An Empirical-Economic Theory of the Eurozone

Labour Market Policy
The most erroneous liberal-market premise of the EMU is the assumption that labour market actors, particularly trade unions, either do not exist or are too weak to resist competitive downward pressure on wages. The design of Europe’s shared currency is premised on the non-existence of collective bargaining (Crouch, 2000) and shares the neoclassical assumption that labour markets can and do operate in perfectly competitive markets. This implicit design of the monetary union assumes that if asymmetric shocks hit, national economies, regions and sectoral industries will automatically adapt through a reduction in labour costs. This reduction in labour costs is presumed to act as a functional equivalent to currency devaluations at a macro level (see Hall and Gingerich, 2004).

Currency devaluation traditionally externalized excessive endogenous labour costs to the main trading partners of a given national economy (Crouch, 2000). Devaluation and exchange rate adjustments acted as a cushion to avoid social dislocation when national economies became over inflated. This option is no longer available for countries of the Eurozone. The implication is that an ‘internal devaluation’ must be pursued by Member States when confronted with an economic shock. This does not take into consideration the structural and current account imbalances within the Eurozone nor the distributional implications of shifting the burden of adjustment on to wages and public spending. But it is central to the Troika austerity program.

The assumption that the entire burden of cost adjustment can fall on labour market actors completely ignores the embedded and historically diverse institutional structures of collective bargaining in European economies. Collective bargaining and negotiated wage setting is one of the core features of coordinated market capitalism or ‘social Europe’.  Every economy, with the exception of Ireland, Estonia and Slovakia, has collective bargaining coverage of over 60 per cent in the Eurozone. Austria, Belgium, Finland, France, Greece, Italy, the Netherlands, Slovenia and Spain all have collective bargaining coverage at 80 per cent or more (see Visser, 2009). This involvement of organized labour in wage setting makes it difficult to impose downward labour cost reductions across the economy. Neither will adjustment be so extensive that it can act as the functional equivalent to currency devaluation. Any adjustment in labour costs will be negotiated between labour market actors (at sectoral or national level) unless labour is so weak that it cannot resist a unilateral imposition of wage cuts. However, the rigid constraints of the EMU’s budget deficit requirement, and the newly proposed fiscal treaty, means that government as employer may have no option but to impose a reduction in pay rates in the public sector.

Given the institutionally and historically evolved structure of coordinated wage setting in Europe, one should not assume that organized labour markets are strategically incapable of reducing labour costs through collective bargaining. Most research indicates that those sectors most exposed to international competition have been capable of concession bargaining and internalizing significant levels of wage restraint (Hancké & Johnston, 2009, Traxler & Brandl, 2010, Crouch 2000) or adopting alternative labour market policies such as short-term working to reduce costs. The question for governments, however, is under what conditions can those sectors not exposed to international trade, particularly those within the public sector, do the same? This is a significant problem for countries under the conditions of a severe public finance crisis where public sector pay bargaining is systematically associated with national social partnership arrangements, as is the case in Ireland and much of southern Europe.

The Calmfors and Drifill (1988) model presented two scenarios for non-inflationary wage growth. On one side of the u-trough are self-clearing liberal markets. There is no empirical evidence to support this scenario (outside the US and the UK) even if it is deduced to be the most efficient mechanism of coordinating wages (see Soskice, 1990). On the other side of the u-trough are peak level wage bargaining actors who coordinate wages at a national level. This national level coordination is a required incentive for trade unions to internalize the costs of inflationary wage agreements. Most corporatist economies, however, have evolved away from national level coordination. This led many economists to conclude that the advent of the EMU would provide an incentive for the complete deregulation of wage setting akin to self-clearing markets. This did not occur. As illustrated by Crouch (2000), wage setting institutions evolved and adapted to new economic constraints. Most labour market actors adopted an ‘organized decentralization’ (Austria, Germany and Sweden) of collective bargaining whilst some integrated centralized wage negotiations into national tax-based income agreements (Finland and Ireland). Hence, whilst the new monetarist paradigm acted as a stimulus for institutions of coordinated wage setting to evolve, these institutions did not disappear. Wages and labour markets are still institutionally regulated by collective organizations.

