‘Whatever it takes’: Polanyian perspectives on the eurozone crisis and the gold standard

Abstract

The parallels between the monetary politics of the gold standard and that of the eurozone crisis are striking and have informed contemporary debate about the future of European integration. The eurozone crisis has been widely interpreted as the result of a mismatch between international monetary integration and a concomitant lack of fiscal integration, or more broadly as the result of a European Union which is economically integrated, yet politically fragmented. The prospect of a 1930s-style descent into division and nationalism has formed the backdrop against which moves towards extensive integration at the supranational level have been made. Polanyi diagnosed the political effects of monetary integration through his analysis of the gold standard system in The great transformation, making it important that we unpack his analysis and consider carefully how a Polanyian perspective might apply to the eurozone today. I argue that Polanyi encourages us to look beyond ‘monetary vs. fiscal’ and ‘economic vs. political’ characterizations of European integration, and instead to examine how such oppositions are formed in the first place and how they constrain political debate, particularly in terms of how ‘sound money’ is established as the highest policy concern. Through a re-reading of Polanyi's distinction between ‘all-purpose’ and ‘special-purpose’ money, I highlight how, despite the huge efforts undertaken to preserve the identity of the euro as an all-purpose currency, the eurozone crisis has rendered visible a series of latent conflicts between the different functions of money. This analysis moves us away from the ‘monetary vs. fiscal’ integration view of the eurozone crisis and towards a more open study of how the various possible purposes of money are being articulated and challenged, offering some limited hope for alternatives to the current eurozone policy agenda.     

Fiscal Consolidation and Australia's Public Debt

Australia has experienced one of the fastest growing public debt levels in the world post‐Global Financial Crisis due to a series of large federal budget deficits driven by high government spending. In this paper we examine the balance sheet implications of this escalating public debt, before proposing some macro‐fiscal objectives for determining its sustainable level. These objectives are to (i) restore the federal government's solvency; (ii) eliminate foreign public debt; and (iii) achieve budgetary balance over the business cycle. Empirically, we first examine how much fiscal consolidation is required for debt stabilisation at current levels, before considering what sized budget balances are needed to achieve the target debt to GDP ratios consistent with the proposed objectives. The results show that no target debt to GDP level consistent with the optimal levels will be met on current fiscal settings in the medium term. This implies significantly greater fiscal consolidation is required to minimise future fiscal risk.     

Germany and the Eurozone Crisis: Between Hegemony and Domestic Politics

This paper explores Germany’s centrality to the outcome of the eurozone crisis. It argues that the eurozone crisis has led Germany’s ordo-liberal principles to trump its other longstanding commitment – i.e. to European integration. These two principles are explored in order then to shed light on how they have played out during the crisis. German centrality has created high expectations for it to provide leadership. Exploring hegemony conceptually and in practice, it is argued that international legitimacy and increasing domestic constraints have limited a leadership role. Indeed, it is argued that it is the domestic political situation that explains why ordo-liberalism has trumped pro-Europeanism. Ordo-liberal emphasis on stability culture has provided a valuable strategic resource for securing German objectives within the eurozone while satisfying the requirements of domestic politics.     

The Impact of Parties and Elections on Municipal Debt Policy in Mexico

Opportunistic electoral fiscal policy cycle theory suggests that all subnational officials will raise fiscal spending during elections. Ideological partisan fiscal policy cycle theory suggests that only left‐leaning governments will raise election year fiscal spending, with right‐leaning parties choosing the reverse. This article assesses which of these competing logics applies to debt policy choices. Cross‐sectional time‐series analysis of yearly loan acquisition across Mexican municipalities—on statistically matched municipal subsamples to balance creditworthiness across left‐ and right‐leaning governments—shows that all parties engage in electoral policy cycles but not in the way originally thought. It also shows that different parties favored different types of loans, although not always according to partisan predictions. Both electoral and partisan logics thus shape debt policy decisions—in contrast to fiscal policy where these logics are mutually exclusive—because debt policy involves decisions on multiple dimensions, about the total and type of loans.     

Do citizens care about government debt? Evidence from survey experiments on budgetary priorities

Ever since the Great Recession, public debt has become politicised. Some research suggests that citizens are fiscally conservative, while other research shows that they punish governments for implementing fiscal consolidation. This begs the question of whether and how much citizens care about debt. We argue that debt is not a priority for citizens because reducing it involves spending and tax trade-offs. Using a split-sample experiment and a conjoint experiment in four European countries, we show that fiscal consolidation at the cost of spending cuts or taxes hikes is less popular than commonly assumed. Revenue-based consolidation is especially unpopular, but expenditure-based consolidation is also contested. Moreover, the public has clear fiscal policy priorities: People do not favour lower debt and taxes, but they support higher progressive taxes to pay for more government spending. The article furthers our understanding of public opinion on fiscal policies and the likely political consequences of austerity.     

