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The political economy of the Euro crisis: Cognitive biases, faulty mental models, and time inconsistency

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  • Willett, Thomas D.
  • Srisorn, Nancy

Abstract

This paper discusses a number of major factors that led to the euro crisis and the failure of officials to deal with it effectively. It is argued that a good deal of these deficiencies in policy can be explained by a combination of faulty mental models, time-inconsistency problems, and cognitive biases such as wishful thinking. The project of European integration has brought great economic benefits and fulfilled the founders’ hopes that the European economies would become so tied together that war would be unthinkable. In creating the euro, however, they failed to recognize that monetary integration is fundamentally different from trade integration and that the group of euro countries as a whole did not come close to meeting the criteria for an optimum currency area. Furthermore the institutional infrastructure created for the euro was far too weak to head off emerging problems and to deal effectively with the crisis once it broke out.

Suggested Citation

  • Willett, Thomas D. & Srisorn, Nancy, 2014. "The political economy of the Euro crisis: Cognitive biases, faulty mental models, and time inconsistency," Journal of Economics and Business, Elsevier, vol. 76(C), pages 39-54.
  • Handle: RePEc:eee:jebusi:v:76:y:2014:i:c:p:39-54
    DOI: 10.1016/j.jeconbus.2013.12.001
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    References listed on IDEAS

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    Cited by:

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    2. Jaramillo, Laura & Mulas-Granados, Carlos & Kimani, Elijah, 2017. "Debt spikes and stock flow adjustments: Emerging economies in perspective," Journal of Economics and Business, Elsevier, vol. 94(C), pages 1-14.
    3. Liu Yao & Mukherjee Arijit, 2024. "Lobbying for Tariff Protection, International Technology Licensing and Consumer Surplus," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 24(1), pages 117-139, January.

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    More about this item

    Keywords

    #60; F30; H12; Political economy; Eurozone; European union; Financial crisis; Debt crisis;
    All these keywords.

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • H12 - Public Economics - - Structure and Scope of Government - - - Crisis Management

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