View More View Less
  • 1 Péter Pázmány Catholic University Institute of International Studies and Political Science Budapest Hungary
Restricted access

Purchase article

USD  $25.00

1 year subscription (Individual Only)

USD  $700.00

The main goal of the paper is to explain the role of expectations in austerity cycles during financial bailouts. The paper presents a political economy model of bailouts, where the conditions, their implementation, and market reception are considered as forms of a social dilemma. In such situations, expectations about the actions of other actors approximated by the concepts of trust or distrust play a critical role. An environment of trust is conducive to mitigating the size and effects of fiscal contraction, while an environment of distrust is likely to magnify both. It is also argued that the credibility of government is the key driving force in these self-reinforcing cycles. The crisis management experiences of Greece and Ireland serve to illustrate the theoretical model.

  • Alesina, A. — Perotti, R. (1995): Fiscal Expansions and Fiscal Adjustments in OECD Countries. NBER Working Paper, No. 5214.

    Perotti R. , '', in Fiscal Expansions and Fiscal Adjustments in OECD Countries , (1995 ) -.

  • Alesina, A. — Perotti, R. — Tavares, J. (1998): The Political Economy of Fiscal Adjustments. Brookings Papers on Economic Activity, 1: 197–266.

    Tavares J. , 'The Political Economy of Fiscal Adjustments ' (1998 ) 1 Brookings Papers on Economic Activity : 197 -266.

    • Search Google Scholar
  • Ardagna, S. — Caselli, F. (2012): The Political Economy of the Greek Debt Crisis: A Tale of Two Bailouts. LSE Center for Economic Performance, Special Paper, No. 25. Available: http://personal.lse.ac.uk/casellif/papers/greece.pdf . Accessed: July 27, 2013

    Caselli F. , '', in The Political Economy of the Greek Debt Crisis: A Tale of Two Bailouts , (2012 ) -.

  • Axelrod, R.M. (1984): The Evolution of Cooperation. New York: Basic Books.

    Axelrod R.M. , '', in The Evolution of Cooperation , (1984 ) -.

  • Barry, F. (ed.) (1999): Understanding Ireland’s Economic Growth. Houndmills — London: Palgrave Macmillan.

    Barry F. , '', in Understanding Ireland’s Economic Growth , (1999 ) -.

  • Bechtel, M.M. — Hainmueller, J. — Margalit, Y. (2012): Sharing the Pain: Explaining Public Opinion towards International Financial Bailouts? MIT Political Science Department Research Paper, No. 2012–5. Available at SSRN: http://ssrn.com/abstract=2032147

    Margalit Y. , '', in Sharing the Pain: Explaining Public Opinion towards International Financial Bailouts , (2012 ) -.

  • Blanchard, O. — Leigh, D. (2013): Growth Forecast Errors and Fiscal Multipliers. IMF Working Paper, No. 13/1.

    Leigh D. , '', in Growth Forecast Errors and Fiscal Multipliers , (2013 ) -.

  • Boltho, A. (2000): What Matters for Economic Success? Greece and Ireland Compared. In: Bara, Z. — Csaba, L. (eds): Small Economies Adjustment to Global Tendencies. Budapest: Aula, pp. 150–169.

    Boltho A. , '', in Small Economies Adjustment to Global Tendencies , (2000 ) -.

  • Chrysoloras, N. (2013): Rebuilding Eurozone’s Ground Zero: A Review of the Greek Economic Crisis. GreeSE Paper, No. 66. London: London School of Economics.

    Chrysoloras N. , '', in Rebuilding Eurozone’s Ground Zero: A Review of the Greek Economic Crisis , (2013 ) -.

  • Considine, M. — Dukelow, F. (2011): Ireland and the Impact of Economic Crisis: Upholding the Dominant Policy Paradigm. In: Farnsworth, K. — Irving, Z. (eds): Social Policy in Challenging Times: Economic Crisis and Welfare Systems. Bristol: The Policy Press, pp. 181–198.