How to not speak the ‘F‐word’: Federalism between mirage and imperative in the euro crisis

The recent financial and debt crisis has resuscitated the debate about European federalism – a theme that seemed not to have survived the painful constitutional adventure that ended with the ratification of the Lisbon Treaty in 2009. With the adoption of significant policy and institutional measures for tightening macroeconomic and budgetary coordination (including a constitutionally enshrined debt brake), the reforms of the monetary union have undisputedly brought the European Union further on the path towards an ever closer union. In an era where EU integration has been increasingly politicised, and Euroscepticism has been on the rise and exploited by anti‐system parties, national leaders have to face a political hiatus and respond to increased needs for symbolic and discursive legitimation of further federalisation. This is all the more crucial for French and German leaders who have brokered the main decisions during the crisis of the eurozone. Against this background, the purpose of this article is not to assess whether, or to what extent, the recent reforms of economic and monetary union have made the EU more federal. Rather, the purpose is to tackle the following puzzle: How have EU leaders legitimised the deepening of federal integration in a context where support for more European federalism is at its lowest? To elucidate this, a lexicographic discourse analysis is conducted based on all speeches held by the German Chancellor Merkel and the two French Presidents Sarkozy and Hollande, previous to, or after European summits from early 2010 until the spring of 2013. The findings indicate that federalism is both taboo and pervasive in French and German leaders' discourse. The paradox is barely apparent, though. While the ‘F‐word’ is rarely spoken aloud, two distinctive visions co‐exist in the French and German discourse. The coming of age of a political union through constitutional federalism is pictured as ineluctable, yet as a distant mirage out of reach of today's decision makers. At the same time, the deepening of functional federalism in order to cope with economic interdependence is a ubiquitous imperative that justifies further integration. The persisting gap between the constitutional and the functional vision of European federalism has crucial implications. Insofar as the Union is held responsible for not delivering successful economic policy, political leaders will fail to legitimise both functional and constitutional federalism.     

The Vocal Euro‐outsider: The UK in a Two‐speed Europe

The EU is divided between member states that have adopted the euro and those that have not. This article looks at the issue of differentiated integration with particular reference to eurozone integration and the euro‐outsiders. I explore the recent public debate in the UK on euro‐outsiderness, comparing this with debates in Denmark. The article highlights some striking differences between the UK and Denmark when it comes to the actual management of euro‐outsiderness in Brussels as well as some of the dilemmas facing euro‐outsiders such as the UK, Denmark, Sweden and Poland as the EU struggles to exit its crises. Finally, I discuss the future of two‐speed European integration and the UK's possible exit from the EU. The UK cannot escape the dilemma of favouring either influence or autonomy; whether the UK remains in or leaves the EU, it will need to allow the eurozone to proceed in order to prevent further eurozone crises.     

Fiscal consolidation under electoral risk

The European debt crisis has uncovered serious tension between democratic politics and market pressure in contemporary democracies. This tension arises when governments implement unpopular fiscal consolidation packages in order to raise their macroeconomic credibility among financial investors. Nonetheless, the dominant view in current research is that governments should not find it difficult to balance demands from voters and investors because the economic and political costs of fiscal consolidations are low. This would leave governments with sufficient room to promote fiscal consolidation according to their ideological agenda. This article re‐examines this proposition by studying how the risk of governments to be replaced in office affects the probability and timing of fiscal consolidation policies. The results show that governments associate significant electoral risk with consolidations because electorally vulnerable governments strategically avoid consolidations towards the end of the legislative term in order to minimise electoral punishment. Specifically, the predicted probability of consolidation decreases from 40 per cent after an election to 13 per cent towards the end of the term when the government's margin of victory is small. When the electoral margin is large, the probability of consolidation is roughly stable at around 35 per cent. Electoral concerns are the most important political determinant of consolidations, leaving only a minor role for ideological concerns. Governments, hence, find it more difficult to reconcile political and economic pressures on fiscal policy than previous, influential research implies. The results suggest that existing studies under‐estimate the electoral risk associated with consolidations because they ignore the strategic behaviour that is established in this analysis.     

