Eurozone Periphery Research Articles

Mapping citizens, voters, and parties’ preferences on European solidarity across EU member states

ABSTRACT Since 2008, the European Union (EU) witnessed a growing tension between the social and economic dimensions of integration as a consequence of the ‘polycrisis’. The increasing politicisation of EU issues in national political arenas that led to the rise of Eurosceptic parties mostly revolved around the issue of European solidarity. Against this background, this study investigates the congruence between voters and incumbent members of national parliaments on the highly contentious aspects of EU solidarity. First, the article maps the extent to which national political elites share similar views on EU solidarity with their voters. Secondly, we assess members of parliaments (MPs)-voters’ congruence at the party level. Employing original data from an elite and a mass survey conducted in six EU countries between 2017 and 2018, we find that both voters and MPs expressed a high level of support for policies strengthening European solidarity in the Eurozone periphery. Instead, voters in Northern and Eastern EU member states shared more positive preferences than their national representatives. Furthermore, the party-voter distance was higher for radical-right Eurosceptic MPs, especially in Northern Europe, than for other parties.

Capitalist diversity or unevenness? Uneven and combined development, growth models and the crisis in the eurozone periphery

The ‘unevenness’ of European capitalism has been well established by Comparative Political Economy (CPE) as central to the origins of the eurozone crisis. The influential ‘growth models’ perspective has shown how the integration of export-led models in the ‘core’ with demand-led models in the periphery has led to the build-up of destructive current and capital account imbalances. However, CPE approaches are limited by their methodological nationalism, which stands in their way of adequately theorising the international dimensions of the crisis. In contrast, recent scholarship on Uneven and Combined Development (U&CD) and the global financial crash is more suited to overcome methodological nationalism, but existing contributions are let down by their lack of mid-range International Political Economy (IPE) concepts and their limited engagement with CPE. The main contribution of this article is to develop a new account of the origins of the eurozone crisis in Portugal and Ireland, by developing a framework that synthesises recent U&CD scholarship on the eurozone crisis and new developments in CPE, namely, the growth models perspective (GMP). This article shows how the GMP provides U&CD with two key mid-range analytical tools, namely the notion of the ‘dominant growth coalition’ (DGC), and a wider conception of European multiplicity. The DGC concept makes it possible for U&CD analysis to account for peripheral politics, while also recognising the wider multiplicity beyond relations of core-periphery dependency. In turn, U&CD makes it possible for the GMP to take the international more seriously in its analysis of the political economy of capitalist diversity.

The politics of structural reform in Ireland: Dominant growth coalitions, domestic business elites, and internal devaluation

This paper broadens the scope of the Growth Model (GM) research agenda beyond the study of ‘core’ business elites by investigating the influence of (oft-neglected) non-core business actors and sectoral interests in determining growth strategies. To do so it looks at a crucial case in the GM debate: Ireland. Ireland’s robust recovery from the eurozone crisis has set it apart from the rest of the eurozone periphery. For GM scholarship, Ireland’s recovery has been driven by its long-established multinational/export sector, which is relatively indifferent to the effects of austerity and internal devaluation. Why, then, was internal devaluation a central plank of Ireland’s crisis response and Economic Adjustment Programme (EAP)? Drawing on 10 original interviews with Irish business elites and policy makers and documentary evidence, this paper shows that domestic, not multinational, business elites played a key role in framing conditionality related to competitiveness and labour market reform in the Irish EAP. This challenges the concept of ‘dominant growth coalitions’ and argues that an exclusive focus on ‘core’ business elites neglects the ability of other fractions of business power to determine growth strategies. Looking beyond ‘core’ business elites makes it possible to identify transformation behind more obvious patterns of continuity.

Subsidizing new jobs in the Euro-zone periphery

The macroeconomic effects of a selective wage subsidy targeted to new labour hires are evaluated and compared with those of standard fiscal instruments. The analyses are based on a search and matching monetary model in which a distinction between the wage negotiated by newly-hired workers and incumbents is introduced. The model is estimated using data for high unemployment countries of the Euro-zone periphery. We show that, although the labour market policy can be an effective measure to jump-start employment, it is not superior to standard fiscal expansions in stimulating a timely response of economic activity. A liquidity trap environment reinforces these results, showing that policy actions triggering a deflation can be pro-cyclical with zero interest rates.

