Why Is Europe Engaged in an Inter-Dependence War, and How Can It Be Stopped?

DEM Working Paper N. 2017/06

32 Pages Posted: 11 May 2017

See all articles by Luciano Andreozzi

Luciano Andreozzi

University of Trento - Department of Economics and Management

Roberto Tamborini

University of Trento - Department of Economics and Management

Date Written: May 9, 2017

Abstract

There is large evidence that European countries, the EMU in particular, are engaged in an interdependence war, i.e. non-cooperative policies with huge social and economic costs due to mutual negative externalities. In this regard, the EMU as a supranational institution with the overarching end to generate and distribute collective benefits from integration and policy coordination seems off the mark. We present a policy game between two interdependent countries showing that the causes and consequences of interdependence wars lye in non-cooperative strategies dictated by the national social preferences over "good" but costly policy choices embedded into the government's policy function. By means of the model we examine what supranational policy regimes may achieve a Pareto improvement. Among the latter, one that we call "Europe", minimises the additive loss function of the two countries. The thrust of our analysis is that the supranational regimes which do not take national preferences into account, dubbed "technocratic regimes", are dominated, so that the single alternative is between Europe and "exit" for the non-cooperative regime. An important result is that Europe is the Pareto-dominant regime only within a limited range of asymmetry between countries' social preferences. The paper concludes with some political-economic implications for the reform of the EMU.

Keywords: European Economic and Monetary Union, Policy Games, Design of Supranational Institutions

JEL Classification: P15, F55, D78

Suggested Citation

Andreozzi, Luciano and Tamborini, Roberto, Why Is Europe Engaged in an Inter-Dependence War, and How Can It Be Stopped? (May 9, 2017). DEM Working Paper N. 2017/06. Available at SSRN: https://ssrn.com/abstract=2965766 or http://dx.doi.org/10.2139/ssrn.2965766

Luciano Andreozzi

University of Trento - Department of Economics and Management ( email )

Via Inama 5
Trento, I-38100
Italy

Roberto Tamborini (Contact Author)

University of Trento - Department of Economics and Management ( email )

Via Inama 5
Trento, I-38100
Italy

Register to save articles to
your library

Register

Paper statistics

Downloads
14
Abstract Views
215
PlumX Metrics