The design and intellectual underpinnings of the EMU simply assumes that embedded institutions of collective bargaining do not exist, or if they do, the State and employers can effectively ignore them. No government in Ireland or southern Europe internalized the monetarist constraint that if confronted with a macroeconomic shock, and lacking the capacity to engage in currency devaluation, the entire burden of adjustment would have to fall on wage, labour and fiscal policy. Nor did they provide for collective buffers to offset the negative effects of an economic shock, as provided for in the Finnish income agreements.

Fiscal policy
The EMU was designed for a symmetric pan-European economy but operates in an asymmetric way (see Hancké et al., 2009). The narrow focus on wage-cost competitiveness and fiscal consolidation, central to the prescribed austerity programs in southern Europe, ignores the institutional diversity, complex problems and structural imbalances both across and within eurozone economies. Policy-makers in the ECB assumed that all eurozone economies would converge in both price and wage costs. Most of the evidence indicates, however, that post-EMU, national and regional economies increasingly diverged on these indicators (see Lane, 2009). Countries in the north and south shared a monetary currency but not the corresponding institutional governance required to coordinate economic policy. Market processes alone, and a narrow focus on liberalisation, have proved to be an ineffective means of European integration (see Scharpf, 2011).

From 1999 to 2008, large export countries at the centre of the eurozone (Germany) continued to run current account surpluses. This surplus capital and savings was channelled into peripheral economies of the eurozone (Ireland and Spain, in particular) creating an unnecessary oversupply of credit (facilitated by low ECB interest rates) that was channelled into a poorly regulated domestic financial market, which in turn channelled the cheap credit into real estate, as will be shown in later sections. This structural divergence cannot be accommodated by monetary policy alone. In the absence of a central government or a functional equivalent, each national economy operates as though it is institutionally independent. The crisis in the sovereign bond markets that emerged in 2008, however, provided an exogenous stimulus for all governments in the eurozone to recognize the extent of their financial interdependence and the instability of integrated European finance-capital markets. Yet the policy prescriptions adopted were oriented toward nationalistic austerity packages, not coordinated strategies of collective action to tackle structural trade and labour imbalances that had accumulated since 2000 (see Felipe & Kumar, 2011).

The implicit assumption of the EMU is that economic problems only emerge from budgetary indiscipline, not risky and unsustainable economic behaviour in the private market (see Pissani-Ferry, 2010). The growth and stability pact was designed on the basis that public spending is the primary problem facing national governments. The sovereign debt crisis, however, was the direct result of a collapse in a financial binge that fuelled asset price booms and the associated tax revenues the government had come to depend upon. Both Ireland and Spain experienced an asset price (housing) boom upon entry to the EMU. Non-fiscal asset price bubbles facilitated by cheap credit and low ECB interest rates created this problem, not government spending. Or, more precisely, the problem is not labour costs and government spending but the mismanagement of private capital by private actors coupled with an unsustainable tax base. The ECB, however, operates according to average (mean) indicators of labour costs and inflation across seventeen eurozone economies. Hence, whilst the Irish economy was overheating internally, the ECB continued to cut interest rates to encourage higher levels of economic growth in what was perceived to be the underperforming economies of France and Germany.

Furthermore, during the period 1999–2009, it was Greece, Germany, Italy and France that regularly exceeded the 3 per cent deficit requirement of the growth and stability pact. Ireland went from a stable budget balance to a fiscal deficit of 14.7 per cent in less than two years. Spain went from a stable budget surplus to a deficit of 10.1 per cent in less than 18 months. Spain actually ran a fiscal surplus in 2005, 2006 and 2007 (European Commission, 2010). This begs the question as to whether it is empirically feasible to use the statistical mean of the growth and stability pact, and the new fiscal compact treaty, as a basis for how national economies should manage their budget deficits in an economic crisis. With the exception of Greece, all European political economies, by this ‘fiscal’ indicator, behaved relatively prudently in the post-EMU era.