    Dukelow F. , '', in Social Policy in Challenging Times: Economic Crisis and Welfare Systems , (2011 ) -.

  • Cottarelli, C. — Giannini, C. (2006): Bedfellows, Hostages, or Perfect Strangers? Global Capital Markets and the Catalytic Effect of IMF Crisis Lending. In: Mody, A. — Rebucci, A. (eds): IMF-Supported Programs: Recent Staff Research. Washington, D.C.: International Monetary Fund, pp. 202–227.

    Giannini C. , '', in IMF-Supported Programs: Recent Staff Research , (2006 ) -.

  • Dellepiane, S. — Niamh, H. (2012): The Politics of Tough Budgets: The Eurozone Periphery 2008–2011. 19th International Conference of Europeanists organised by the Council for European Studies, Boston MA, 22–24 March, 2012. Available: http://hdl.handle.net/10197/4224. Accessed: July 27, 2013.

    Niamh H. , '', in The Politics of Tough Budgets: The Eurozone Periphery 2008–2011 , (2012 ) -.

  • Drazen, A. (2002): Conditionality and Ownership in IMF Lending: A Political Economy Approach. IMF Staff Papers, Vol. 49. Special Issue, pp. 36–67.

    Drazen A. , '', in Conditionality and Ownership in IMF Lending: A Political Economy Approach , (2002 ) -.

  • Durlauf, S.N. (2001): Econometric Analysis and the Study of Economic Growth: A Skeptical Perspective. In: Backhouse, R. — Salanti, A. (eds): Macroeconomics and the Real World. Oxford: Oxford University Press, pp. 249–262.

    Durlauf S.N. , '', in Macroeconomics and the Real World , (2001 ) -.

  • Easton, D. (1965): A Systems Analysis of Political Life. New York: Wiley & Son.

    Easton D. , '', in A Systems Analysis of Political Life , (1965 ) -.

  • EC (2006): Measuring Administrative Costs and Reducing Administrative Burdens in the European Union. Working Document, No. 2006(691).

    '', in Measuring Administrative Costs and Reducing Administrative Burdens in the European Union , (2006 ) -.

  • EC (2010): The Economic Adjustment Program for Greece. Occasional Papers, No. 61. Brussels: Directorate General for Economic and Financial Affairs.

    '', in The Economic Adjustment Program for Greece , (2010 ) -.

  • EC (2011): The Economic Adjustment Program for Ireland. Occasional Papers, No. 76. Brussels: Directorate General for Economic and Financial Affairs.

    '', in The Economic Adjustment Program for Ireland , (2011 ) -.

  • EC (2012a): The Economic Adjustment Program for Ireland — Winter 2011 Review. Occasional Papers, No. 93. Brussels: Directorate General for Economic and Financial Affairs.

    '', in The Economic Adjustment Program for Ireland — Winter 2011 Review , (2012 ) -.

  • EC (2012b): The Second Economic Adjustment Programme for Greece. Occasional Papers, No. 94. Brussels: Commission of the European Communities Directorate General for Economic and Financial Affairs.

    '', in The Second Economic Adjustment Programme for Greece , (2012 ) -.

  • EC (2012c): The Second Economic Adjustment Programme for Greece First Review — December 2012. Occasional Papers, No. 123. Brussels: Directorate General for Economic and Financial Affairs.

    '', in The Second Economic Adjustment Programme for Greece First Review — December 2012 , (2012 ) -.

  • EC (2013a): Economic Adjustment Programme for Ireland Spring 2013 Review. Occasional Papers, No. 123. Brussels: Directorate General for Economic and Financial Affairs.

    '', in Economic Adjustment Programme for Ireland Spring 2013 Review , (2013 ) -.

  • EC (2013b): Statistical Annex of European Economy, Spring. Brussels: Commission of the European Communities Directorate General for Economic and Financial Affairs.

