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Why is Europe engaged in an inter- dependence war, and how can it be stopped?

Author

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  • Luciano Andreozzi

    ()

  • Roberto Tamborini

    ()

Abstract

There is large evidence that European countries, the EMU in particular, are engaged in an interdependence war, i.e. non-cooperative policies with huge social and economic costs due to mutual negative externalities. In this regard, the EMU as a supranational institution with the overarching end to generate and distribute collective benefits from integration and policy coordination seems off the mark. We present a policy game between two interdependent countries showing that the causes and consequences of interdependence wars lye in non-cooperative strategies dictated by the national social preferences over ''good'' but costly policy choices embedded into the government's policy function. By means of the model we examine what supranational policy regimes may achieve a Pareto improvement. Among the latter, one that we call ''Europe'', minimises the additive loss function of the two countries. The thrust of our analysis is that the supranational regimes which do not take national preferences into account, dubbed ''technocratic regimes'', are dominated, so that the single alternative is between Europe and ''exit'' for the non-cooperative regime. An important result is that Europe is the Pareto-dominant regime only within a limited range of asymmetry between countries' social preferences. The paper concludes with some political-economic implications for the reform of the EMU.

Suggested Citation

  • Luciano Andreozzi & Roberto Tamborini, 2017. "Why is Europe engaged in an inter- dependence war, and how can it be stopped?," DEM Working Papers 2017/06, Department of Economics and Management.
  • Handle: RePEc:trn:utwprg:2017/06
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    File URL: http://www.economia.unitn.it/alfresco/download/workspace/SpacesStore/a245fd52-574c-424b-a9b0-6e016d288f49/DEM2017_06.pdf
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    References listed on IDEAS

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    1. Gneezy, Uri & Rustichini, Aldo, 2000. "A Fine is a Price," The Journal of Legal Studies, University of Chicago Press, vol. 29(1), pages 1-17, January.
    2. Alberto Alesina & Ignazio Angeloni & Federico Etro, 2005. "International Unions," American Economic Review, American Economic Association, vol. 95(3), pages 602-615, June.
    3. Luc Eyraud & Vitor Gaspar & Tigran Poghosyan, 2017. "Fiscal Politics in the Euro Area," IMF Working Papers 17/18, International Monetary Fund.
    4. Enrico Spolaore, 2014. "The Political Economy of European Integration," Discussion Papers Series, Department of Economics, Tufts University 0778, Department of Economics, Tufts University.
    5. Alberto Alesina & Ignazio Angeloni & Federico Etro, 2001. "Institutional Rules for Federations," NBER Working Papers 8646, National Bureau of Economic Research, Inc.
    6. Tamim Bayoumi, 2014. "After the Fall; Lessons for Policy Cooperation from the Global Crisis," IMF Working Papers 14/97, International Monetary Fund.
    7. Wickens, Michael R., 2016. "Is there an alternative way to avoid another eurozone crisis to the Five Presidents' Report?," CEPR Discussion Papers 11225, C.E.P.R. Discussion Papers.
    8. Wickens, Michael, 2016. "Is there an alternative way to avoid another eurozone crisis to the Five Presidents' Report?," Journal of Empirical Finance, Elsevier, vol. 39(PB), pages 156-165.
    9. Putnam, Robert D., 1988. "Diplomacy and domestic politics: the logic of two-level games," International Organization, Cambridge University Press, vol. 42(03), pages 427-460, June.
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    Cited by:

    1. Klaudijo Klaser, 2018. "The European Social Welfare Function Shaped on a Difference Principle: A Normative Rawlsian Approach in Favour of Fiscal Union," CESifo Working Paper Series 7186, CESifo Group Munich.

    More about this item

    Keywords

    European Economic and Monetary Union; policy games; design of supranational institutions;

    JEL classification:

    • F55 - International Economics - - International Relations, National Security, and International Political Economy - - - International Institutional Arrangements
    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation

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