The Bail-Out! Positive Political Economics of Greek-type Crises in the EMU
AbstractThe Greek bail-out was highly controversial. An oft-heard assessment is that i) the bail-out was a mistake, ii) the political haggling over it was irrational and iii) the bail-out will create a moral hazard problem. Contrary to this view, our analysis suggests that, given EMU’s present political-economic set-up, i) the bail-out was unavoidable, ii) the lengthy process of political haggling leading to it was understandable, and iii) the bail-out does not have to be necessarily associated with a future moral hazard problem. Based on our analysis, we suggest that the EMU’s institutional design could be improved by establishing ‘exit rules’ and that bail-outs should be made rule-based. We have based our analysis on a political-economic, game-theoretic model that helps to understand why and how the parties involved in the Greek crisis arrived at the bail-out and on what conditions the final solution depended. The model allows tracing analytically the dynamics of the negotiation processes as well as the conditions and parameters on which the scope and limits of fiscal redistribution in EMU depends. In doing so, we formally take account of the ‘negative externality’ problem that has been central to policy debates related to the EMU’s institutional design and has played an important role in the Greek crisis. However, contrary to the existing literature, we do not only focus on the economic aspects of such negative externality, but also look at where they emanate from and interact with political factors, in particular the dynamics of the political negotiation process within the EMU.
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Bibliographic InfoPaper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3178.
Date of creation: 2010
Date of revision:
Greek crisis; bail-out; negative externality; political economics; game theory; euro; EMU;
Other versions of this item:
- Christian Fahrholz & Cezary Wójcik, 2012. "The Bail-Out! Positive Political Economics Of Greek-Type Crises In The Emu," Journal of International Commerce, Economics and Policy (JICEP), World Scientific Publishing Co. Pte. Ltd., vol. 3(02), pages 1250010-1-1.
- Christian Fahrholz & Cezary Wojcik, 2010. "The Bail-Out! Positive political economics of Greek-type crises in the EMU," CASE Network Studies and Analyses, CASE-Center for Social and Economic Research 413, CASE-Center for Social and Economic Research.
- C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
- H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
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