External Enablers of the Eurozone’s Austerity Bias

• In Event: European Political Economy

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 argues that
beyond domestic ideological preferences, sectoral interests or distributive
politics, Europe’s austerity bias was bolstered by a convenient exit 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 to
increase explanatory leverage. It draws a parallel between Germany and Ireland
and finds that, compared to their respective 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.

Author

• Palma Polyak, Scuola Normale Superiore