External enablers of Eurozone austerity: exploring the link between the ease of suppressing domestic spending and trading partners’ demand

Abstract

ABSTRACT In the onset and aftermath of the Eurozone crisis, why did the currency area stick to policies suppressing domestic spending and forcing up saving? And why could some countries uphold these policies easier than others? This paper explores how individual Eurozone members’ ease of suppressing spending was linked to the policy choices of their trading partners. It finds that beyond domestic ideological preferences, sectoral interests or distributive politics, Europe’s austerity bias was bolstered by a convenient external option: positive external demand shocks from China and the United States alleviated the employment costs of weakened home markets. The analysis of balance-of-payments and employment statistics is nested in a case comparison framework: it draws a parallel between Germany and Ireland and finds that, compared to their surplus and deficit country groups, these perceived ‘success cases’ of austerity were aided by their better position to benefit from foreign demand boosts through favourable export product mixes and established ties to faster-growing partners. Reliance on global demand, however, was only possible because of the regional nature of the shock; such boosts are absent in case of more widespread demand collapses like the Global Financial Crisis or the economic fallout in the wake of COVID-19.