Lost in consolidation? Declining public investment, multiplier effects and alternatives to the path of fiscal consolidation in Portugal

This paper deals with one of the most pressing concerns that Eurozone periphery economies will face in the near future: how to achieve a sustained recovery from the COVID-19 crisis while dealing with growing public debt-to-GDP ratios. The paper assesses the macroeconomic relationship between public spending, economic growth and debt sustainability. We use a TSLS method to perform the econometric estimation of the public spending multiplier for a panel of 11 Eurozone economies over the 1995–2019 period. We find evidence that the multiplier is positive and close to 1,8, suggesting that the benefits of promoting public investment exceed its initial financing cost. As a result, we conclude that debt sustainability is not only compatible with, but in fact improved by a more expansive fiscal policy and present an alternative policy path for the Portuguese economy in the 2021–2025 period based on this conclusion.

Should EU member states help each other? How the national context shapes individual preferences for European solidarity

With the outbreak of the Eurozone crisis, the idea of providing cross-national financial transfers to countries in economic and financial difficulties has exacerbated the political divide between EU member states with strong macroeconomic performances, which were only weakly hit by the crisis, and the countries of the Eurozone periphery that struggled with a harsh economic downturn. This paper aims to explain which factors drive public support for cross-national solidarity within and across countries. We argue that the national context in which citizens live affects their preferences for providing financial help to other European countries, and moderates the role played by subjective egotropic and sociotropic economic concerns, ideological predispositions, and Eurosceptic vote choices in shaping public support for European solidarity. Using the original REScEU 2016 survey, we find that subjective economic motivations provide a limited contribution in explaining support for European solidarity, and almost only in countries weakly hit by the crisis. On the contrary, left–right positions, and especially Eurosceptic vote choices, strongly polarize preferences for EU financial assistance, both within and across countries with voters from Eurosceptic parties more(less) likely to support European solidarity in countries strongly(weakly) hit by the Eurozone crisis.

Does sovereign risk impact banking risk in the Eurozone? Evidence from the COVID-19 pandemic

This paper studies the impact of sovereign risk on Eurozone banking risk during a novel crisis such as the COVID-19 pandemic. Spillover effects on volatility are identified using Granger causality tests, a spillover matrix, and BEKK-GARCH models. The results confirm that an increase in Eurozone sovereign risk has impacted banking risk in Eurozone and that there is no evidence that sovereign risk in the countries of the Eurozone periphery is being transmitted to banking risk in the core countries during the crisis. These conclusions are very important for risk management and the design and monitoring of Eurozone financial policies.

Veza između javnih prihoda i javne potrošnje - dokazi o heterogenosti Evrozone

After the global economic crisis, a broad consensus has emerged that membership in the Eurozone exerts a strong pressure on fiscal policy, since it is characterized by the dichotomy of common monetary policy and heterogeneous fiscal policies. This paper analyzes the performance of fiscal policies, highlighting the nexus between the public revenues and public expenditure from the angle of 19 Eurozone economies in the period 2010q1-2020q4. The research is based on Dumitrescu & Hurlin (2012) and Juodis, Karavias & Sarafidis (2021) Granger non-causality tests in macro panels in order to test causality direction, as well as Westerlund errorcorrection-based panel cointegration test to analyze fiscal sustainability. Having in mind the heterogeneity and divergency of the Eurozone members, sub-samples were estimated, concerning the core, the periphery and the emerging Eurozone economies. The results imply that all Eurozone economies achieve weak fiscal sustainability, while all economies from the group of Eurozone periphery applied "tax and spend" hypothesis. The empirical finding could be related to the fact that Eurozone periphery economies were hit harder by the global and sovereign debt crisis, and that implemented austerity and bail-out programs were adequate, thus resulting in sustainable fiscal position, reducing heterogeneity of fiscal performance within the Eurozone economies.

