoliberal tradition—without, however, remedying the structural flaw.

The TARGET2 Imbalances

The most concrete technical indicator is the TARGET2 interbank settlement system, which since 2011–2012 has shown growing imbalances between the North and the South: Germany’s credit balance exceeded 1,200 billion euros in 2022, while Italy and Spain remained in debt by several hundred billion each. This phenomenon reflects both divergences in competitiveness and a lack of trust among banks—since 2011–2012, banks in the North have stopped lending their liquidity to those in the South—and has been partly amplified by the ECB’s quantitative easing (approximately 2,600 billion euros between 2015 and 2018), since the injected liquidity tends to flow into financial systems perceived as safer, which are concentrated precisely in the North.

An Incomplete Banking Union

The ECB itself, in its 2025 strategic assessment, lists the completion of the banking union and the capital markets union among the unmet priorities. Above all, there is no common deposit insurance system—proposed in 2015 but blocked by opposition from Germany and the Netherlands, which were reluctant to guarantee deposits perceived as riskier in the South: a refusal consistent with the ordoliberal logic of individual responsibility. This results in a vicious cycle between banks and governments (the so-called doom loop): banks hold large amounts of their own country’s sovereign debt, so that a government bond in distress weakens the banks, and banks in distress require public aid that exacerbates the debt.

Fiscal Rules Without Fiscal Capacity

The Stability and Growth Pact sets rigid limits—deficit at 3% of GDP, debt at 60%—without a corresponding mechanism for common transfers capable of absorbing asymmetric shocks: this is perhaps the purest example of the ordoliberal imprint, with binding rules in place of shared fiscal capacity. In its June 2026 mission to the Eurozone, the International Monetary Fund recommended that highly indebted countries improve their structural primary balance by approximately three percentage points of GDP by 2031: an adjustment that, without corresponding growth, risks replicating the recessionary austerity already experienced during the Greek crisis.

The Competitiveness Gap Between the North and the South

Since the introduction of the euro, labor cost differentials per unit of output between Germany and the Mediterranean periphery have not been corrected through exchange rate devaluation, but only through so-called “internal devaluation”—wage compression and unemployment—: a politically costly and socially destabilizing process, as demonstrated by the Greek case and, to a lesser extent, by the Italian and Portuguese cases. It is the same mechanism that the series identifies in West Africa’s CFA franc: a common currency that prevents exchange rate adjustments shifts the entire burden of adjustment onto the domestic labor market.

An Unresolved Democratic Deficit

Finally, there remains an issue only partially attributable to the ordoliberal framework: the perceived distance between the Union’s institutions—a Commission not directly elected, Council decision-making processes that lack transparency for the public—and its citizens, a deficit of legitimacy debated for decades in European political science and intertwined with disputes over the rule of law in Hungary and Poland and with the veto power in the Council. A Union perceived as distant struggles to generate the consensus necessary for the long-term reforms—common fiscal transfers, a banking union, and treaty revisions—that the crises outlined here would require.

Conclusions

The trajectory outlined here forms a coherent sequence. On a theoretical level, the idea of a self-regulating market has been refuted both by conceptual criticism and by crises—from 1929 to 2008—without this justifying a rejection of the market as such: a comparison of liberalism, neoliberalism, and Keynesianism shows that no school of thought has endured for long in its pure form. Historically speaking, neoliberalism did not assert itself by its own force, but through identifiable actors—the Mont Pelerin Society, the Chicago Boys, the conditionality of the International Monetary Fund and the World Bank, and the Thatcher and Reagan administrations—and it was a political choice among the possible variants of capitalism, not its inevitable outcome. Finally, from an institutional perspective, the Eurozone has codified into rules a related yet distinct tradition—the ordoliberal one—whose flaws—a suboptimal currency area, the absence of a lender of last resort, an incomplete banking union, and fiscal rules lacking a common fiscal capacity—reflect a preference for discipline at the level of individual states over risk-sharing.

The common thread is the transformation of a political choice into a constraint presented as technical. Understanding this is the prerequisite for assessing the other crises addressed in this series—globalization, rearmament, strategic dependence on the United States, migration—all marked, to varying degrees, by Europe’s same difficulty in translating a shared diagnosis into a capacity for common action.

Bibliographic Note

The data and references cited in this article are drawn, among other sources, from CEPR (Centre for Economic Policy Research), the European Central Bank, the International Monetary Fund, and the World Bank, as well as from the theoretical works of Friedrich Hayek, George Akerlof, Daniel Kahneman, Amos Tversky, Richard Thaler, Hyman Minsky, John Maynard Keynes, Milton Friedman, Robert Lucas, Dani Rodrik, Daron Acemoglu and James Robinson, John Ruggie, David Harvey, Gérard Duménil and Dominique Lévy, Peter Hall and David Soskice, Robert Mundell, Peter Kenen, Walter Eucken, and Franz Böhm. Data current as of July 2026.