    '', in Statistical Annex of European Economy, Spring , (2013 ) -.

  • EC (2014): Statistical Annex of European Economy, Spring. Brussels: Commission of the European Communities Directorate General for Economic and Financial Affairs.

    '', in Statistical Annex of European Economy, Spring , (2014 ) -.

  • Fraser, A. — Enda, M. — Sinead, K. (2013): Deepening Neoliberalism via Austerity and ‘Reform’: The Case of Ireland. Human Geography, 6(2): 38–53.

    Sinead K. , 'Deepening Neoliberalism via Austerity and ‘Reform’: The Case of Ireland ' (2013 ) 6 Human Geography : 38 -53.

    • Search Google Scholar
  • George, A.L. — Bennett, A. (2005): Case Studies and Theory Development in the Social Sciences. Cambridge, MA: MIT Press.

    Bennett A. , '', in Case Studies and Theory Development in the Social Sciences , (2005 ) -.

  • Giavazzi, F. — Pagano, M. (1990): Can Severe Fiscal Consolidations be Expansionary? Tales of Two Small European Countries. NBER Working Paper, No. 3372.

    Pagano M. , '', in Can Severe Fiscal Consolidations be Expansionary? Tales of Two Small European Countries , (1990 ) -.

  • Gibson, H.D. — Hall, S.G. — Tavlas, G.S. (2011): The Greek Financial Crisis: Growing Imbalances and Sovereign Spreads. Working Paper, No. 124. Athens: Bank of Greece.

    Tavlas G.S. , '', in The Greek Financial Crisis: Growing Imbalances and Sovereign Spreads , (2011 ) -.

  • Grauwe, P. de — Ji, Y. (2013): Panic-Driven Austerity in the Eurozone and Its Implications. VoxEU, 21 February. Available: http://www.voxeu.org/article/panic-driven-austerity-eurozone-andits-implications. Accessed: July 27, 2013.

    Ji Y. , '', in VoxEU , (2013 ) -.

  • Guajardo, J. — Leigh, D. — Pescatori, A. (2011): Expansionary Austerity: New International Evidence. IMF Working Paper, No. 11/158.

    Pescatori A. , '', in Expansionary Austerity: New International Evidence , (2011 ) -.

  • Győrffy, D. (2009): Structural Change without Trust. Reform Cycles in Hungary and Slovakia. Acta Oeconomica, 59(2): 147–177.

    Győrffy D. , 'Structural Change without Trust. Reform Cycles in Hungary and Slovakia ' (2009 ) 59 Acta Oeconomica : 147 -177.

    • Search Google Scholar
  • Győrffy, D. (2013): Institutional Trust and Economic Policy: Lessons from the History of the EU. Budapest — New York: CEU Press.

    Győrffy D. , '', in Institutional Trust and Economic Policy: Lessons from the History of the EU , (2013 ) -.

  • Hardiman, N. — Regan, A. (2013): The Politics of Austerity in Ireland. Intereconomics, 48(1): 9–14.

    Regan A. , 'The Politics of Austerity in Ireland ' (2013 ) 48 Intereconomics : 9 -14.

  • Hardin, R. (2002): Trust and Trustworthiness. New York: Russel Sage Foundation.

    Hardin R. , '', in Trust and Trustworthiness , (2002 ) -.

  • Honohan, P. (2009): Resolving Ireland’s Banking Crisis. The Economic and Social Review, 40(2): 207–231.

    Honohan P. , 'Resolving Ireland’s Banking Crisis ' (2009 ) 40 The Economic and Social Review : 207 -231.

    • Search Google Scholar
  • Honohan, P. (2010): The Irish Banking Crisis: Regulatory and Financial Stability Policy 2003–2008. A Report to the Minister for Finance from the Governor of the Central Bank. Dublin: Central Bank. Available: http://www.bankinginquiry.gov.ie/The%20Irish%20Banking%20Crisis%20Regulatory%20and%20Financial%20Stability%20Policy%202003-2008.pdf. Accessed: July 27, 2013.