Austerity Regimes at the Local Level: Examining Fiscal Effects of Austerity Commissioners Using a Time-Series Synthetic Control Method

Abstract

From a democratic perspective, the replacement of government or parliament by a public manager to enforce budget discipline marks a serious intervention. Transferred to the local level, the replacement of the mayor and the council in three German municipalities by a state official (a so-called state commissioner) in recent years has raised questions about the legitimacy and adequacy of such a strong interventionist instrument. One crucial answer to be given to this legitimacy issue concerns effectiveness, in other words whether the instrument can fulfill its designated task by improving the local fiscal situation since the fiscal success of the commissioner is a basic prerequisite for legitimacy. By using a time-series approach of the synthetic control method (SCM) and constructing a synthetic comparison case to the town of Altena, an answer regarding the commissioner’s potential to reduce the short-term debt can be given. The commissioner was successful in limiting the debt increase and seems to have reversed the debt trend. This finding supports the effectiveness of rather hierarchical instruments for ensuring fiscal discipline at the local level and thereby adds to broadening the international public management literature on municipal takeovers.     

Better Off Out? Britain and Europe

The largest ever rebellion of Conservative MPs on Europe took place in October 2011 with 81 Conservative MPs defying the Conservative whip to vote for a referendum on Britain's continued membership of the European Union. This resurgence of dissent over Europe has been fuelled by the crisis in the eurozone. The Conservative party is now an overwhelmingly Eurosceptic party, but Conservative Eurosceptics are divided over whether the Government should use the opportunity of the eurozone crisis to take Britain out of the European Union, or whether it should seek to negotiate a looser arrangement, or do nothing at all. Conservative policy on Europe has been further complicated by the coalition with the Liberal Democrats, and by the consequences for the British economy if the eurozone disintegrates. Public opinion is also divided. British policy on the European Union remains ambivalent and muddled because British aims are inconsistent, and because there is no consensus on where Britain's interests truly lie.     

Grant Levels and Debt Issuance: Is There a Relationship? Is There Symmetry?

Although previous work on fiscal federalism and grants has focused on the effects of grants on expenditures, no published research examines the impact of decreasing grants on state financing. This research addresses how decreasing levels of federal grant money to states affect states' long-term debt issuance, and whether the relationship is symmetric for increasing and decreasing grants. The model is tested with time series, cross-sectional data from 1984 to 1999. The results show that grants affect debt issuance, the effect is asymmetric, and direction of the effect differs for different types of debt issuance.     

Budget Deficits in the States: Connecticut

Like many states, the State of Connecticut has recently faced substantial budget problems. This article is one of several that explore budget deficits in the states. We explore the reasons, extent, and current solutions to the budget deficits in Connecticut. Connecticut's fiscal circumstances include very poor accounting practices; dueling revenue estimates; large amounts of debt (both bonded and for post-employment benefits); a structurally strong legislature and governor; a governor and legislative majority of different political parties and fiscal philosophies; and a legislature with the ability to override gubernatorial vetoes. The combination of these ingredients has led to a highly partisan and contentious approach to budget discussions amid some of the largest budget deficits the state has ever experienced.     

The politics of external approval: Explaining the IMF's evaluation of austerity programmes

During the European debt crisis, numerous states launched austerity programmes. The International Monetary Fund (IMF) evaluates and forecasts the likelihood of member states’ success in implementing these programmes. Although IMF evaluations influence country risk perceptions on capital markets, little is known about their reasoning. This article uses fuzzy‐set qualitative comparative analysis (fsQCA) to explore on what grounds the IMF evaluated the success prospects of austerity programmes during the European debt crisis. Results reveal that IMF evaluations are heavily influenced by the programme's implementation credibility. They require a tractable policy problem, a country's institutional capacity to structure implementation, and favour expenditure reduction over revenue measures. By acting as a strict guide on the road to fiscal adjustment, the IMF indirectly influences member states’ scope of policy making through its surveillance activities. Extensive austerity programmes that need to be implemented swiftly are evaluated negatively if the country is not involved in an IMF programme.     

Serial payers,serial losers? The political economy of Argentina’s public debt

A global neoliberal architecture has enabled many countries to increase their public debts to meet their fiscal needs. But since 2008 a number of European and North American economies have faced financial crises induced by unsustainable debts. This paper analyses the case of post-default Argentina since 2001, so as to better comprehend the political economy of public debt, especially in cases where governments are elected on anti-austerity platforms. Presidents Néstor and Cristina Kirchner were committed to a debt-reduction policy, yet Argentina faced a new, ‘selective’, default in 2014. This paper analyses how the country has been trapped in a cycle of debt dependency, which can only be interrupted by a comprehensive audit of the debt’s legitimacy followed by debt cancellation. Critical lessons are provided for other countries facing similar situations.     

