Macroeconomic preferences of national parliamentary parties

6 Macroeconomic preferences of national parliamentary parties¹

Introduction

The fourth and the fifth chapter of this book analyzed how parliamentary parties voted on anti-crisis measures and why they supported or rejected them. The analysis of voting behaviour established that the dominant explanatory variable has been political parties’ position on European integration. In particular, whereas pro-European parties voted in favour of anti-crisis measures, Eurosceptic parties rejected them. The comparative analysis of discourses accompanying approval of the analyzed measures demonstrated that parties supporting the measures referred to general economic interests of their states and the eurozone as well as the value of the European integration process in general. Opponents tended to justify their position with national interests and narrow interpretation of the ‘no bailout clause’ but also negative effects of austerity measures on the bailout states’ economies. It is telling that the legislative process concerning macroeconomic reform has been to such extent devoid of arguments discussing different models of markets’ stabilization. Apparently, only a small share of opponents raised the issue debating the neoliberal approach.

In fact, the reform of European economic governance is not only a matter of ‘more or less’ integration (Jabko, 2011), but it is also about redistribution and a choice of economic strategies oriented towards combating the crisis. Furthermore, voters can be adequately represented only if parties demonstrate how a particular policy or legislative bills affects their interests. Do these findings imply that the majority of parliamentary parties do not have an opinion on that matter? Is it likely that parties representing different positions on the left–right scale have not advocated different policy options? This chapter analyzes the issue in more detail.

The chapter poses the following questions: do economic principles inform political parties’ choices regarding anti-crisis measures in the eurozone or, on the contrary, is it the newly emerged conflict of interest between the creditors and debtors? The literature suggests that macroeconomic policy outcomes, both during economic booms and downturns, depend to a large extent on the economic stance of the governing party: whereas parties representing the economic left advocate Keynesian macroeconomic measures, right-wing parties opt for neoliberal ones (Alesina and Rosenthal, 1995; Boix, 2000). However, the existing literature referred to policies that political parties were propagating for their own country and not for other states. As a consequence, we do not know whether the same mechanism accounts for the choice of anti-crisis policies which political parties advocate for the bailout states in the eurozone. Prior policy-responses to financial crises were always national ones (though with some degree of international coordination, for instance, under the International Monetary Fund), but the financial crisis that hit the eurozone in 2010 urged not only a joint coordination of national policies but, foremost, financial solidarity among the eurozone members (Closa and Maatsch, 2014).

The current political discourse challenges the established knowledge regarding the role of economic principles in political parties’ policy choices. The creditors are blamed of pursuing the ‘hellenization’ of the crisis (Krugman, 2012) by claiming that financial problems of southern Europe are predominantly caused by their governments’ irresponsible budgetary policy. On the other hand, governments of debtors reject that interpretation and point to systemic weaknesses of the euro as a common currency. Whereas societies in creditor states remain reluctant towards financial assistance, taxpayers in debtor states demonstrate their frustration with harsh austerity measures.

By now, the literature has neglected the role of parliamentary deliberation on anti-crisis measures. Political scientists devoted more attention to decision-making processes at the executive level (Puetter, 2012) than among legislators. However, these are parliamentary debates which account most directly for policy-formation processes on a domestic level. In contrast to executives, parliamentary discourses represent more thoroughly a diversity of interests and positions expressed by political actors (Wendler, 2013).

This chapter poses the following specific research questions: how can we explain parliamentary parties’ positioning on anti-crisis measures implemented in the bailout states of the eurozone? Which factors account for political parties’ choices: the economic orientation of a party, conflicting interests of creditors and debtors or perhaps the cleavage between the government and the opposition?² The empirical findings draw on national plenary parliamentary debates devoted to the approval of the increased budgetary capacity of the European Financial Stability Facility (EFSF) from 2011. The selected states were: Austria, Germany, France, Slovenia, Belgium, Spain, Ireland and Greece.

The methodological approach of the chapter was based, first, on the qualitative and quantitative discourse analysis of national parliamentary debates devoted to the increased budgetary capacity of the EFSF and, second, on the QCA crisp-set analysis. Whereas plenary discourses helped to establish which parties supported neoliberal and Keynesian measures, the QCA analysis was employed in order to examine the conditions under which parties opted for one of the two macroeconomic approaches.

