Crisis Politics in Europe: Why Austerity is Easier to Implement in Some Countries than in Others.

Abstract

When countries face balance-of-payments crises, their policy responses vary widely. This paper 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. While 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 paper uses qualitative case studies and survey data to examine the significant variation in crisis responses, crisis politics, and distributive outcomes of the 2008-10 global financial crisis in eight Eastern European countries. The paper concludes with a discussion of the implications of the Eastern European experience for crisis politics in the Eurozone crisis.

Keywords: Balance of payments crisis, crisis management, euro crisis, Eastern Europe, austerity, devaluation