Category Archives: Austerity

Reforming Southern Europe: How to Square the Triangle of Employment, Fiscal Austerity and Inequality?

Mass unemployment is probably one of the most worrying features of the Eurozone crisis. As youth unemployment is hitting record levels (one in four people under 25 in Europe and more than one in two in Spain are officially out of work), many observers are warning against the rise of a “lost generation”, especially in Southern Europe. The European central Bank and international financial situations may have developed an obsession for deficit and debt reduction, but mass unemployment can be considered a much more worrying problem in the long term for both workers and governments. For workers, skills deteriorate when they are out of work, and as technology goes forward, their likelihood of finding a job tend to decrease with the duration of unemployment. For governments, each period of mass unemployment tends to increase the incompressible threshold of structural unemployment. When the number of unemployed increases en masse, it is very difficult to come back to the initial level even in the case of an upturn, as many workers driven out of work for too long are never able to come back into employment again. The problem is even more serious when unemployment concerns primarily young people at the beginning of their career, who cannot even start climbing the ladder in the first place.

In this context, what can governments do, and how do different types of reform impact on public deficits and inequality? In the late 1990s, political economists have argued that service economies, where economic and productivity growth tend to be much lower than in the past, entail a “trilemma” between high employment, low inequality and budgetary restraint. Following this idea, governments in service economies have to choose two out of these three objectives, as all three of them cannot be reconciled.

For many Continental European countries with so-called “Bismarckian” welfare states such as France, Germany, Italy or Spain, the common wisdom is that employment has often been sacrificed to reduce inequality and – often unsuccessfully – contain taxation at the same time. Redistribution is funded through payroll contributions levied on wages rather than by general taxes, which tends to price out low-skilled workers. The amount of contributions employers have to pay even on low salaries can make them too expensive, and earnings-related benefits and minimum wages possibly prevent the entry of low-skilled workers. In Mediterranean countries like Spain, Italy, Greece or Portugal, the problem also often emphasised is the rigidity of labour laws which tend to protect the “insiders” – people who have entered the labour market in the period of growth in the 1960s to 1990s, making it harder for new entrants to get in. The result of this is that young people are much more affected by unemployment in spite of the fact that they are typically much more qualified than their parents. On top of this, poor childcare inherited from a strong *male breadwinner” bias combined with the loosening of family structures typically hampers female employment in Southern Europe: in 2012, only 54% of Spanish women and 50.5% of Italian women between 20 and 64 were in employment (64% and 71 for men respectively). The corresponding figure for Denmark was 72.2 (females) and 78.8 (males). Even considering lower employment rates in general, the gender gap in employment is typically greater in the South.

The first strategy governments can pursue to increase employment while keeping a lid on public expenditure is the Anglo-Saxon way, namely mass deregulation to price in workers again at the bottom of the labour market. It is also the one that is being pushed by European institutions, Germany and the current Spanish government. By cutting down payroll contributions and benefits, what is sought is the expansion of the labour market downwards, through low wage-jobs. It is understandable that Germany is pushing for this kind of solution because it is the strategy that it has pursued itself since the early 2000s, with the rise of mini-jobs, the Hartz reforms and a deliberate strategy of wage compression by German trade unions. The obvious direct consequences of this strategy are the higher income inequalities typical of Anglo-Saxon economies. Income inequalities in Germany also seem to have increased considerably in recent years in spite of the “jobs miracle”. It is unclear, however, whether deregulation is really able to increase employment across a wider set of countries. Moreover, the internal devaluation strategy pursued by Germany to boost exports and run a positive trade balance can only work if other countries run a trade deficit: we cannot all be Germans at the same time.

The second strategy is the Scandinavian way. It consists in the massive expansion of the public sector to provide a wide variety of social services funded by high levels of taxes. Countries like Denmark, Norway or Sweden tend to have higher employment levels at least in part because the state provides or subsidises a large variety of quality social services such as childcare, which not only employ a large workforce, but also tend to facilitate female employment. Affordable childcare allows both members of households to be employed, while its absence often forces a member of South European households – typically the woman – to choose to stay at home. Moreover, theses countries invest massively in active labour market policies. Obviously, the price to pay for this strategy is very high levels of taxation to fund the state, or alternatively, an increase in borrowing. In the context of fiscal austerity that pervades almost all European countries, this is politically very difficult, or even impossible. Countries like France, however, still have large programs of publicly subsidised employment for young people. In 2013, a quarter of jobs held by people below 25 were partly subsidised by the state.

Employment ratio 20-64 by gender

Employment ratio 20-64 by gender

If deregulation creates inequality and is not guaranteed to work, while public sector expansion is very expensive, what is left? In a forthcoming book chapter with Jelle Visser, we argue that there may be a third “liberal-corporatist” way based on the experience of countries such as Switzerland and the Netherlands, where employment participation is high, inequality is low to moderate, and the public sector is nowhere near the size of Scandinavian countries. This model relies on the widespread use of part-time employment and strong systems of occupational skills lifting wages in the bottom of the labour market. The Netherlands and Switzerland have the highest incidence of part-time employment in the OECD, and Switzerland has one of the lowest income inequality levels in the OECD in spite of the fact that it redistributes as little as the United States. In a context where public sector expansion and extensive subsidised childcare as found in Scandinavian countries are politically difficult to put in place, the increase of part-time employment has been a private response allowing women in particular to reconcile childcare with labour market participation. Interestingly, the places where the Dutch and Swiss social models perform particularly well are those in which Southern European countries are lacking, notably for female, elderly, and youth employment. The latter is largely due to strong systems of vocational training which ensure a better transition from school to work, so that the alternative is not only between dropping out of school with low skills or going to university, a system which also tends to foster income inequalities. In all these respects, they can represent a politically viable way to escape the trilemma outlined above at a lower cost in terms of public finances and inequality.

