Capitalising on constraint

Bailout politics in Eurozone countries

Catherine Moury, Stella Ladi, Daniel Cardoso, Angie Gago, Kathryn Simpson, Paul Tobin, Dimitris Papadimitriou, Kathryn Simpson, Paul Tobin, Dimitris Papadimitriou

• Publisher: Manchester University Press
• Year: 2021
• Print ISBN:
  9781526149886
• eBook ISBN:
  9781526149879
• Topic: Politics & International Relations
• Subtopic: Political Economy
• Index: Politics & International Relations

This book is an essential analysis of what really happens behind closed doors during and after a bailout.

In the last decade, five Eurozone governments in economic difficulty received assistance from international lenders on the condition that certain policies specified in the Memoranda of Understanding were implemented. How did negotiations take place in this context? What room for manoeuvre did the governments of these countries have? After conditionality, to what extent were governments willing and able to roll back changes imposed on them by the international lenders?

This book explores the constraints on national executives in the five bailed out countries of the Eurozone during and beyond the crisis, from 2008 to 2019. The authors argue that despite international market pressure and creditors' conditionality, governments had some room for manoeuvre during a bailout and were able to advocate, resist, shape or roll back some of the policies demanded by external actors. Under certain circumstances, domestic actors were also able to exploit the constraint of conditionality to their own advantage.

Capitalising on constraint shows that after a bailout programme, governments could use their discretion to revert the measures that brought the greatest benefits at a lower cost. The authors provide a valuable insight into the determinants of bargaining leverage, the importance of credibility, and the limits of conditionality that might inform the design of international and European lending during future crises.

1
The politics of conditionality: a theoretical framework

In this chapter, we present our arguments at length, situating them in the broader literature. We start by briefly describing the constraints faced by European governments. We then explain why we believe that governments try to keep room for manoeuvre during a bailout. We detail the implications of this leverage, and the variables influencing it. Finally, we explain what we think happens when the bailout terminates.

On the constraints faced by European governments

As several authors have noted, parties in government are torn between two increasingly conflicting goals: responsibility (i.e. the respect of the international commitments taken by their predecessors and the promotion of their external credibility) and responsiveness (i.e. the response, of political leaders or governments, to the demands of their citizens) (Laffan, 2012; Mair, 2009).

It is difficult to address these two objectives simultaneously due to the growing internationalisation of trade and finance. Governments that increase their deficit and debt excessively, or deviate too far from supply-side policies in this context, risk damaging their currency's credibility and their firms’ competitiveness (Clift and Ryner, 2014; Hallerberg and Basinger, 1998; Rodrik, 1998; Schmidt, 2002, pp. 22–23).

Governments in the EU are also bound by the European treaties (and the rules thereof) which, unlike other constitutions, are not only extensive but difficult to amend (De Witte, 2009). As many scholars have noted, these EU rules are increasingly shaped by ordoliberalism – a German school of thought that posits that the principles of neo-monetarism and supply-side economics should be imposed by constitutional rules, sanctions and through independent institutions (Feld et al., 2015; Ferrera, 2020; Warlouzet, 2019; Young, 2014). The SGP is a paradigmatic example of the constitutionalisation of ordoliberalism as it calls for sound public finances, institutionalises monitoring devices and sanctions, and delegates monetary policy to the ECB. Moreover, global and European constraints are interrelated, as Eurozone members lost the power to print money and hence to guarantee bondholders that they will be paid back whatever the circumstances (De Grauwe, 2012).

The shrinking discretion of European governments became crystal clear during the sovereign debt crisis (Ferrera, 2017; Ladi and Graziano, 2014; Streeck, 2014), a period of ‘coercive Europeanisation’ (Ladi and Graziano, 2014). As described in the introductory chapter, European economic governance rules were modified over this period, and the new instruments increased the EU's surveillance and enforcement capacity regarding the implementation of structural reforms (Heins and de la Porte, 2015, p. 3).

A fundamental constraint on European governments during the crisis also came from the dramatic divergence between the costs of Eurozone countries’ sovereign bonds. Periphery countries became increasingly concerned about their credibility and therefore engaged in spending cuts and reforms (Moury and Standring, 2017). However, these efforts were not very successful (Afflatet, 2016; Rommerskirchen, 2015), and financial speculation only declined when the ECB put the Outright Monetary Transactions in place in September 2012 (Van Der Heijden et al., 2018 see Introduction).

These circumstances forced some EU countries to respond to implicit and explicit conditionality. Implicit conditionality, which is ‘based on an implicit understanding of the stakes and sanctions involved, underlain by some measure of power asymmetry’ (Sacchi, 2018, p. 1) was exercised, for example, by the European Central Bank when it warned Italy and Spain to stop buying government bonds unless they pursued reforms (Bosco and Verney, 2012, p. 138; Lütz et al., 2020; Sacchi, 2018). Implicit conditionality was also enforced by EU actors and/or powerful member states in ‘“backroom” diplomacy’ (De la Porte and Natali, 2014, p. 735) – their influence deriving from the liquidity they could eventually provide to weaker countries and/or from the knock-on effect their declarations would have on investors (Moury et al., 2021). Countries that asked for a bailout – such as Greece, Ireland, Portugal, Spain and Cyprus – were additionally subject to explicit conditionality as the progressive payments of the loans granted to them were conditional upon a series of reforms detailed in MoUs.

The MoUs negotiated with the Troika (ECB, EC and IMF) on behalf of international lenders were based on common assumptions. First, the belief that investors’ confidence and growth depended on reducing public and private debt as quickly as possible. Hence, all MoUs include measures to cut state expenditure and incentivise banks, companies and individuals to deleverage (Greer, 2014). Secondly, the idea that ‘internal devaluation’ through lower wages and the deregulation of labour wage provisions was necessary to make economies more competitive given that external devaluation was not possible (Afonso, 2019; Clauwaert and Schömann, 2012). Thirdly, that consumers would be better served if competition was increased everywhere, and public ownership dwarfed. Hence, the privatisation of public enterprises, the liberalisation of protected professions and the reduction of firms’ excessive profit (‘rents’) were present in all MoUs.

On the leverage of executives during a bailout

Despite these commonalities, however, we observe some important differences across bailed out countries. To start with, as the chapters of this book show, there was never an unequivocal need to call in international lenders: the decision to ask for a loan rather than to explore alternatives was ultimately political. Moreover, the MoUs differ in their size, content and emphasis in ways that cannot be explained solely by prior macroeconomic conditions (Hardiman et al., 2016). Elections in the middle of a programme often led to renegotiations of the MoUs (Hick, 2018; Moury and Standring, 2017) and the success of implementation seems to have varied across governments and countries (Afonso et al., 2015; Hardiman et al., 2016; Walter, 2016).

This evidence suggests that executives had some leeway in the timing, design and implementation of the MoU, a leverage th...

Table of contents

• Cover
• Half-title page
• Series page
• Title page
• Copyright page
• Contents
• Figures
• Tables
• Contributors
• Acknowledgements
• Abbreviations
• Introduction
• 1: The politics of conditionality: a theoretical framework
• 2: Greece
• 3: Ireland
• 4: Portugal
• 5: Spain
• 6: Cyprus
• 7: Capitalising on external constraint: six things you should know about Eurozone bailouts
• References
• Index