Crisis Politics in Europe

• Author: Stefanie Walter
• Published date: 01 June 2016
• Date: 01 June 2016
• DOI: http://doi.org/10.1177/0010414015617967
• Subject Matter: Articles

Comparative Political Studies

2016, Vol. 49(7) 841 –873

© The Author(s) 2015

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DOI: 10.1177/0010414015617967

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Article

Crisis Politics in Europe:

Why Austerity Is Easier

to Implement in Some

Countries Than in Others

Stefanie Walter1

Abstract

When countries face balance-of-payments crises, their policy responses

vary widely. This article argues that the choice between the two main

options of internal adjustment (i.e., austerity and structural reforms) and

external adjustment (i.e., exchange-rate devaluation) depends on how costly

each of these strategies is for a country overall. Although the choice of

adjustment strategy is thus structurally determined, the level of political

conflict associated with crisis management depends on both the national

vulnerability profile and partisan interests. Moreover, irrespective of the

adjustment strategy, all governments design the specific reforms in ways that

shelter their own voters. Empirically, this article uses qualitative case studies

and survey data to examine the significant variation in crisis responses, crisis

politics, and distributive outcomes of the 2008-2010 global financial crisis in

eight Eastern European countries. The article concludes with a discussion of

the implications of the Eastern European experience for crisis politics in the

Eurozone crisis.

Keywords

economic policy, political economy, east European politics, politics of

growth/development, euro crisis, financial crisis

1University of Zurich, Switzerland

Corresponding Author:

Stefanie Walter, University of Zurich, Affolternstrasse 56, 8050 Zurich, Switzerland.

Email: walter@ipz.uzh.ch

617967CPSXXX10.1177/0010414015617967Comparative Political StudiesWalter

research-article2015

842 Comparative Political Studies 49(7)

Across the Eurozone, crisis politics have varied widely. Some countries, such

as Ireland, have successfully implemented painful domestic reforms. Others

have experienced significant political difficulties in resolving their macro-

economic and structural problems. In Greece, for example, the implementa-

tion of austerity measures and structural reforms have been so politically

contentious that it has brought the country to the verge of a Eurozone exit

twice and has drawn many voters to radical parties on the right and the left of

the political spectrum.

Existing research leaves us less puzzled by the political struggles in

Greece than by the Irish success. Most research on the politics of past bal-

ance-of-payments (BOP) crises, such as the breakdown of the gold standard

(Eichengreen, 1992; Simmons, 1994), the Latin American Debt Crisis

(Frieden, 1991a; Nelson, 1990), or the Asian Financial Crisis (Pepinsky,

2009; Walter, 2013), emphasizes the political difficulties associated with

implementing painful domestic reforms. The Eurozone crisis is the newest

in this series of crises (Copelovitch, Frieden, & Walter, 2016; Gibson,

Palivos, & Tavlas, 2014). It is an unusual crisis because membership in a

currency union officially rules out the option of external adjustment. This

presents Eurozone countries with a daunting task: History shows that

democracies usually devalue their currencies during severe BOP crises,

rather than “adjust internally” through austerity and structural reforms.

Nonetheless, across the Eurozone all crisis countries have embarked on a

course of internal adjustment: The wish to remain a member of the Eurozone

deprives them of the option to devalue their exchange rate. What is puz-

zling is that some countries have had a much easier time implementing this

strategy than others.

Marrying insights from comparative and international political economy

research, this article argues that this variation can be understood in terms of

national differences in the costs of internal adjustment relative to the costs of

external adjustment. Differences in a country’s cost structure, or “vulnerabil-

ity profile,” affect the choice of crisis strategy and the level of political con-

flict associated with crisis management. If one adjustment path (say Eurozone

exit) clearly imposes more costs than the alternative (say internal adjust-

ment), the government pursues the latter path swiftly and without major

political difficulties. In contrast, when both crisis strategies are associated

with high economic and social costs, crisis politics will be fraught with politi-

cal conflict, delay, and attempts to involve other countries in the crisis resolu-

tion process. The choice of adjustment strategy is thus basically a technocratic

choice; however, partisan considerations influence the specific policy design,

as all governments try to protect their own voters from the consequences of

the crisis.

Walter 843

To empirically test this argument, this article analyzes how another set of

European countries responded to similar problems. It performs qualitative

comparative case studies of how eight Eastern European EU member states

outside the Eurozone varied with regard to crisis responses, crisis politics,

and distributive outcomes during the Global Financial Crisis of 2008-2010.

As EU members, these countries operated in a framework that is similar to

those of Eurozone countries in many respects. But as EU countries outside

the Eurozone, they still had the full set of policy options at their disposal.

Nonetheless, four countries—Bulgaria, Estonia, Latvia, and Lithuania—still

chose internal adjustment rather than a devaluation of their currencies, an

approach that plunged these countries into deep recessions but nonetheless

enjoyed wide popular support. In contrast, crisis resolution was much more

difficult and contentious in Hungary and Romania where adjustment mea-

sures included elements of both internal reforms and exchange-rate devalua-

tion. Finally, Poland and the Czech Republic devalued in response to the

crisis, a strategy that was largely uncontroversial. The analysis shows that

these differences in adjustment strategies and crisis politics were associated

with variation in national vulnerability profiles. Despite these significant dif-

ferences, the distributive outcomes of the crisis did not vary significantly

across countries: Government voters systematically felt less affected from

the consequences of the crisis than voters of the opposition or non-voters.

Looking at the Eastern European experience allows me to investigate

under which circumstances countries succeed in their efforts to adjust inter-

nally, and under which circumstances crisis resolution is particularly diffi-

cult. Taking into consideration that not only the cost of external adjustment

but also the willingness of other Eurozone members to provide financial sup-

port are significantly larger in the Eurozone, this analysis then allows me to

draw inferences about the politics of crisis management in the Eurozone cri-

sis. The last section of this article therefore concludes with a discussion of the

implications of the Eastern European experience for the Eurozone crisis.

Argument

BOP crises have been a constant feature of the international economy and are

often associated with other crises, most notably debt, banking, and currency

crises. They all share the same core problem: The country is consuming more

than it is producing, which is reflected in a current account deficit. When the

private foreign capital that has been financing this consumption stops flow-

ing in, the country experiences a BOP crisis.

In principle, there are three ways to address such a crisis (Webb, 1991).

Countries can continue to finance the current account deficit using their