Dóra Győrffy Péter Pázmány Catholic University, Hungary First World Congress of Comparative Economics, Rome, June 24-27, 2015.

In the context of widespread disappointment with crisis management in the European Union what explains the heterogeneity of outcomes in program countries?

 The debate on crisis management – austerity or growth  Economic outcomes of crisis management in six program countries  Determinants of success and failure – an overview of six hypotheses  Implications and conclusions

 Focus on fiscal consolidation  Break down of pre-crisis consensus on the possibility for non-Keynesian effects of fiscal consolidation with the emergence of austerity spirals (Krugman 2013)  Absence of confidence effects due to: 1. Global recession with zero-bound interest rates (Perotti 2011) 2. Fallacy of composition – „we cannot all be austere at once” (Blyth 2013) 3. Composition of adjustment matters (Alesina et al 2015) 4. Quality of government matters (Monastiriotis 2014)

Austerity and growth in the EU Austerity and growth in the EU (without Greece)

GreeceIreland

PortugalHungary

LatviaRomania

GDP (2004=100) GDP per capital PPS (EU28=100)

 H1. The availability of exchange rate policy helps in managing the crisis  H2. More open economies are less exposed to the tradeoff between austerity and growth  H3. Expenditure-based adjustments are more successful than revenue-based ones  H4. The quality of relations with the Troika influences the success of crisis management  H5. The presence of strong public support for the government helps the management of crisis  H6. Domestic institutions determine the success of crisis management

Real unit labor costs (2010=100) Labor productivity

 A shared economic philosophy and domestic ownership of the program in Ireland and Latvia  Acceptance of conditionality by government and opposition in Portugal and Romania  Conflictual relationship and widespread mistrust among negotiating actors in Greece and Hungary  What are the domestic roots of these different relationships?

 Liberal market economies (Ireland, Latvia, Romania) vs Southern model (Hungary?, Portugal, Greece)  Southern model: dual economy with an extensive role of small and medium enterprises in employment, weak innovation capacity, an important role for the family in social provision, relatively high pensions, and extensive state regulations in the product and labor markets  Problem: state capacity

 RoL: ”the perceptions of the extent to which agents have confidence in and abide by the rules of society, and in particular the quality of contract enforcement, property rights, the police, and the courts, as well as the likelihood of crime and violence”  Relations with the Troika and domestic rule of law reflect the willingness of the state for self- constraint

 Success or failure of crisis management seem to depend on the willingness of the state for self-constraint. Its absence shows up in increased uncertainty and risk premium, weakening private property rights and short- term oriented, populist policies.  Implications 1. The debate on austerity and growth is misleading. 2. Managing the financial crisis is a deeply political activity, and international lenders cannot remain oblivious to the trespassing of basic values in EU including democracy, human rights and the rule of law. 3. Since domestic culture and values strongly shape institutions, the rule of law cannot be strengthened by force. Reducing moral hazard in the international financial system is an important step to constrain populist impulses in periphery countries.

Thank you for your attention!