Although the European financial crisis had mostly abated after 2012, the consequences persist long after the speculative attacks ceased. High rates of public debt and unemployment , low level of investment, and large-scale social disappointment characterize numerous member states of the European Union (EU) several years after the crisis. In such an environment, gloomy predictions about the future of Europe have been prevalent even before the migration crisis, Brexit , or the inauguration of Donald Trump as the president of the United States .
As the public discourse became enveloped in despair and angst, a wide discrepancy opened between the short-term fire-fighting efforts of international institutions and the various long-term proposals of analysts about the move toward fiscal and political union in the EU. The divergence among countries, which were most hit by the crisis, the sources of the differences and their implications for building a more resilient EU were mostly neglected in the debate. However, without understanding these national-level issues, it is very difficult to make realistic proposals about further integration.
The major question of this book is very simple: what factors determined the success or failure of financial crisis management in countries which needed international financial support? Success and failure are naturally subjective concepts. Here they are understood in both economic and political terms. Economic crisis management can be considered successful if a country is able to return to market financing, its economic growth recovers with declining unemployment and public debt, and its competitiveness is stable or improving.1 The definition of political success is more complex—in the book it is understood as the ability of the traditional political elite to recover the trust of the public or at least preserve its political power from anti-elite, populist forces. At first sight, the relationship between the two dimensions of success can vary—an economically successful crisis management does not necessarily exclude populist takeover, while the resistance to populism does not imply economic success. The case studies of the book provide ample evidence about how difficult it is to be successful in both dimensions.
The chapter provides an overview of the research. The next section introduces the eight countries under analysis focusing on their economic differences after the crisis. Then a brief literature review is presented about the major debates surrounding financial crisis management in the EU, followed by an elaboration on the theoretical approach taken in the book. The fourth section discusses methodology, and the chapter concludes with an overview about the structure of the book.
1.1 Divergence After Crisis in the EU Program Countries
After the collapse of Lehman Brothers, the global financial crisis swiftly spread to Iceland then to the EU. The first victim was Hungary , which requested financial assistance in October 2008. Latvia and Romania also needed support, and turned to the International Monetary Fund (IMF) in November 2008 and March 2009, respectively. As these countries can be considered emerging economies, their financial trouble and the need for IMF involvement was not completely unexpected. However, euro-zone member states were not supposed to turn to the IMF , and thus although Greece lost access to the financial markets in December 2009, it took months before financial assistance was finally offered in May 2010. Afterward other euro-zone countries followed: Ireland in November 2010, Portugal in April 2011, and finally Spain and Cyprus in June 2012. In the following, these eight countries are referred to as program countries.
By 2016 all program countries could return to market financing with the exception of Greece . However, as shown by Table 1.1 there is a considerable divergence in growth, unemployment , the level of public debt , and the changes in competitiveness among the eight countries.
Table 1.1
Selected macroeconomic indicators in EU program countries in 2016
GDP 2016 (2004 = 100) | Unemployment rate in 2016 | Public debt as % of GDP in 2016 | Competitiveness rank in 2016 (change from 2006/2007) | |
|---|---|---|---|---|
C yprus | 110.5 | 13.1 | 107.8 | 83 (−28) |
Greece | 80.8 | 23.6 | 179 | 86 (−21) |
I reland | 155.9 | 7.9 | 75.4 | 23 (−1) |
Hu ngary | 115.6 | 5.1 | 74.1 | 69 (−22) |
Latvia | 131.4 | 9.6 | 40.1 | 49 (−4) |
Portugal | 100.6 | 11.2 | 130.4 | 46 (−6) |
Romania | 142.2 | 5.9 | 54.4 | 62 (+12) |
Spain | 111.6 | 19.6 | 99.4 | 32 (−3) |
EU-28 | 114.5 | 8.5 | 85.1 | N/A |
Economic growth performance is assessed through taking 2004 GDP as the base—while the choice is certainly arbitrary, it seems more appropriate than using the immediate pre-crisis year as in many cases the latter was an indicator of an overheated economy. From Table 1.1 we can see that compared to the EU-28 average, three countries showed exceptional growth performance between 2004 and 2016 in spite of the financial crisis: Ireland , Romania , and Latvia . Greece represents a stark contrast with its 2016 GDP standing only at 80.8 percent of its 2004 level. Portugal is the second worst performer as its GDP stands at the 2004 level. Hungary , Cyprus , and Spain perform around the EU-28 average with their 2016 GDP surpassing the 2004 level by 10–15 percent.
Similar divergence can be observed in terms of unemployment and public debt. On these dimensions the Eastern countries (Hungary , Latvia , and Romania ) and Ireland perform better than the Mediterranean countries as they register single-digit unemployment rates and debt levels below the EU average. Greece fares the worst on these dimensions with 23.6 percent unemployment and public debt at 179 percent of GDP. The other three Mediterranean countries also underperform the EU average with double-digit unemployment rate and debt levels around 100 percent of the GDP with Portugal registering 130.4 percent.
The long-term sustainability of growth performance strongly depends on competitiveness . Table 1.1 shows the ranking of the eight countries in 2016 in the Global Competitiveness Report of the World Economic Forum and the change in their ranking from the pre-crisis period. As we can see, the competitive position of Cyprus , Greece , and Hungary deteriorated the most, while Ireland , Latvia , Portugal , and Spain registered only a moderate decline in their ranking. The best performer on this dimension is Romania , which improved its position by 12 places although clearly from a very low initial level.
To summarize the main findings from Table 1.1 we can see that Greece is clearly the worst performer, while Ireland has fared best among the eight countries. Among the remaining countries, the three Eastern countries generally perform better than three Mediterranean states. The central question of the book is what explains these differences.
1.2 Narratives on Crisis Management
During the years of financial crisis management, several narratives emerged about what factors determine...