These fiscal indicators, however, mask the type and level of government tax and spend policies specific to particular national economies. Countries with property booms such as Ireland and Spain did not run a significant deficit but successive governments institutionalized an unsustainable low tax regime based around ‘political budget cycles’ (see Cousins, 2007). Government revenue became reliant upon consumption and pro-cyclical taxes (i.e. stamp duty on property) that evaporated when its liquidity-rich and credit-fuelled housing bubble burst. Furthermore, in the Irish case, successive tax-based incomes policies legitimized this process. The EMU is not designed to tackle unsustainable growth strategies of national economies or the structural composition of tax revenues. It simply assumes that government spending in itself is the problem. Therefore, the European Commission and international rating agencies never questioned the underlying economic growth or fiscal policy regimes of Ireland and southern Europe. They bought into the myth of market convergence.

The narrow focus on fiscal and cost competitiveness (central to European monetary policy and the Troika adjustment programmes) meant that when the crisis emerged in 2008, it was assumed the problems facing ‘peripheral’ economies of the eurozone (Greece, Ireland, Italy, Portugal and Spain) were the same. This was not the case. The Greek problem was definitively fiscal, related to government spending and specific to its own national economy. On the other hand, Ireland and Spain regularly ran budget surpluses and institutionalized a low tax regime that was supported by international bodies such as the IMF and the OECD. Both countries rank below the EU-27 average on two policy indicators that normally impact upon budget deficits: total government expenditure as a percentage of GDP, and total spending on social protection as a percentage of GDP. Total taxation as a percentage of GDP is also significantly below the EU-27. Yet given the neoclassical intellectual underpinnings of the EMU, both countries must cut expenditure to tackle their deficits despite having relatively low levels of public spending as a percentage of national income. The design of the EMU compels policymakers and national governments to pursue austerity even though empirically it is not making the economic problem worse. What is required is an intellectual paradigm change in how we approach economic problems in the Eurozone.

Coordinated Wage-Setting
In a stochastic world, monetary constraints are the primary collective action problem facing countries in the eurozone, not fiscal deficits or wage competitiveness (Darvas, Pissani-Ferry, 2011). But the politics of fiscal adjustment is mediated through country-specific institutions of collective bargaining, industrial relations and social policy regimes (i.e. the historically embedded institutions in the labour market that provide the strategic capacity for trade unions, government and employers to engage with one another as social partners), which I will now examine.

The legal and institutional framework of collective bargaining is the most important variable in accounting for the diversity of responses to the economic crisis across Europe (Glassner & Keune, 2010). It is also the most important variable in accounting for the variaiton in national labour market regimes. National social pacts, as they evolved in Ireland and the southern European periphery in the build-up to EMU, were a particular mode of governance that can be distinguished from sectoral and firm negotiation in wage bargaining. They were a government-led process to involve organized interests in the formulation of public policy but systematically tied to the negotiation of wage restraint in sheltered sectors of the economy (Traxler & Brandl 2010). In the absence of this wage-setting or industrial relations function, social partnership provides an ‘expressive’ function that acts as a symbolic legitimation of government policy (see Traxler, 2010). The social dialogue arrangements of Central and Eastern Europe arguably fall into this latter category.

