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The Euro Area Crisis: Politics over Economics

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  • Orphanides, Athanasios

Abstract

This paper explores the dominant role of politics in decisions made by euro area governments during the crisis. Decisions that appear to have been driven by local political considerations to the detriment of the euro area as a whole are discussed. The domination of politics over economics has led to crisis mismanagement. The underlying cause of tension is identified as a misalignment of political incentives. Member state governments tend to defend their own interests in a noncooperative manner. This has magnified the costs of the crisis and has resulted in an unbalanced and divisive incidence of the costs across the euro area. The example of Cyprus is discussed, where political decisions resulted in a transfer of about half of 2013 GDP from the island to cover losses elsewhere. In the absence of a federal government, no institution can adequately defend the interests of the euro area as a whole. European institutions appear weak and incapable of defending European principles and the proper functioning of the euro. Political reform is needed to sustain the euro but this is unlikely to pass the political feasibility test with the current governments of Europe.

Suggested Citation

  • Orphanides, Athanasios, 2014. "The Euro Area Crisis: Politics over Economics," CEPR Discussion Papers 10033, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:10033
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    Citations

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    Cited by:

    1. Athanasios Orphanides, 2020. "The fiscal–monetary policy mix in the euro area: challenges at the zero lower bound," Economic Policy, CEPR;CES;MSH, vol. 35(103), pages 461-517.
    2. Stergios Skaperdas, 2015. "Myths and Self-Deceptions about the Greek Debt Crisis," Revue d'économie politique, Dalloz, vol. 125(6), pages 755-785.
    3. Orphanides, Athanasios, 2014. "Are rules and boundaries sufficient to limit harmful central bank discretion? Lessons from Europe," Journal of Economic Dynamics and Control, Elsevier, vol. 49(C), pages 121-125.
    4. Regina Queiroz, 2017. "From the exclusion of the people in neoliberalism to publicity without a public," Palgrave Communications, Palgrave Macmillan, vol. 3(1), pages 1-11, December.
    5. Orphanides, Athanasios, 2017. "Central Bank Policies and the Debt Trap," CEPR Discussion Papers 11834, C.E.P.R. Discussion Papers.
    6. Chen, Yi-Ning Katherine, 2018. "Customer Acceptance of IPTV After Service Failure," 22nd ITS Biennial Conference, Seoul 2018. Beyond the boundaries: Challenges for business, policy and society 190355, International Telecommunications Society (ITS).
    7. Kleczka, Mitja, 2015. "Monetary Policy, Fiscal Policy, and Secular Stagnation at the Zero Lower Bound. A View on the Eurozone," MPRA Paper 67228, University Library of Munich, Germany.
    8. Jorg Bibow, 2015. "The Euro's Savior? Assessing the ECB's Crisis Management Performance and Potential for Crisis Resolution," Economics Working Paper Archive wp_845, Levy Economics Institute.
    9. repec:liu:liucej:v:14:y:2017:i:1:p:13-36 is not listed on IDEAS
    10. van Riet, Ad, 2017. "Addressing the safety trilemma: a safe sovereign asset for the eurozone," ESRB Working Paper Series 35, European Systemic Risk Board.
    11. Regina Queiroz, 2018. "Individual liberty and the importance of the concept of the people," Palgrave Communications, Palgrave Macmillan, vol. 4(1), pages 1-12, December.

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    More about this item

    Keywords

    Currency union; Euro; European integration; Sovereign debt; Deauville; Cyprus;
    All these keywords.

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G01 - Financial Economics - - General - - - Financial Crises
    • H12 - Public Economics - - Structure and Scope of Government - - - Crisis Management
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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