The chapter begins with a presentation of two macroeconomic approaches: Keynesianism and neoliberalism. The next section of the chapter presents the literature review and the hypotheses accounting for political parties’ positioning on macroeconomic policies. The empirical analysis section is preceded by the presentation of the methodological approach. The final section of the chapter presents conclusions.

Keynesianism and neoliberalism

Both approaches differ significantly with respect to the role a state should play in the market cycle. In general, neoliberals stress deregulation, whereas Keynesians advocate an active role of a state in monetary and fiscal policy. Although both neoliberals and Keynesians share the assumption that markets act rationally, neoliberals argue that markets always get the price right provided all the relevant information is publically available. Keynesians, by contrast, point to various ‘market failures’ which distort the situation of a perfect competition.

How should governments respond to the economic crisis? Keynesians and neoliberals recommend the opposite: neoliberal economists advocate pro-cyclical measures and Keynesians counter-cyclical ones. According to Keynesians, governments should stimulate the economy by conducting expansionary fiscal and monetary policy, that is, increasing government spending, increasing inflation and decreasing the tax rate. In contrast, neoliberal economists argue that government spending is counterproductive during recessions for it tends to lead to stagflation (inflation and unemployment increase while growth decreases). Instead, neoliberals suggest budgetary consolidation, policies of austerity which aim at reducing public expenses.

The neoliberal tool-box for states struggling with economic crisis comprises predominantly budgetary consolidation and various austerity measures. Economists representing this approach maintain that strong austerity not only allows a reduction in public spending but, foremost, it helps to regain confidence in the markets (Ardagna, 2009). From that perspective, markets are believed to lose confidence in states that continue to run high deficits. These states are likely to be ‘punished’ by investors with higher interest rates. Neoliberal economists disregard Keynesian anti-crisis measures by arguing that the only viable strategy to lead the economy out of the crisis and to regain confidence of investors is to cut public spending in order to reduce the deficit. In their view, expansionary fiscal policy will increase interest rates and thereby reduce investment and consumption.

Keynesian economists are not against budgetary consolidation as such, but they argue that it should be implemented during periods of economic growth and not vice versa. In their view, strong austerity leads to decrease of the GDP (Guajardo et al., 2011). Although the reduction of spending allows governments to cut the deficit, the GDP is very likely to a decrease because cuts in public spending (including reductions of work-places in public sector) are likely to weaken consumption. That, in turn, affects the private sector which is going to sell less. Therefore, Keynesians believe that inflation is a better tool to ‘get the prices right’ than wage-cuts suggested by neoliberals. Under higher inflation investors may be more willing to borrow if the currency is going to be worth less.

Contrary to neoliberals, Keynesians point to the fact that prices and wages can only slowly adjust to the economic downturn. As Mankiw and Romer (1991) observed, prices adjust slowly (they are ‘sticky’) due to ‘menu costs’ which are related to the adaptation process, such as printing new menu lists in restaurants.

Despite a large body of literature in that area, there is no consensus among empirically oriented economists as to which of the two approaches is more effective during the crisis (Furceri and Sousa, 2009). Some studies indicate that governments’ spending has a negative effect on consumption and investment. Others stipulate that high sovereign debt levels (the effect of public spending) hamper growth (Kumar and Woo, 2011; Cottarelli and Jaramillo, 2012). By contrast, there are also empirical studies which conclude that public spending offers a better way out of crisis by having a positive effect on investment and consumption (Furceri and Sousa, 2009; Baldacci, Gupta and Mulas-Granados, 2012).

Which factors account for political parties’ positioning on macroeconomic policies? Hypotheses of this study

The existing literature identified major factors explaining political parties’ positioning on macroeconomic policies, such as general economic ideology (left or right) or governing status (membership in the government or opposition). However, the question remains: do the same explanatory paths account for political parties’ choices on macroeconomic measures during the current sovereign debt crisis? The QCA is an adequate approach to test that because it allows investigating ‘conjunctual causations’ across the observed cases. In other words, we assume that different constellations of factors may lead to the same result (i.e. Keynesian positioning). Furthermore, each constellation leading to the same outcome can have a different theoretical significance: whereas one can imply that ‘crisis matters’, the other can demonstrate the opposite. This section sheds more light on phenomenon.

