External enablers of Eurozone austerity: exploring the link between the ease of suppressing domestic spending and trading partners’ demand

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 explores how individual Eurozone members’ ease of suppressing spending was linked to the policy choices of their trading partners. It finds that beyond domestic ideological preferences, sectoral interests or distributive politics, Europe’s austerity bias was bolstered by a convenient external 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: it draws a parallel between Germany and Ireland and finds that, compared to their 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.

KEYWORDS:

• External demand
• imbalances
• Euro
• Germany
• Ireland

Acknowledgements

The author would like to thank Manuela Moschella, Stefanie Walter, Ari Ray, Nils Redeker, Aidan Regan, Sam Brazys, Niamh Hardiman, Jonathan Hopkin, Dorothee Bohle, Guglielmo Meardi, and Gergo Motyovszki and three anonymous reviewers for their helpful comments and suggestions on earlier drafts of this paper. All remaining errors are mine.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Data availability statement

A replication file with all data and calculations featured in this article is openly available at the Harvard Dataverse under https://doi.org/10.7910/DVN/GRGSBW.

Notes

1 Ireland’s Central Statistical Office (CSO) constructs an adjusted Gross National Income (GNI*) measure and a ‘modified’ current account balance (CA*) to remove ‘globalisation-related’ distortions: flows connected to R&D and intellectual property assets, aircraft leasing activities and profits of redomiciled PLCs (Department of Finance 2019). Irish CA/GDP figures are replaced by CA*/GNI* consistently throughout the paper.

2 The European Commission uses an asymmetric threshold, 3 per cent for deficits, 6 per cent for surpluses; the US Treasury usually uses a 4 per cent numerical cap for both sides; the IMF prepares more sophisticated measures based on fundamentals. (For an overview of monitoring regimes, see: Moschella 2014)

3 Since the common currency itself plays a central role in the analysis, countries who adopted the euro more recently – Slovenia (2007), Cyprus and Malta (2008), Slovakia (2009), Estonia (2011), Latvia (2014) and Lithuania (2015) – are excluded. Outlier case Luxembourg is also dropped (the economy’s small size distorts comparative statistics).

4 E.g. “German business calls for end to new borrowing ban.” Financial Times, Sep 24, 2019

5 Source of import data throughout the section: OECD TiVA. (Data and calculations available in the replication file.)

6 An average between 2010 and 2016. (Data: OECD).

7 It is important to stress that TiM data are approximations, assumptions of homogenous productivity can produce biases.

Additional information

Notes on contributors

Palma Polyak

Palma Polyak is a final-year PhD candidate at the Scuola Normale Superiore, Faculty of Political and Social Sciences in Florence, Italy. Her dissertation research focuses on the politics of Eurozone members’ export-reliance and current account surpluses, from both global and domestic perspectives.