If government-led wage coordination is a political strategy to coordinate income policy in sheltered sectors of the economy (in particular, the public sector), then it is this form of centralized wage coordination that will come under greatest pressure for downward wage flexibility in the current crisis. Governments faced with the requirement to cut budget deficits have very little to trade with trade unions when public sector pay is a significant portion of general government expenditure. If centralized wage agreements only cover the unionized sectors of the economy (as is the case in Ireland and Italy but not Finland, the Netherlands or Slovenia), then wage-setting excludes the majority of the workforce. It is this structure of ‘inclusive’ and ‘exclusive’ bargaining that conditions whether the social partners adopt a market or collective bargaining response to the crisis. Governments operating within a labour market with ‘exclusive’ bargaining are more likely to pursue a unilateral strategy of adjustment. They can opt out of a social partnership agreement with little repercussion because trade unions have neither ‘carrot nor stick’ to be considered a necessary political partner. Governments only have to engage with public sector unions as an employer.

Coordinated wage bargaining that is inclusive across the economy confers significant bargaining power upon the social partners to negotiate labour cost reductions. This multi-employer type of bargaining (as witnessed in Austria, Germany, and the Netherlands) confers bargaining coverage of over 70 per cent and empowers trade unions and employer associations to coordinate their interests autonomously. Given this institutional structure, labour market actors are likely to use internal (firm/sectoral) and external (national) collective bargaining strategies when negotiating a cost adjustment, despite the constraints of the EMU. In this regard, it is those economies that have exclusive bargaining coverage (only Ireland, Estonia and Slovakia have collective bargaining coverage below 45 per cent in the eurozone) that are more likely to experience a fragmented collective bargaining regime. The microconditions in these labour markets do not act as a counter-force to asymmetric macroeconomic shocks, and limit the capacity to adopt a coordinated response. This is particularly the case when negotiated wage agreements are not just exclusive to particular sectors of the economy but contain no legal requirement on multinationals or small firms to implement negotiated wage settlements. This voluntarist dimension complements a market-based adjustment. Employer associations do not encompass the majority of firms covered by national wage agreements, making tripartite structures of social dialogue dependent upon the political preference of the government. This explains the ease with which the State eviscerated social partnership in many those countries most affected by the Eurozone crisis.

Hence, voluntarist institutions of social partnership that are primarily applicable to unionized sectors of the economy (periphery of the Eurozone), as opposed to inclusive and legally binding institutions of wage setting (core of the Eurozone), weaken the capacity of trade unions to be included as an encompassing actor in the politics of adjustment, and decrease the possibility of a negotiated response to the economic crisis. Higher levels of trade union and employer density increase the capacity for negotiated labour market cost reductions when combined with high levels of collective bargaining coverage. From the perspective of the government and employers, weak institutional foundations in the labour market make it easier for them to avoid social partnership, even if this is less effective than a negotiated adjustment based on deliberative agreement. Employer associations are organized on the basis of business lobby groups and their labour market strategies are primarily mediated by employment rights legislation (i.e. individual-based adjudication rather than collective bargaining).

Liberal market political economies (where market processes act as the main incentive for employment coordination) are supposedly better placed to internalize the macroeconomic shocks in the eurozone (this is not to say it is normatively preferable). In the EMU, only Ireland falls into this category. The neoliberal orientation of the Irish economy makes it easier to implement orthodox adjustment policies as the institutional complementarities governing the labour market, fiscal and wage policy fit the neoclassical design of the EMU. Conflict is primarily mediated through dialogue and adjudication via the voluntarist Labour Relations Commission. This dimension of social partnership has remained intact during the crisis whereas the national consensus-based approach to incomes policy and pay bargaining has collapsed, leading to the absence of coordination and increased deregulation of the labour market.

The  implication is that there is no coordinated approach to the crisis aimed at a series of trade-offs to maintain employment in those countries, such as Ireland, lacking the institutional foundations characteristic of Cordinated Market Economiess (CMEs) in northern Europe. Southern European countries are in the worst of all worlds. They have neither flexible-liberal nor coordinated-market institutions to internalise a coherent labour market response. The outcome of the current labour market adjustment in these countries is to exacerbate the divide between insiders (usually young) and outsiders (usually close to retirement). Whether these countries can develop a new ‘third’ equillibrium is an empiricial question. But presently the conditions for such a social market response are non-existent. This does not bode well for the future employment prospects of those living in southern Europe – and the EMU as a whole.