The existing empirical research demonstrated that parliamentary parties opt for macroeconomic measures which coincide with their general economic ideology: parties located on the economic ‘right’ opt for neoliberal measures whereas parties located on the economic ‘left’ – advocate Keynesian ones (Alesina and Rosenthal, 1995; Boix, 2000). For instance, in the United States the Republicans concentrate on decreasing inflation, but the Democrats attach more importance to the reduction of unemployment. More recent literature focussing on the financial crisis (i.e. Broz, 2013) also demonstrates that economic orientation of governments plays a significant role. According to Broz (2013) partisan character of governments can be a cause of a financial crisis. This is because right-wing governments introduce various deregulative measures. Therefore, a response – like the run-up – to a crisis is also likely to be informed by the economic ideology of a governing political party. In particular, political parties representing the right-wing of the economic spectrum are likely to advocate pro-cyclical measures, such as policies of austerity. In contrast, parties representing the economic left are more likely to propose anti-cyclical measures, for instance, increase of government spending.

According to the other hypothesis put forward in the literature institutional factors are likely to modify MPs’ macroeconomic positions. In particular, given the fact that the major cleavage in politics is between governments and opposition (e.g. Raunio, 2009), we can assume governing parties to continue the once implemented policy line, whereas opposition parties continue to challenge it and propose alternative solutions. Furthermore, whereas governing majorities carry the burden of international responsibility for their position, opposition parties are free from those considerations.

In the eurozone context the cleavage between the government and the opposition can also account for the choice of macroeconomic measures. There were two major reasons why parties in government became wedded to neoliberal macroeconomic policies at the EU level. First, already before the sovereign debt crisis the EMU and the SGP were based on neoliberal principles. Second, having opted for a neoliberal anti-crisis approach in 2010, governing parties decided to continue with that policy line in 2011 despite opposition parties’ criticism. On the contrary, opposition parties are more likely to support Keynesian measures. They enjoy an advantaged position since they are not obliged to implement the policies they are suggesting. Moreover, opposition parties can attract new voters who are dissatisfied with the current policy line. As a consequence, we can assume that whereas governing parties are more likely to continue with the neoliberal policies, opposition parties are expected to propose counter-measures (Keynesian ones).

However, we have to bear in mind that the abovementioned mechanisms were established upon the data analyzing macroeconomic policies which national parties implemented in their own states. Until now, there is no research demonstrating how the creditor or debtor statuses can interfere with the abovementioned mechanisms. There are certain reasons which allow us to expect that the sovereign debt crisis in the eurozone generated new paths accounting for the choice of macroeconomic measures. Namely, there is one, but very important, difference between the current crisis of the eurozone and all other prior crises: eurozone states are affected by the crisis even if their finances are healthy. Obviously, in the globalized economy financial crisis in one state affects other states as well, for instance, by impacting the import–export rates. However, the interdependence of national economies in the eurozone is even stronger. This is because creditor states carry the risk of covering debtor states’ debts if they fail to attend it. Furthermore, in contrast to the IMF, these are only eurozone members that can apply for a loan.

The second peculiarity of the eurozone crisis is that creditors decide on anti-crisis measures that do not apply to their own states but to the bailout states. Although in principle national finances remain within the exclusive competences of national governments, debtors have to give up some sovereignty once they sign the Memorandum of Understanding (MoE). Acquisition of loans from the IMF also involves conditionality; however, their mechanism is less politicized than in the eurozone. In the eurozone these were national governments and national parliaments that had to approve the introduction of the bailout fund. By definition, these institutions follow their national political and economic interests. Under unanimity procedure, a veto of one eurozone member can put on hold the approval process of the bailout fund. That situation can give rise to conflicting interests of creditors and debtors but also frustration among constituencies in both groups of states.

Hence, if the sovereign debt crisis had an impact on political parties’ macroeconomic choices it can be expected that parliamentary parties in states that received a bailout are more inclined to opt for Keynesian anti-crisis measures. Vice versa, states with stable economies would be more likely to opt for neoliberal anti-crisis measures.

Why do Keynesian anti-crisis measures better correspond with the interests of ‘weak’ economies? That is because voters in these states strongly disapprove of austerity measures. For that reason, as a vote-seeking strategy, it is risky for MPs to advocate introduction of such measures in their states. In contrast, Keynesian anti-crisis measures are more likely to be welcomed by voters. If governments ‘inject’ money into the market their voters will not punish them in the next elections.

