The Domestic Politics of International Cooperation: Germany and the European Debt Crisis

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AbstractInternational cooperation can fail even though governments have no distributional conflicts or incentives to free-ride, face no informational or credibility problems, and even agree on the policies that need to be implemented. Germany's refusal to cooperate with the Eurogroup members on the Greek bailout in 2010 until the crisis threatened to derail the entire Eurozone is puzzling in that regard especially because Germany is the main beneficiary of the euro. It was alleged at the time that this was a dilatory tactic designed to postpone a domestically unpopular decision until after crucial regional elections. But why would voters allow themselves to be misled like that? And why did Merkel agree to the bailout before the elections took place? To analyze how citizen preferences affect international cooperation, we develop a game-theoretic model of the four-way interaction between two governments that must coordinate a response to a crisis affecting both countries but who also must face the polls domestically with an electorate that might be uncertain whether a response is necessary. We find that, paradoxically, governments that stand to receive the greatest benefits from international cooperation face the greatest obstacles to implementing the required policies even when voters would want them to. We show how the model can rationalize Merkel's electoral strategy and why her party suffered at the polls when the strategy went off the rails.