Crisis and Complementarities: A Comparative Political Economy of Economic Policies after COVID-19

Bob Hancké,Toon Van Overbeke,Dustin Voss

doi:10.1017/s1537592721001055

Abstract

We examine economic policy responses to the COVID-19 induced economic collapse in Germany (a coordinated market economy) and the UK (a liberal market economy). The two countries responded to the symmetric economic shock with very similar furlough and business credit schemes to stabilize the demand and supply sides of the economy. However, since these policies fed into very different political-economic structures in both countries, they produced very different results. We attribute this divergence to the effect of “institutional complementarities,” the notion in Varieties of Capitalism that different elements of a system are mutually articulated and, therefore, mutually reinforcing beyond their initial contribution, or vice versa. Our results serve as a cautionary tale to policymakers that introducing policy elements developed in other institutional contexts is complex and challenge us to consider systematically the way in which institutional frameworks actively shape policy outcomes.

Highlights

We examine economic policy responses to the COVID-19 induced economic collapse in Germany and the UK
This paper examines responses to the economic effects of COVID-19 in Germany, a paradigmatic case of the “Coordinated Market Economy” (CME) in the Varieties of Capitalism framework (Hall and Soskice 2001), where strategic links between business, labor, banks, and government offer the organizational matrix for economic coordination, and the UK, a “Liberal Market Economy” (LME), where markets and contracts are the dominant mode of economic organization
Crises such as COVID-19 offer a window into the key mechanisms that underpin political-economic systems: What is often disguised under a layer of normality in other periods forces itself to the forefront in such moments of high tension

Summary

Introduction

We examine economic policy responses to the COVID-19 induced economic collapse in Germany (a coordinated market economy) and the UK (a liberal market economy). The initial symmetric shock of the pandemic elicited symmetric economic policy responses everywhere: macroeconomic “stimulus” by central banks and finance ministries, wage subsidies and furlough schemes to prop up household incomes and prevent unemployment, and grants or cheap loans to keep businesses afloat.

Results

Conclusion