The Crisis of the Democratic State in Europe

This working paper titled ‘Political Tensions in Euro-Varieties of Capitalism’ argues that the European response to the financial cum fiscal crisis in the Eurozone is leading to a democratic crisis of the state. It has exposed a tension between the national and the supranational in a multi-level polity whilst opening up new political cleavages between the core and periphery of Europe. This dilemma has become particularly acute for program countries that are either directly or indirectly in receipt of non-market financial funding from the Troika. In the absence of exchange rate adjustments, Ireland and Southern European countries must pursue an internal devaluation that shifts the entire burden of adjustment on to fiscal and labour market policy.  National governments, regardless of political partisanship, are required to comply with external EMU mandates and liberalize their welfare state, cut public spending and impose market conforming structural reforms. The core argument of this paper is that imposing a one size-fits-all neoliberal solution to diverse economic problems across different varieties of capitalism is the real source of the Eurozone crisis. Using a cross-country comparative analysis of Greece, Ireland, Italy, Portugal and Spain I conclude that this is an outcome of inbuilt institutional and macroeconomic asymmetries in the EMU. But it is leading to unprecedented electoral volatility and a legitimation crisis of the democratic state in Southern Europe.

Critical feedback most welcome:

Machiavelli and the Political Response to the Eurozone Crisis

This year is the 500 anniversary of the publication of Niccolo Machiavelli’s Il Principe (The Prince). The European University Institute (EUI) will hold a conference next week to discuss various interpretations of this infamous book. I will present a paper that attempts to ask what Machiavelli would say about the political response to the current Eurozone crisis. It is not an attempt at democratic normative theory but an inquiry into what Machiavelli can contribute to comparative political economy. More precisely it asks why citizens in Europe should comply with external mandates of the EMU.

The paper argues that Machiavelli has been influential in political science because he systematically analysed the strategies pursued by leaders to consolidate their power. In this regard it was shift away from normative to empirical political theory. I argue that political leaders in Europe today must legitimate their policy decisions to the electorate. There are two ways to do this: input or output legitimacy. Input legitimacy means that governments respond to the preference of the electorate by designing policies that satisfy their interests. This is currently lacking for countries in Troika adjustment programs.

In the absence of input legitimacy national governments can legitimate their policies if the outcomes lead to effective performance such as strong economic growth or full employment. The crisis of the Eurozone is a causal outcome of an absence of both input and output legitimacy. The European response has been to promote technocratic economic policies insulated from politics. The lesson to be learnt from Machiavelli is that such a response is not viable. Incumbent governments will be punished by their electorates leading to unprecedented political volatility in the Eurozone.

The paper concludes that it would be perfectly legitimate for heads-of-state in Ireland and Southern Europe to make a credible threat to leave the Eurozone.

Understanding the Fiasco of Italian Politics

The clear winner of the Italian elections was Beppe Grillo and the Cinque Stelle Movimento (5 Star Movement). They emerged out of nowhere to take 25 percent of the vote, recording the largest ever increase for a party entering their first election. They now hold the balance of power in parliament but have no interest in entering government. Italy has a hung parliament and unless the social democrats strike a suicidal deal with Berlusconi (which Grillo wants) a new election is likely. Presently, the government are electing a new president who will be tasked with trying to forge a grand coalition. In the unlikely event that this occurs those who are likely to benefit from a new election, according to recent polls, are Beppe Grillo and Silvio Berlusconi; two masters of populist leadership which attracts so many votes in Italy. It is the undesirable outcome of the personalization of politics, and something the left have proven incapable of adapting to.

