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The Euro Area Crisis: Politics over Economics

Listed author(s):
  • Athanasios Orphanides

    ()

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. Copyright International Atlantic Economic Society 2014

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File URL: http://hdl.handle.net/10.1007/s11293-014-9419-1
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Article provided by Springer & International Atlantic Economic Society in its journal Atlantic Economic Journal.

Volume (Year): 42 (2014)
Issue (Month): 3 (September)
Pages: 243-263

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Handle: RePEc:kap:atlecj:v:42:y:2014:i:3:p:243-263
DOI: 10.1007/s11293-014-9419-1
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  1. Enrico Spolaore, 2013. "What Is European Integration Really About? A Political Guide for Economists," Journal of Economic Perspectives, American Economic Association, vol. 27(3), pages 125-144, Summer.
  2. Jesús Fernández-Villaverde & Luis Garicano & Tano Santos, 2013. "Political Credit Cycles: The Case of the Eurozone," Journal of Economic Perspectives, American Economic Association, vol. 27(3), pages 145-166, Summer.
  3. Sargent, Thomas J., 2011. "United States Then, Europe Now," Nobel Prize in Economics documents 2011-6, Nobel Prize Committee.
  4. Jens Boysen-Hogrefe, 2012. "Die Zinslast des Bundes in der Schuldenkrise: Wie lukrativ ist der „sichere Hafen“?," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 13, pages 81-91, May.
  5. Michaelides, Alexander, 2014. "What Happened in Cyprus?," CEPR Discussion Papers 9993, C.E.P.R. Discussion Papers.
  6. Stephanie Schmitt-Grohé & Martin Uribe, 2013. "Downward Nominal Wage Rigidity and the Case for Temporary Inflation in the Eurozone," Journal of Economic Perspectives, American Economic Association, vol. 27(3), pages 193-212, Summer.
  7. Peter Temin & David Vines, 2013. "The Leaderless Economy: Why the World Economic System Fell Apart and How to Fix It," Economics Books, Princeton University Press, edition 1, number 9932.
  8. Zenios, Stavros A., 2014. "Fairness and Reflexivity in the Cyprus Bail-In," Working Papers 14-04, University of Pennsylvania, Wharton School, Weiss Center.
  9. Kevin H. O'Rourke & Alan M. Taylor, 2013. "Cross of Euros," Journal of Economic Perspectives, American Economic Association, vol. 27(3), pages 167-192, Summer.
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