Sovereign Debt, Migration Pressure, and Government Survival

Abstract

As soon as the sovereign debt crisis began, it was widely understood that Germany’s response would dictate its ultimate resolution. Whereas the initial round of bailouts stabilized markets and preserved the Euro, the purpose of the second Greek bailout is less clear. We argue that the German government’s decision to support a second Greek bailout reflected domestic political calculations. While a bailout would involve short-term political costs, Merkel’s government also recognized the social and economic consequences of potential Greek default. In particular, a default entailed the prospect of a massive inflow of migrants from Southern Europe into Germany, which would have hurt labor markets and, in turn, could have cost Merkel’s coalition electoral support. To evaluate the political, economic, and social costs of the second Greek bailout, we use models of credit default swap spreads, studies of international migration, and research on vote intention.