Working Paper: NBER ID: w18899
Authors: jesus fernandez-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: euro; economic reforms; financial conditions; institutional deterioration
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 |
|---|---|
| adoption of the euro (F36) | abandonment of necessary structural reforms (E69) |
| abandonment of necessary structural reforms (E69) | deterioration of governance and institutions (O17) |
| deterioration of governance and institutions (O17) | long-term negative implications for economic growth (F69) |
| credit boom (F65) | reversal of necessary reforms (P21) |
| credit boom (F65) | decline in governance quality (O17) |
| credit boom (F65) | failure to implement reforms (E69) |
| failure to implement reforms (E69) | reduced growth prospects (E66) |
| adoption of the euro (F36) | credit boom (F65) |
| credit boom (F65) | prolonged credit bubbles (E32) |