The Political Economy of Financial Subordination: The Role of Currency and Sovereign Debt Hierarchies

This PhD thesis investigates how monetary and financial relations structure core–periphery divergences, emphasizing the role of currency and sovereign debt hierarchies. Drawing on a pluralist approach within heterodox economics, it examines the financial subordination of both the global periphery and the Eurozone periphery. The disciplinary power of capital exercised through financial markets reaches its most intense expression in the global periphery. Subordinated within the international monetary and financial system, these countries issue currencies lacking international acceptability and sovereign debts that are not perceived globally as safe assets. This thesis explores why such financial subordination persists as a structural condition. Monetary and financial hierarchies also shape spatial inequalities at the regional level, assuming different forms depending on local characteristics. This thesis also investigates why, in the Eurozone, a region belonging to the global core and issuing a strong international currency, the disciplinary power of finance still operates unevenly across member states. Chapters 1 and 2 analyse the international financial subordination of the global periphery. Chapter 1 investigates state financialisation in the periphery through a case study of Brazil. State financialisation is conceptualised as a dual process: the state promotes and depends on financial markets, while these markets discipline it toward neoliberal policies. In peripheral economies, this dynamic is shaped by international currency and sovereign debt hierarchies. This mutual dependence creates a contradiction: financial deepening provides risk-management tools while reinforcing global financial hierarchies. The argument is illustrated through Brazil, showing how the Central Bank and Treasury became increasingly entangled with financial markets as they managed the risks attached to the country’s currency and sovereign debt. After the reversal of the financial cycle in 2013, these dynamics strengthened market discipline and deepened the neoliberal policy agenda. Chapter 2 explores patterns of external financial vulnerability in peripheral countries and their link to foreign debt and its currency denomination. It argues that the ability to borrow abroad in local currency does not represent a structural break in vulnerability patterns. These vulnerabilities remain rooted in global monetary and financial hierarchies, while the interaction between the global financial cycle and domestic characteristics shapes their specific forms. The chapter develops an open economy stock–flow consistent (SFC) growth model to examine the effects of a foreign liquidity-preference shock. The model shows that greater reliance on local-currency foreign debt creates new vulnerability channels that coexist with, and might even reinforce, traditional ones linked to foreign-currency debt. Policy simulations suggest that capital controls can stabilise investor expectations and mitigate the effects of foreign liquidity shocks. Chapters 3 and 4 analyse the regional financial subordination of the Eurozone periphery. Chapter 3 argues that financial asymmetries within the Eurozone reflect a regional hierarchy of sovereign debts shaped by the EMU’s institutional architecture. It introduces the concept of the “Eurozone’s contradiction”: the tension between enforcing financial discipline and preserving the monetary union. When this tension escalates and systemic risks emerge, institutional and policy interventions temporarily soften market discipline and compress the sovereign debt hierarchy. As risks recede, discipline is re-imposed, allowing asymmetries to return. Thus, the periphery’s regional financial subordination is dynamically shaped by EMU institutions in managing the Eurozone’s contradiction. This framework is applied to analyse policy and institutional developments during the debt crisis, the pandemic, and the post-pandemic period. Chapter 4 investigates the role of sovereign investor groups in reproducing and reinforcing the Eurozone’s core–periphery divide. It provides a descriptive and statistical analysis of investor bases across member states and their relationship with bond yields and ECB policies. While domestic banks tend to behave more uniformly, foreign investors respond asymmetrically, amplifying core–periphery divergence. The chapter argues that the institutional approach to sovereign debt is crucial in shaping these dynamics. It also develops a framework to evaluate the impact of quantitative tightening (QT) on member-state financial fragility. By combining QT effects with the potential re-emergence of foreign investor asymmetries, it shows how these processes may deepen intra-Eurozone divergence.