PopConstraints: Estimating Popular Constraints in Debt Crisis Management

June, 2018 to July, 2020
Fritz Thyssen Foundation

The Eurozone crisis has raised the question how governments ideally address high and rising public debt. Following the recommendations from the main international institutions, e.g. the IMF and the EU, many governments initiated fiscal austerity programs to accommodate these fiscal pressures. These policies often caused dissatisfaction and opposition among a wide range of voters in many countries. In turn, this has frequently led to government breakdowns and other forms of political instability. Such instability is unwelcome both politically and economically as it increases uncertainty, decreases reform capacity and inhibits the resolution of the crisis.

The difficulties of governments and international organizations to design politically sustainable fiscal policy responses are grounded in our limited understanding of popular constraints in times of fiscal pressure. Current advice on what governments, with the help of IOs, can do in such situations is fundamentally inconsistent due to conflicting findings in the existing literature. Past research has pointed to a minimal impact of fiscal retrenchment on government stability. Yet, our own recent research results indicate that this impact has been severely underestimated because earlier research ignores strategic selection bias and the multidimensional nature of fiscal consolidations. These challenges are difficult to address in the conventional, country-level research design that most existing research uses.

The goal of this project is, therefore, to delineate how voters set the political boundaries for debt crisis management. First, we will identify the political feasibility frontier that governments face in fiscal policy. This frontier will define, which fiscal austerity packages are politically sustainable without massive political destabilization, and which ones are not. Second, we will examine how this feasibility frontier can be relaxed when the government is trapped between competing demands from voters and financial investors. In addition to emergency financing, e.g. through bailout packages within the EU or by the IMF, we will explore how these international organizations (IOs) can absorb some of the political blame during debt crises to stabilize a country politically and not only financially.

To this end, we propose to establish how individual voters evaluate different types of austerity policies by conducting survey experiments in four European crisis countries. Our analysis will employ novel survey research methods to collect original, individual-level data that capture how voters evaluate governments and IOs who implement fiscal austerity programs. By examining voter attitudes, we will be able to quantify how popular constraints during debt crises delimit government action and how IOs can help to ease these constraints. We take an international approach by conducting surveys in multiple countries, notably Greece, Spain, Ireland and Estonia, which vary in the degree of political instability caused by fiscal tensions. In sum, our approach will push the research frontier in political economy by measuring the political costs of austerity, by delineating the boundaries of fiscal policy and by assessing the political effects of IO involvement on voter behavior.

This project not only helps to clarify the competing claims in the previous literature about the political effects of fiscal austerity. It is also directly relevant to the operations of European governments, including Germany as one of the most important actors in the European debt crisis. It will help to develop politically sustainable solutions to debt crises that are in greater accordance with political accountability than existing strategies. This is not only important to reduce the democratic deficit and fading trust in governments and international organizations when large groups of voters deem fiscal policy unacceptable. It is also essential to raise the effectiveness of crisis resolution strategies by avoiding political instabilities in the Eurozone and beyond. In this way, our results will speak to the ongoing debate within the EU and the IMF about the best responses to fiscal crises. Our analysis will provide a scientific basis for the evaluation of these different views and their underlying beliefs about voters that characterize this debate.

The goals of the project, thus, are

  • to conduct survey experiments in seven European countries;
  • to estimate the effect of austerity on voter evaluations of governments;
  • to define the political feasibility frontier that governments face during debt crises.