Izvozne performanse i konkurentnost perifernih članica Evrozone

This paper examines the impact of the selected factors on the real exports of goods and services in the several Euro area (the eurozone) peripheral economies. There are five countries in the sample (Italy, Spain, Portugal, Ireland, and Greece). The time period from 2000 to 2019 is considered. The research is aimed at providing robust estimates of the long-term relationship between the real exports of these countries and the selected explanatory variables using panel data analysis. The coefficients of the cointegration export equation were estimated using the FMOLS and DOLS estimators. Using the FMOLS estimator, the estimated coefficient of the real effective exchange rate is negative (-0.80) and of the variable foreign demand is positive (2.25). The coefficient of the real effective exchange rate confirms the fact that, from the point of view of the eurozone peripheral members, the overestimated real value of the Euro has a disincentive effect on their real exports. The estimated coefficient of foreign demand suggests that the real export of goods and services (volumes) of the eurozone peripheral members increases by 2.25% when the real GDP of the EU increases by 1%. The real export elasticity of the eurozone periphery countries is higher for foreign demand (income elasticity) than for relative price changes (price elasticity). Reductions in wages and prices in peripheral countries have led to redistributive effects in favor of the core.

PIGS ECONOMIES: BAIL-OUT VS. BAIL-IN

This paper analyzes bail-out and bail-in programs in the Eurozone periphery economies after the transformation of the global crisis into a debt crisis. Continuous rise of debt service costs was leading PIGS economies (Portugal, Ireland, Greece, Spain) either to abandon of Eurozone or to negotiate rescue programs. Using Panel corrected standard errors (PCSE) method, the research shows that bail-out programs had a negative effect on GDP growth in PIGS economies in the period 2011-2019, as the consequence of crowding-out effects. However, the results showed that bail-out programs could positively affect fiscal variables. An alternative solution is the bail-in mechanism, which is a sustainable mechanism that does not burden taxpayers. Based on examples of banks in Spain and Portugal, results show that using bail-in programs, panic and contagion effects could be avoided; however, in the case of future crisis, the effects of bail-in programs on the real economy still need to be examined.

Competitiveness Revisited: Labour Costs, Financial Flows and the Case of Italy

Explanations of Italy's and Germany's position within the Eurozone commonly focus on trade ‘competitiveness,’ a concept measured in terms of unit labour costs. This trade-centric view offers a poor explanation for the evolution of the two countries external debt levels following the adoption of the Euro. It also fails to explain the external financial fragility that Italy has repeatedly experienced in the period since 2010. Both outcomes are better explained by dynamics in cross-border financial markets. Monetary union created large incentives for banks in the Eurozone's core states, including Germany, to direct funds to banks in the Eurozone's periphery (those countries whose banks had earlier faced higher currency-related risk premia in obtaining external financing). Domestic policy decisions in Germany further contributed to this outcome. In the period since 2010, the Eurozone's rules-based governance model and the failure of governments to create a common safe asset for banks became a major factor contributing to Italy's financial fragility. It remains to be seen whether Europe's response to the COVID-crisis will mark a watershed, and break these financial markets dynamics.

Financial resource curse in the Eurozone periphery

The housing booms and busts in Ireland and Spain were among the most striking episodes of the Eurozone crisis. While asset price inflation and financialization of housing was gathering pace across the developed world, these two ‘most different’ cases converged on the same outcome as the most extreme forms of construction-based bubbles. The key contributions of this paper are threefold. Firstly, we show how cheap credit can be understood as analogous to a natural resource such as oil: resource abundance generates a ‘paradox of plenty’ whereby an asset becomes a liability. Secondly, we open the black box of political pathways through which this happens, expanding our understanding of how perverse outcomes are produced. Thirdly, we account for why Spain and Ireland were more susceptible to extreme outcomes than other European countries, thereby extending our understanding of asymmetries in the political economy of the Eurozone.