Don’t Blame the Euro: Historical Reflections on the Roots of the Eurozone Crisis

The article argues that many of the issues that are causing trouble in the eurozone today had long been debated, but not solved, prior to the beginning of the so-called euro crisis. Three thematic examples are used to show this: the decade-long discussion surrounding economic convergence and the question of a transfer union; the dispute over the alleged use of financial mechanisms as a substitute for addressing structural economic weaknesses; and the development of European banking regulation and supervision before the creation of the single currency. Finally, the article argues that even though some of the features of today’s crises – in particular the debt and deficit issues – were outlined at the time of the euro’s introduction, some important recent developments such as the various new operations undertaken by the European Central Bank were not. This should command modesty and cautiousness in the analysis of the evolution of the euro crisis.     

A Panacea for all Times? The German Stability Culture as Strategic Political Resource

The German Stability Culture is frequently pointed to in the literature as the source of the country’s low inflation policies and, at the European Union level, the design of Economic and Monetary Union (EMU). In Germany, the term was regularly wielded by central bankers and Christian Democrat (CDU–CSU) politicians to legitimise the move to EMU in the face of a large majority of public opinion opposed – and subsequent EU-level policy developments – particularly in the context of the eurozone debt crisis that erupted in 2009. An ordered probit analysis is used to demonstrate the depth of the German Stability Culture, showing support for low inflation cuts across all party and ideological lines. Despite this ubiquity, the term has been wielded with regularity only by the centre-right Christian Democrats and is strongly associated with this party. A strategic constructivist analysis is employed to explain this uneven but persistent usage in German domestic politics.     

Fiscal rules,fiscal outcomes and financial market behaviour

Since the outbreak of the eurozone's sovereign debt crisis, a range of fiscal policy measures have been adopted at the European Union (EU) and national levels that have given rise to claims of a significant reinforcement of fiscal policy constraint. Given the prominence and reinvigorated political appeal of fiscal rules in the EU and beyond, it is disconcerting how little we actually know about the link between fiscal rules, budgetary outcomes and market behaviour. In this research note, the aim is to take stock of the existing literature and challenge its contribution to the current policy debate on the merits of fiscal rules. Specifically it will focus on problems linked to endogeneity, measurements and contextuality.     

Whatever Happened to Greece?

The sovereign debt crisis in Greece and other periphery countries is a yardstick for the viability of the European project: if Greece defaults and exits the Euro‐zone, then the entire European architecture will be questioned. This article examines the origins of the Greek debt crisis and argues that the key sources of the debt are the economic and political factions that have dominated Greek politics since the fall of the Colonels in summer 1974 amidst the Cyprus calamity. These factions (political parties, comprador economic interests etc.), whose policy actions and preferences are amalgamated with the interests of Euro‐Atlantic elites, are now being severely undermined, both politically and economically, as the prosperity of the Greek middle classes is eroded following two years of harsh austerity measures imposed on the Greek ruling factions by those Euro‐Atlantic elites. Furthermore, this article outlines ways out of the Greek debt crisis, putting into test some reasonable policy proposals that are being widely discussed in Greece and abroad.     

The early modern origins of contemporary European tax outcomes

What explains variation in tax outcomes between European states? Previous studies emphasise the role played by political institutions, but focus mostly on the input side of politics – how access to power and policy making is structured – and the institutions of relatively recent times. It is argued in this article that output‐side institutions related to the implementation of political decisions also matter and have deep institutional origins. As the classic literature has argued, the early modern period from 1450 to 1800 was formative for the development of fiscal capacity, but European states diverged in the stock of capacity they acquired. This article tests whether these differences still affect contemporary tax outcomes using a novel measure of fiscal capacity, based on the age, extent and quality of state‐administered cadastral records. The empirical analysis shows that, on average, countries with higher early modern fiscal capacity have higher tax revenue today, compared to countries with lower early modern fiscal capacity. This association is robust to different model specifications and alternative measurements. The findings have important policy implications as they indicate how deeply the current fiscal problems of the continent are entrenched, but also point to what needs to be prioritised within ongoing tax reforms.     

Decentralization and Fiscal Discipline in Sub-national Governments: Evidence from the Swiss Federal System

This article analyses the relationship between decentralizationand the extent of fiscal discipline in the Swiss cantons between1984 and 2000. From a theoretical point of view, decentralizationand federalism can be associated with both an expansive anda dampening effect on government debt. On the one hand, decentralizedstructures have been argued to lead to a reduction of debt dueto inherent competition between the member states and the multitudeof veto positions which restrict public intervention. On theother hand, decentralization has been claimed to contributeto an increase of public debt as it involves expensive functionaland organizational duplications as well as cost-intensive, oftendebt-financed, compromise solutions between a large number ofactors that operate in an uncoordinated and contradictory way.Our empirical results show that in periods of prosperous economicdevelopment, the architecture of state structure has no impacton debt. However, the degree of decentralization influencesdebt in economically poor times: In phases of economic recession,administratively decentralized cantons implement a more economicalbudgetary policy than centralized Swiss member states.