Institutions in Crisis
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Institutions in Crisis

European Perspectives on the Recession

Edited by David Howden

This critical and thought-provoking book explores the causes and consequences of Europe’s failed political and economic institutions. Europe’s recession has created new challenges as market turmoil has shaken the foundations of the twin pillars of the new drive for European integration – political and monetary unions. This book critically assesses the patchwork solutions continually offered to hold the troubled unions together. Failed political policies, from the prodigious ‘Common Agricultural Policy’ to ever more common fiscal stimulus packages, are shown to have bred less than stellar results in the past, and to have devastating implications for future European growth. The contributors outline the manner through which European monetary union has subsidized and continues to exacerbate the burgeoning debt crisis. Most strikingly, the interplay between Europe’s political and economic realms is exposed as the boondoggle it is, with increasingly bureaucratic institutions plaguing the continent and endangering future potential.
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Chapter 7: The Eurosystem: Costs and Tragedies

Philipp Bagus


Philipp Bagus The institutional setup of the Eurosystem brought the system close to collapse in May 2010. The Greek government had to be rescued by a €110 billion loan package. The Spanish, Portuguese and Irish governments only stabilized after the introduction of a €750 billion loan facility. Member states of the Eurozone are in the process of reforming the Stability and Growth Pact (SGP) in order to prevent a future sovereign debt crisis and a collapse of the Euro. The future of the Eurozone depends on a reform that enforces meaningful penalties on fiscal irresponsibility. In this chapter I explain why the current institutional setup of the Eurosystem provoked a sovereign debt crisis and demonstrate that the institutional structure resembles a classic tragedy of the commons. In addition to the tragedy of the commons of the Eurosystem, we will find several other layers of negative externalities in the monetary sphere. We will analyse which circumstances have limited the exploitation of the commons and how the limits have been insufficient to prevent the sovereign debt crisis. Finally, we will set out several reforms that may alleviate the situation or even totally eliminate the culpable negative externalities. The more externalities a reform eliminates the more difficult tends to be its introduction politically, that is, there is a trade-off between political feasibility and reduction of negative externalities. We will rank reforms starting with the more politically moderate and hence more feasible ones, before ending with the more ambitious, thorough ones. TOWARD A USEFUL...

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