Under pressure. Economic constraints, electoral politics and labour market reforms in Southern Europe in the decade of the Great Recession

AbstractEven when subject to comparable exogenous constraints during the Eurozone crisis and in its immediate aftermath, governments in Southern Europe have pursued distinct labour market reform agendas. What room for manoeuvre did governments of crisis‐struck peripheral countries really have in shaping their labour market reform strategies, and how can we account for the observed variation? We address these questions by making a twofold contribution to the debate on the political economy of austerity in the Eurozone periphery. First, through the first systematic analysis of all labour market and collective bargaining (CB) reforms implemented in Portugal, Spain, Italy and Greece over 2009–2019, we identify those elements of core labour market deregulation common across Southern European countries (namely, the loosening of employment protection for workers on open‐ended contracts and the decentralisation of CB to the firm level); and those elements of variation, both cross‐country and cross‐party, in the content of corollary labour market interventions that accompanied this core deregulation. Second, we explain these similarities and variations in reform outcomes as the product of the interaction of two factors: economic constraints and electoral dynamics. We argue that the implementation of the common core of deregulation is linked to the exogenous pressure to improve export competitiveness to which Southern European countries have been subjected since the crisis. Through the combination of survey data analysis and qualitative evidence, we then show empirically how the variation in the corollary measures accompanying deregulation is linked to the class composition of the electoral social blocs Southern European partisan governments rely on or aim to assemble. Based on this analysis, we identify four ideal‐typical labour market reformist strategies attempted by Southern European governments during the decade of the Great Recession. The analysis highlights that although domestic politics plays a crucial role in shaping structural adjustment under crisis conditions, not all reform strategies are equally viable within the framework of Economic and Monetary Union.

Macroeconomic adjustment in the euro area

Abstract Macroeconomic adjustment in the euro area periphery was more recessionary than pre-crisis imbalances would have warranted. To make this claim, this paper proposes a novel use of a Propensity Score Matching Model to produce counterfactuals for the Eurozone crisis countries (Greece, Portugal, Ireland, Cyprus, Spain) based on over 200 past macroeconomic adjustment episodes between 1960 and 2010 worldwide. At its trough, between 2010 and 2015 per capita GDP had contracted on average 11 percentage points more in the Eurozone periphery than in the standard counterfactual scenario. These results are not dictated by any specific country experience, are robust to a battery of alternative counterfactual definitions, and stand confirmed when using alternative estimation strategies, such as a Synthetic Control Model or a parametric dynamic panel regression model. Zooming in on the potential causes, the lack of an independent monetary policy, while having contributed to a deeper recession, does not fully explain the Eurozone's specificity, which is instead to be traced back to a sharper-than-usual contraction in investment and fiscal austerity due to high funding costs. These insights lend empirical backing to the proponents of more wide-reaching reforms of the Eurozone architecture, aimed at preventing some of these developments from repeating themselves.

How the Eurozone disempowers trade unions: the political economy of competitive internal devaluation

Abstract The marginalization of trade unions was a notable feature of the sovereign debt crisis in the Eurozone periphery. However, governments have recently imposed liberalizing reforms against union protests in the Eurozone core too. We argue that organized labour loses influence across the core-periphery divide because the ‘new economic governance’ puts national governments under enhanced pressure to compete against each other on wage and labour market flexibility—a process known as competitive internal devaluation. The article illustrates this argument through comparative quantitative indicators of liberalization and qualitative process-tracing in three core countries. Whereas Germany’s outstanding competitiveness position allowed its unions to extract significant concessions, their counterparts in France and Finland faced unprecedented defeats from governments aiming to restore economic growth by closing down the competitiveness gap to Germany. Our findings highlight the class power implications of the Eurozone’s reliance on the labour market as the main economic adjustment variable.

Keeping the euro at any cost? Explaining attitudes toward the euro-austerity trade-off in Greece

Despite years of crisis, the euro has enjoyed strong popular support across the Eurozone periphery. In light of the high costs of internal devaluation strategies, this begs the question why the public has remained in favor of the common currency. In this article, we propose a theoretical mechanism that accounts for both voters’ pocketbook preferences and their sociotropic assessments over the noisy trade-offs associated with the outcomes of euro membership and euro exit. Using original survey data from three consecutive survey waves in Greece (conducted in July, September, and December 2015, respectively), we analyze the attitudes of Greek voters toward the euro in an environment of acute uncertainty, austerity, high unemployment, and economic recession. First, we juxtapose our uncertainty mechanism of popular euro attitudes against other explanations put forward in the literature and find strong support for our argument. Second, we conduct a survey experiment to tap into attitudes toward the euro-austerity trade-off and find that as uncertainty over policy outcomes diminishes, framing effects abate in significance, especially among those who voted No in the July 2015 referendum. Finally, we derive distinct sets of euro preferences for different ‘vulnerability profiles’. Over time, as the trade-offs of euro membership become more pronounced, we find a marked fall in euro support between July and December 2015.