    Honohan P. , '', in The Irish Banking Crisis: Regulatory and Financial Stability Policy 2003–2008. A Report to the Minister for Finance from the Governor of the Central Bank , (2010 ) -.

  • IMF (2007): Ireland: 2007 Article IV Consultation. IMF Country Report, No. 07/325.

    '', in Ireland: 2007 Article IV Consultation , (2007 ) -.

  • IMF (2008): Greece: 2007 Article IV Consultation. IMF Country Report, No. 08/148.

    '', in Greece: 2007 Article IV Consultation , (2008 ) -.

  • IMF (2009a): Greece: 2009 Article IV Consultation. IMF Country Report, No. 09/244.

    '', in Greece: 2009 Article IV Consultation , (2009 ) -.

  • IMF (2009b): Ireland: 2009 Article IV Consultation. IMF Country Report, No. 09/195.

    '', in Ireland: 2009 Article IV Consultation , (2009 ) -.

  • IMF (2010a): Greece: Staff Report on Request for Stand-by Arrangement. IMF Country Report, No. 10/110.

    '', in Greece: Staff Report on Request for Stand-by Arrangement , (2010 ) -.

  • IMF (2010b): Ireland: 2010 Article IV Consultation. IMF Country Report, No. 10/209.

    '', in Ireland: 2010 Article IV Consultation , (2010 ) -.

  • IMF (2010c): Will it Hurt? Macroeconomic Effects of Fiscal Consolidation. In: World Economic Outlook — October 2010. Washington, D.C. pp. 93–124.

    '', in World Economic Outlook — October 2010 , (2010 ) -.

  • IMF (2011a): Greece: Fourth Review under the Stand-by Arrangement. IMF Country Report, No. 11/175.

    '', in Greece: Fourth Review under the Stand-by Arrangement , (2011 ) -.

  • IMF (2011b): Ireland: First and Second Reviews under the Extended Arrangement and Request for Reshaping of the Arrangement. IMF Country Report, No. 11/109.

    '', in Ireland: First and Second Reviews under the Extended Arrangement and Request for Reshaping of the Arrangement , (2011 ) -.

  • IMF (2011c): Ireland: Third Review Under the Stand-by Arrangement. IMF Country Report, No. 11/276.

    '', in Ireland: Third Review Under the Stand-by Arrangement , (2011 ) -.

  • IMF (2012a): Fiscal Monitor October 2012 — Taking Stock: A Progress Report on Fiscal Adjustment. Washington, D.C.

    '', in Fiscal Monitor October 2012 — Taking Stock: A Progress Report on Fiscal Adjustment , (2012 ) -.

  • IMF (2012b): Ireland: 2012 Article IV Consultation. IMF Country Report, No. 12/264.

    '', in Ireland: 2012 Article IV Consultation , (2012 ) -.

  • IMF (2012c): Greece: Request for Extended Arrangement under the Extended Fund Facility — Staff Report. IMF Country Report, No. 12/57.

    '', in Greece: Request for Extended Arrangement under the Extended Fund Facility — Staff Report , (2012 ) -.

  • IMF (2013a): Greece: 2013 Article IV Consultation. IMF Country Report, No. 13/154.

    '', in Greece: 2013 Article IV Consultation , (2013 ) -.

  • IMF (2013b): Greece: Ex Post Evaluation of Exceptional Access under the 2010 Stand-by Agreement. IMF Country Report, No. 13/156.

    '', in Greece: Ex Post Evaluation of Exceptional Access under the 2010 Stand-by Agreement , (2013 ) -.

  • IMF (2013c): Ireland: Tenth Review under the Stand-by Arrangement. IMF Country Report, No. 13/163.

    '', in Ireland: Tenth Review under the Stand-by Arrangement , (2013 ) -.

