Corruption, Reform and the Euro

Most policymakers and academics predicted that the European monetary union would lead to economic and institutional modernizaon in its least productive members – Greece, Ireland, Italy, Portugal and Spain. In fact, apart from Ireland, these countries became even more corrupt and their governments even less effective. This paper suggests an explanation that links the reluctance of peripheral countries to reform with the increase in their corruption levels. It also argues that their societies were stuck in a collective action problem: individuals have understood that corruption is antithetical to institutional quality and reform, but, as they cannot trust each other to refrain from corrupt practices, they stand to lose individually from not being corrupt themselves. Monetary union was seen as an external authority that would resolve this problem. Yet weak EU and eurozone monitoring and sanctioning discouraged the formation of social norms while making it attractive for formerly non-corrupt actors to engage in corruption, given the low risk of being caught. Survey evidence supports growth in perceptions of corruption and bribery, along with the weakening of social trust, trust in the police and in politicians across the periphery after the euro’s introduction.