Whilst the social democratic; ‘Partitio Democratico’ (PD), led by Pier Luigi Bersani emerged as the largest party, taking 29.5 percent of the vote, this is less than 8 percent of what they took in the 2005 elections. In a context of an unprecedented financial crisis, recession and austerity, this massive drop in support is being heralded as a clear crisis for the centre-left. Furthermore, for the first time in Italian elections, the far-left failed to get above the 4 percent threshold, taking no seats in parliament. Some have argued that had the social democrats elected Matteo Renzi instead of Pier Bersani, they would have taken an additional 7 percent of the vote. Renzi (the mayor of Florence) is young, charismatic and understands the dynamics of contemporay media driven politics. For the traditional left he is nothing more than a centrist promoter of Blairite New Labour. But he appreciates that there are votes in the centre and that Italians, more than most, have a tendency to support personalities (the social democrats were the only party to not put a picture of their leader on posters). If a new election is to be held Renzi will probably strike for the leadership.

Another important observation to be taken away from this election was the outright rejection of Mario Monti and his centre right civic movement, who won a mere 10 percent of the vote. This is less than what was gained by the pre-existing centrist parties that he gathered to form his civic movement. Some have argued that the vote against Monti was a vote against European austerity. There is an element of truth in this. His reforms were widely criticised as having depressed domestic demand, leading to increased unemployment. But the policy reform he introduced that led to most criticism was the re-introduction of a property tax. This has nothing to do with Europe. The role of EMU in shaping the Italian crisis was secondary to domestic politics in this election. In fact, the Italians don’t even have a word for ‘policy’, it is all about ‘politics’, and Monti simply did not fit the bill for what makes a successful politician in Italy. The respected technocrat was demolished by the political campaigning force of Berlusconi. But importantly, one must think about the counter-factual situation of what would have happened if Monti had not entered the election? He split the right-wing vote and kept Berlusconi and the PDL out of government. If this is the case, then Monti’s succeeded in his task of saving Italy from Berlusconi.

Berlusconi’s centre-right ‘Popollo Della Libertá’ (PDL) emerged as the second largest party, taking 29.18 percent of the vote. Some have lauded this as a political comeback but this hides the fact that it was the biggest ever defeat for a sitting party in Italian elections. The PDL lost 16 percent of the vote. This is much like what happened to the Christian Democrats in the late 1980’s. They probably would have lost more if Berlusconi had not promised to personally re-fund the property tax if elected. It is only because of a peculiar electoral law that Berlusconi has a commanding majority in the house of deputies – and hence a cliam to form a government. The outcome is that there are 8 possible majorities that could facilitate a coalition government. Bersani and the PD must be part of 7 of these. The only real possibility, however, is Grillo supporting the social democrats. He has categorically ruled this out. Hence, Italy is in the hands of Beppe Grillo who does not play by the rules of representative democracy. Is this a crisis for Italy?

The short answer is yes. The two main parties of the left and right have lost their largest share ever in Italian elections. It was the second most volatile election since WW2. The volatility can be explained by a change in ‘supply’ (i.e. the entry of a new party). Hence to understand the political fiasco of Italy we have to explain the success of Beppe Grillo and his 5 star movimento. In much of the Italian press they are dismissed as a joke led by a quasi-authoritarian comedian. In truth they are a mix between the German pirate party and anti-establishment populism, with a charismatic political leader. The emphasis they place on participatory democracy is not practised within the party. Their policies are predominately left wing even if they refuse to call them so. In terms of the candidates who ran under the platform of the Movimento, according to research carried out at the Bacconi institute, they were the youngest, most female represented, and most educated of all the political parties. In this regard, the movimento are more reflective and representative of Italian society.