  • Ioakimidis, P.C. (2001): The Europeanization of Greece: An Overall Assessment. In: Featherstone, K. — Kazamias, G. (eds): Europeanization and the Southern Periphery. London: Frank Cass, pp. 73–94.

    Ioakimidis P.C. , '', in Europeanization and the Southern Periphery , (2001 ) -.

  • Jeanne, O. (1997): Are Currency Crises Self-Fulfilling? A Test. Journal of International Economics, 43(3–4): 263–286.

    Jeanne O. , 'Are Currency Crises Self-Fulfilling? A Test ' (1997 ) 43 Journal of International Economics : 263 -286.

    • Search Google Scholar
  • Kahn, M. — Sharma, S. (2005): IMF Conditionality and Country Ownership of Adjustment Programs. In: Mody, A. — Rebucci, A. (eds): IMF-Supported Programs: Recent Staff Research. Washington, D.C.: International Monetary Fund, pp. 119–130.

    Sharma S. , '', in IMF-Supported Programs: Recent Staff Research , (2005 ) -.

  • Keynes, J.M. (1936): The General Theory of Employment, Interest and Money. New York: Harcourt, Brace.

    Keynes J.M. , '', in The General Theory of Employment, Interest and Money , (1936 ) -.

  • Kindleberger, C.P. (1989): Manias, Panics and Crashes. Second edition. Houndmills — London: Macmillan Press.

    Kindleberger C.P. , '', in Manias, Panics and Crashes , (1989 ) -.

  • Krugman, P. (2013): How the Case for Austerity has Crumbled. The New York Review of Books, 60(10). Available: http://www.nybooks.com/articles/archives/2013/jun/06/how-case-austerity-has-crumbled/?pagination=false. Accessed: July 27, 2013.

    Krugman P. , '', in The New York Review of Books , (2013 ) -.

  • Lagarde, C. (2013): Ireland and the European Union — Shared Determination, Shared Destiny. Speech in Dublin, 8 March. Available: http://www.imf.org/external/np/speeches/2013/030813.htm. Accessed: July 27, 2013.

    Lagarde C. , '', in Ireland and the European Union — Shared Determination, Shared Destiny , (2013 ) -.

  • Loizides, J. (2013): Are Greek Government Deficit and Debt Statistics Reliable? Journal of Economic and Social Measurement, 38(1): 79–95.

    Loizides J. , 'Are Greek Government Deficit and Debt Statistics Reliable ' (2013 ) 38 Journal of Economic and Social Measurement : 79 -95.

    • Search Google Scholar
  • Millward Brown Lansdowne (2011): National Opinion Poll 1st February, 2011. Available: http://www.millwardbrown.com/Libraries/Ireland_Polls_Downloads/Millward_Brown_Irish- Independent_Poll_January_2011.sflb.ashx. Accessed: July 27, 2013.

    '', in National Opinion Poll 1st February, 2011 , (2011 ) -.

  • Monastiriotis, V. (2013): A Very Greek Crisis. Intereconomics, 48(1): 4–9.

    Monastiriotis V. , 'A Very Greek Crisis ' (2013 ) 48 Intereconomics : 4 -9.

  • Obstfeld, M. (1996): Models of Currency Crises with Self-Fulfilling Features. European Economic Review, 40: 1037–1047.

    Obstfeld M. , 'Models of Currency Crises with Self-Fulfilling Features ' (1996 ) 40 European Economic Review : 1037 -1047.

    • Search Google Scholar
  • OECD (2010): Greece at a Glance: Policies for Sustainable Recovery. Paris.

    '', in Greece at a Glance: Policies for Sustainable Recovery , (2010 ) -.

  • Perotti, R. (2011): The Austerity Myth: Gain Without Pain? NBER Working Paper, No. 17571.

    Perotti R. , '', in The Austerity Myth: Gain Without Pain , (2011 ) -.

