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Author(s): Sebastián Dellepiane Avellaneda and Niamh Hardiman

Paper number and date: WP 10-3, August 2010

Abstract: Ireland’s economic crisis has roots in policy mistakes since 2000. These are grounded in institutional weaknesses in financial regulation, shortcomings in the way fiscal policy is made, overly intimate relationships between government and powerful interests in society, and problems with the manner in which wage determination too place. But the Europeancontext of these policy errors also needs to be taken into account. The creation of the Euro created a set of perverse incentives for the peripheral economies which were meant to be managed at domestic level. In the absence either of European coordinating policy measures, or effective disciplines on national decision-making, the rules of the Stability and Growth Pact proved much weaker than intended, and the problems accumulating in the weaker economies made them particularly exposed to crisis when the downturn came. Similarly, national-level responses to the crisis show diversity depending on the institutional and political resources available to them. Ireland quickly adopted a classic strategy of orthodox austerity policies, and it is clear that its options, like those of the other European peripheral economies, were extremely limited on this matter. However, as countries were left to design their own stand-alone measures, the shortcomings in the institutional design of European decision-making became clearer. The crisis is not merely one of peripheral economies’ policy errors, but extends to the design of monetary union itself. The crisis of the Irish and other peripheral economies points to a crisis at the heart of European politics.

 

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