Those who voted for Grillo and the Movimento, however, do not reflect this profile. Most of their vote came from small towns and municipalities with traditionally low-voter turn out. This might suggest that a vote for Grillo was an alternative to abstention. The social democrats continue to take most of the votes from those with third level education. Those with secondary level education were most likely to vote for Grillo. Berlusconi and Grillo, in this regard, take their vote from what would have been traditionally called the ‘working class’. The Italian left, as far back asGramsci, have always tried and failed to mobilise this section of the electorate. Grillo seems to have succeeded. But this has little to do with their ‘new internet’ approach, given the age profile and broadband coverage of those living in these rural municipal areas. In truth, Grillo mobilised the disaffected, and those who are fed up with the Italian political caste. This is all the more remarkable when one considers that the movimento refused to deal with the mainstream media throughout the campaign.

This leads me to the conclusion that Beppe Grillo and the Movimento won this election because they tapped into mass popular discontent toward what the electorate perceive to be a self-serving corrupt political elite who have ransacked Italian instiutions for their own gain. This has little or anything to do with European imposed austerity. Italians are feeling the reccession but blame poor economic performance on domestic not European politics. It is remarkable that throughout the election campaign Bersani and the social democrats never mentioned corruption once. Needless to say, Berlusconi didn’t either. But it was the central message of the Movimento. If one accepts that the real crisis in Italy is institutional and political (in the same vein as Daron Acemoglu would argue) then the Movimento are a counter-political backlash against an old regime that needs to change. It is quite another thing to argue that the Movimento can be the agent of this change. But it does pose a serious dilemma for the Italian left. They failed to win after the collapse of the Italian system in 1994 and they have failed to win again today. In the absence of a serious alternative to Monti (technocratic) and Berlusconi (populist) the electorate will flock to the Grillo and the Movimento, with unforseen consequences.

Week 8: The Sovereign Debt Crisis in Ireland and Southern Europe

This class is an examination into the sovereign debt crisis afflicting Greece, Ireland, Portugal, Spain and Italy (the so-called GIPSI countries). In these countries the core assumptions of comparative political economy that domestic institutions and political choices lead to differing responses to crisis does not seem to hold. External constraints associated with membership of the EMU seem to be more important than domestic institutions and politics.

For Baccaro and Armingeon (2012) the sovereign debt crisis reveals two things: a dramatic shrinking of the policy space for peripheral countries as a result of monetary unification, and an in-built neoliberal bias of the Euro project. The common GIPSI response is to engineer an internal devaluation vis-á-vis Germany and other trading partners. This has been forced on to countries either directly as part of EU-ECB-IMF (troika) bailout packages or indirectly by interest rates in the sovereign bond markets.

EMU countries are being forced into a procyclical fiscal policy (austerity in a time of contracting growth) which, according to the IMF, is proving to be self-defeating. They are imitating an internal devaluation – focused on cuts in public sector pay, numbers and services. For Baccaro and Armingeon (2012) the only choice left for governments is the process through which they legitimate policy decisions: technocratic governments, grand parliamentary coalitions, concessionary social pacts.

Week 7: National Policy Responses to the Great Recession in Europe

A central question guiding this class is how to explain the cross-national variation in policy responses to the Eurozone crisis in the core and peripheral economies of Europe. This week we will examine the European wide fiscal response, government responses in Germany and France, and conclude with an examination of Northern Europe. We begin with an analysis of the factors we might think are likely to explain variation in government responses to an economic crisis: International institutions, government partisanship, domestic policy legacies, and economic ideas.

Jonas Pontusson and Nancy Bermeo identify three major themes from their edited comparative study into the policy response to the great recession when compared with the long recession of the 1970’s: international institutions have failed to play an ameliorating role than anticipated, the menu of policy choices has narrowed considerably and changed in content, the core insights of the varieties of capitalism framework in comparative political economy hold less weight than might be expected.

Week 6: Europeanisation and the EU Budget

This class examines who gets what, how and when in the EU budget. Agriculture and regional expenditure remain by far the biggest spending blocks. Lisbon gave treaty status to the multi-annual planning process which has signigficantly increased the role of EU parliament. The divide between net beneficiaries and net contributors to the budget, however, has never been larger