  • Public Issue (2011): Memorandum and Debt: One Year After. Available: http://www. publicissue.gr/en/1574/debt-afieroma/#1. Accessed: July 27, 2013.

    '', in Memorandum and Debt: One Year After , (2011 ) -.

  • Regling, K. — Watson, M. (2010): A Preliminary Report on the Sources of Ireland’s Banking Crisis. Dublin: Government Publications Office. Available: http://www.rte.ie./news/2010/0609/reglingwatson.pdf. Accessed: July 27, 2013.

    Watson M. , '', in A Preliminary Report on the Sources of Ireland’s Banking Crisis , (2010 ) -.

  • Reinhart, C.M. — Rogoff, K.S. (2009): This Time is Different: Eight Centuries of Financial Folly. Princeton: Princeton University Press.

    Rogoff K.S. , '', in This Time is Different: Eight Centuries of Financial Folly , (2009 ) -.

  • Reinhart, C.M. — Rogoff, K.S. — Savastano, M.A. (2003): Debt Intolerance. Brookings Papers on Economic Activity, 34(1): 1–74.

    Savastano M.A. , 'Debt Intolerance ' (2003 ) 34 Brookings Papers on Economic Activity : 1 -74.

    • Search Google Scholar
  • Rosanvallon, P. (2008): Counter-Democracy: Politics in an Age of Distrust. Cambridge: Cambridge University Press.

    Rosanvallon P. , '', in Counter-Democracy: Politics in an Age of Distrust , (2008 ) -.

  • Rothstein, B. (2000): Trust, Social Dilemmas and Collective Memories. Journal of Theoretical Politics, 12(4): 477–501.

    Rothstein B. , 'Trust, Social Dilemmas and Collective Memories ' (2000 ) 12 Journal of Theoretical Politics : 477 -501.

    • Search Google Scholar
  • Sabatier, P.A. — Jenkins-Smith, H. (1988): An Advocacy Coalition Model of Policy Change and the Role of Policy Orientated Learning Therein. Policy Sciences, 21: 129–168.

    Jenkins-Smith H. , 'An Advocacy Coalition Model of Policy Change and the Role of Policy Orientated Learning Therein ' (1988 ) 21 Policy Sciences : 129 -168.

    • Search Google Scholar
  • Shiller, R.J. (2000): Irrational Exuberance. New Jersey: Princeton University Press.

    Shiller R.J. , '', in Irrational Exuberance , (2000 ) -.

  • Soros, G. (1987): The Alchemy of Finance: Reading the Mind of the Market. New York: Simon & Schuster.

    Soros G. , '', in The Alchemy of Finance: Reading the Mind of the Market , (1987 ) -.

  • Stix, H. (2013): Does the Broad Public Want to Consolidate Public Debt? The Role of Fairness and Policy Credibility. Kyklos, 66(1): 102–129.

    Stix H. , 'Does the Broad Public Want to Consolidate Public Debt? The Role of Fairness and Policy Credibility ' (2013 ) 66 Kyklos : 102 -129.

    • Search Google Scholar
  • UNCTAD (2013): World Investment Report 2013. New York — Geneva.

    '', in World Investment Report 2013 , (2013 ) -.

  • Visvizi, A. (2012): The Crisis in Greece and the EU-IMF Rescue Package: Determinants and Pitfalls. Acta Oeconomica, 62(1): 15–39.

    Visvizi A. , 'The Crisis in Greece and the EU-IMF Rescue Package: Determinants and Pitfalls ' (2012 ) 62 Acta Oeconomica : 15 -39.

    • Search Google Scholar
  • Zettelmeyer, J. — Trebesch, C. — Gulati, M. (2013): The Greek Debt Restructuring: An Autopsy. Economic Policy, 28(3): 513–563.

    Gulati M. , 'The Greek Debt Restructuring: An Autopsy ' (2013 ) 28 Economic Policy : 513 -563.

    • Search Google Scholar