Is the Eurozone disintegrating? Macroeconomic divergence, structural polarisation, trade and fragility

Abstract This paper analyses macroeconomic developments in the Eurozone since its inception in 1999. In doing so, we document a process of divergence and polarisation among those countries that joined the Eurozone during its first two years. We find evidence for a ‘core–periphery’ pattern among Eurozone countries, that is, however, marked by substantial heterogeneity within these two clusters. We show how the polarisation process underlying this pattern first manifested in increasing current account imbalances, before it translated unto the level of general macroeconomic development when the crisis hit. Empirically, we demonstrate how this macroeconomic divergence is tied to a ‘structural polarisation’ in terms of the sectoral composition of Eurozone countries; specifically, the emergence of export-driven growth in core countries and debt-driven growth in the Eurozone periphery can be traced back to differences in technological capabilities and firm performance. Pushing for convergence within Europe requires the implementation of industrial policies aiming at a technological catch-up process in periphery countries in combination with public investment and progressive redistributional policies to sustain adequate levels of aggregate demand in all Eurozone countries.

Assessing banking sectors’ efficiency of financially troubled Eurozone countries

The aim of this paper is to assess the relative banking efficiency of the Eurozone’s soft underbelly (i.e., the so called PIIGS countries: Portugal, Ireland, Italy, Greece and Spain) in the period after the outburst of the financial crisis. It is one of the few that attempts to measure banking efficiency in the periphery of Eurozone in the outburst of the financial crisis using a battery of efficiency evaluation techniques for robustness reasons. This study relies on a modeling framework consisting of data envelopment analysis (DEA), bootstrapping, Malmquist Productivity Index and truncated regression which is applied on accounting and macroeconomic data spanning from 2009 to 2015. Findings show statistical evidence of a high degree of inefficiency in most of the examined banks. The application of the truncated regression indicate several financial variables as driving forces, offering thus important warning signs for banking performance. Indicators such as Tier 1 Capital to Risk Weighted Assets, Tangible Common Equity to Risk–Weighted Assets, Risk-Weighted Assets to Total Assets, Non-Performing Assets to Total Assets and Net Income Margin contribute in banks' efficiency score. The above financial variables need to be closely monitored by the bank’s decision makers. Moreover, inflation and high levels of General Government Debt to GDP ratio also affect the efficiency of banks.

Macroeconomic Еxternal (Im)Balances within the Eurozone: Core Vs Periphery

Abstract Since the foundation of the eurozone (EZ) until the crisis outbreak, the macroeconomic imbalances between EZ core and EZ periphery have been identified at the internal and external plan. Growing external divergence was evident in the precrisis period reflected in the chronic current account deficit of the periphery, and vice versa for the core EZ members. However, external imbalance within the EZ has been substantially narrowed in the postcrisis period. Based on the panel data framework, crucial factors of current account improvement/worsening are identified in the precrisis 1999-2007 period, as well as the postcrisis 2008-2017 period. Random effect model with standard errors robust to autocorrelation and heteroskedasticity is estimated, in which current account is analysed in dependence from economic growth, fiscal balance, EZ interest rate, real effective exchange rate, openness and dummy variable for the EZ core/periphery. Empirical findings for the precrisis period confirm macroeconomic overheating of the periphery as the main cause of current account worsening, while the postcrisis improvement has been achieved mainly through fiscal contraction and European Central Bank (ECB) loosened monetary stance.

On the stability of stock-bond comovements across market conditions in the Eurozone periphery

We analyze the relationship between returns on equity and long-term government bonds in the crisis-hit Eurozone peripheral economies. In particular, we are interested in the stability of the relationship across differing market conditions and if long-term bonds act as a safe haven for equity investors during periods of financial distress. Employing a Markov-switching vector autoregression model with three regimes, we find that the stock-bond relationship varies across market conditions and across countries. Overall we observe increased comovement during the crisis regimes at the market level, with the relationship between the financial sectors and the domestic sovereign bond being its most important driver across countries.