On the other hand, it can be expected that stable economies, unlikely to need a bailout themselves, would be more reluctant towards Keynesian anti-crisis measures. Why? Weak economies in the eurozone cannot increase their public deficit without risking a further increase of interest rates, particularly if they already have liquidity problems (southern Europe) or solvency problems (Greece). As some economists observed (de Grauwe and Ji, 2012), financial markets underpriced risk of southern European states before the crisis and overpriced it during the crisis, which was not the case of states with national currencies. Governments of states in the monetary union are more prone to ‘self-fulfilling liquidity problem’ (de Grauwe and Ji, 2012, p. 887) than states with national currencies. That is because markets are more afraid of default in the case of shared currency. Hence, if eurozone states opted for Keynesian anti-crisis measures (for instance, a fiscal stimulus), financial markets would very likely respond by increasing further the interest rates. As a consequence, in order to avoid panic of financial markets, such a fiscal stimulus would have to be financed (or at least co-financed) externally, that is either from the EU budget or by economically stable euro states.

On that background this chapter puts forward two sets of hypotheses. The first one reflects the ‘state of the art’ in the literature where the impact of the eurozone sovereign debt crisis on parties’ positioning has not been envisaged yet. If the sovereign debt crisis did not influence parties’ positioning on macroeconomic measures, we can assume that the conditions accounting for Keynesian positioning are: left-wing orientation of a party and membership in the opposition, ~R*~gov→K (see Table 6.1 for the explanation of symbols). On the other hand, the conditions accounting for neoliberal positioning are: right-wing orientation and membership in the government, R*gov→~K.

Source: Author

If the sovereign debt crisis did have an impact on positioning of political parties, the two paths accounting for Keynesian positioning are: (I-a) bailout→K or (II-a) bailout* R*gov→K. Correspondingly, the paths accounting for neoliberal positioning are: (I-b) ~bailout→~K or (II-b) ~bailout*~R*gov→K. The paths (I-a) and (I-b) simply acknowledge the impact of the bailout (its presence and absence) on parties’ positioning. On the other hand, the paths (II-a) and (II-b) constitute hard cases from the perspective of the state of the art in the literature. Namely, if governing parties representing the economic right opt for Keynesian measures and opposition parties representing the economic left advocate neoliberal ones; it implies that the influence of the sovereign debt crisis was stronger than the impact of the basic economic orientation of a party and its governing status.

Methodological approach of this study

This section of the chapter presents the research design of the empirical analysis. The analysis was conducted in two stages: the first stage concerned the analysis of parliamentary plenary debates devoted to the increased budgetary capacity of the EFSF. That data helped to establish how parliamentary parties positioned themselves on anti-crisis measures (defined as preference for Keynesian or neoliberal anti-crisis policies). These positions constitute here the outcome of the analysis (the dependent variable). The goal of the second stage was to explain why certain parties opted either for Keynesian or neoliberal measures. In order to do so, various conditions (independent variables) were tested by means of the QCA crisp-set analysis.

The selection of states was based on their financial position operationalized as credit rating, based on the Standard & Poor data from autumn 2011. As a consequence, the analyzed euro states represent the following categories: triple-A group (Austria, France and Germany), mid-rating (Belgium and Slovenia), bailout likely (Spain) and bailout states (Ireland and Greece). It was assumed that the financial position of a state may have an impact on MPs’ choices regarding the macroeconomic policy in the eurozone; hence, it would be a mistake to concentrate either on economically ‘well-performing’ or ‘under-performing’ states.

Methodological approach, step one: discourse analysis of plenary parliamentary debates

The outcome (the dependent variable) of the analysis is defined as a position of a parliamentary party on anti-crisis measures (neoliberal or Keynesian macroeconomic policies). The conditions (independent variables) tested in this study were: (1) economic orientation of a political party (left or right), (2) membership in a government or opposition and (3) receipt of a bailout.

In order to establish how parliamentary parties positioned themselves on economic anti-crisis measures, the empirical inference was based on national plenary parliamentary debates. The texts of the plenary debates were obtained from the publically accessible online archives of national parliaments. The analyzed debates took place between July and October 2011.³

As many authors noted (Wodak and van Dijk, 2000; Crespy and Gajewska, 2010; Wendler, 2011) parliamentary debates account most directly for the policy output. During plenary sessions MPs (or MEPs) explain their official stance on the debated legislation and engage in a discussion with other MPs. Their speeches reach not only the audience gathered in a plenary session but also their constituencies that follow the debate through the media. As Wodak and van Dijk (2000: 13) noted: