Working Paper: CEPR ID: DP9404
Authors: Jess Fernández-Villaverde; Luis Garicano; Tano Santos
Abstract: We study the mechanisms through which the adoption of the Euro delayed, rather than advanced, economic reforms in the Euro zone periphery and led to the deterioration of important institutions in these countries. We show that the abandonment of the reform process and the institutional deterioration, in turn, not only reduced their growth prospects but also fed back into financial conditions, prolonging the credit boom and delaying the response to the bubble when the speculative nature of the cycle was already evident. We analyze empirically the interrelation between the financial boom and the reform process in Greece, Spain, Ireland, and Portugal and, by way of contrast, in Germany, a country that did experience a reform process after the creation of the Euro.
Keywords: bubbles; euro crisis; financial crisis; political economy
JEL Codes: D72; E0; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| euro adoption (F36) | relaxation of budget constraints (H60) |
| relaxation of budget constraints (H60) | abandonment of necessary structural reforms (E69) |
| financial boom (F65) | abandonment of reforms (E69) |
| financial boom (F65) | deterioration of institutions (O17) |
| abandonment of necessary structural reforms (E69) | deterioration of governance quality (O17) |
| financial boom (F65) | negative long-term growth outcomes (F69) |
| euro adoption (F36) | financial boom (F65) |