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Incidence of part-time employment, 2011

Of course, any supply-side reform agenda is constrained by the availability of demand, which is a massive problem in Southern Europe. Governments are cutting spending at a time when households are reducing their consumption. Supply-side reforms are of little incidence if nobody at home or abroad is buying anything. In Switzerland and the Netherlands as well, high employment has been underpinned by some form of demand-stimulating factor whose sustainability is uncertain. In the Netherlands, tax exemptions on mortgages have encouraged ever-inflating house prices and the highest levels of mortgage debt in Europe. At the moment, the country has fallen in recession, and the government has cut spending at a time when households are seeking to reduce their debt level. In short, while the Dutch government was a harsh advocate of austerity in Southern Europe, it finds itself entrapped in the same kind of “balance-sheet recession” that Spain is facing. In Switzerland, domestic demand has been maintained by very high levels of immigration since the mid-2000s, compensating for declining exports due to the appreciation of the Swiss franc (as a consequence of the depreciation of the euro), and anaemic demand in the Eurozone. The sustainability of this strategy can be questioned as well, as population growth cannot be pursued indefinitely.

This article was first published under a different title on the LSE’s EUROPP blog, and will be published in Spanish by Agenda Publica.

How Margaret Thatcher Made Britain a Soviet State

When I moved to the United Kingdom a year and a half ago, I thought that I was moving to a free market experiment. Margaret Thatcher and her followers – from Blair to Cameron – had crushed the unions, liberalized labour and financial markets, privatized public services, reformed the state following business principles and reduced its interference in the economy. They had freed us from the threat of socialism, its bloated Kafkaesque bureaucracies and its mountains of red tape. I was aware of the massive social inequalities which had emerged as a result, but this was perhaps the price to pay for more freedom and a smaller state, for everything being faster, more fluid, agile and efficient.

The Kafka Bank

I kept this illusion for about three days after moving here, until I tried to open a British bank account. I chose a bank because of its declared “ethical” and responsible approach – it turned out that it was in fact severely mismanaged and its chairman was an avid user of Crystal meth and male prostitutes, but this is irrelevant here. To open a bank account, you need to prove that you live at a particular address. However, there is no government authority where you can go to register and prove that you live somewhere. Because of its concern for the freedom of individuals, Britain also doesn’t have ID cards. A plan to introduce them was axed by the current government in 2010. You have to pay council tax where you live, but it can be in the name of your flatmates or your landlord. The bank in question would not accept a private tenancy agreement as a proof of address, because the private tenancy market is a dodgy business full of rapacious landlords and greedy estate agents. What they accept to prove your address are letters from a bank, but this implies that you already have a bank. The only option for me to prove my address were utility bills, for which of course I needed to wait until the end of the month. As I didn’t have a British bank account and my employer wouldn’t pay my salary on a foreign bank account, I received my first salary in the form of a cheque that I could not cash (or only at these dodgy pawnbroker shops where they charge you a 15% fee).

After a month, I received my energy bill, or more precisely an internet link to an online energy bill. Energy companies strongly encourage or force you to opt for e-billing and direct debit, and they are unwilling to send you actual paper bills, in order to save costs. The friendly Scottish person from the call centre made it clear that it was much better for trees and my wallet to go paperless. I brought the prints to the bank. They didn’t accept them as a valid proof of address because they hadn’t been sent to my physical address. I also tried with a TV license, which I had also bought paperless after I had arrived. I called the TV licensing authority asking them to send me an actual paper license. After a number of requests, what they sent me was a certificate certifying that my TV license existed online. The bank said no again because it wasn’t the actual TV license. Eventually, I managed to have utility bills sent to my address (energy companies charge you a fee for that). Once again, the bank refused because the street number on the bill was “22C”, while the address that had been entered in their “processing facility” was “22”. The lady at the bank said that the computer system in their division in charge of regulatory compliance with money laundering regulations probably wouldn’t accept it if it wasn’t exactly identical. Since the financial crisis, banks had become very careful. If I wanted the “22” to be changed into “22C”, I needed to reapply.

I gave up and went to another bank that had an agreement with my university. Supposedly, you could open a bank account with them easily online. Again because of money laundering regulations, you have to indicate where you’ve lived for the last three years. For some reason, it wasn’t possible to enter a foreign postcode, so online didn’t work. I had an employee sent to my office, who didn’t know either why foreign postcodes couldn’t be introduced online. “It’s out of the ordinary” he said. Of course, nobody that has lived abroad ever moves to London, except perhaps for a few millions a year. In total, it took 7 weeks to open a bank account, right on time to receive my second salary. I am told that it would be tricky to get a British credit card because I have no “credit history” in Britain, so I didn’t even try.

Before moving to the UK, I lived for a year in Germany, the country of rules everywhere and rigid old-style bureaucracies. To open my German account, I took my tenancy agreement to the local authority (Bezirksamt), they stamped a certificate that I brought to the bank, and my account was open within a few days. Now I assume that one of the reasons why British banks are so absurdly picky, it’s because you can apparently do a lot more with a British bank account than with a German bank account: fee-free overdraft, special conditions for loans, etc. Actually, you have access to a lot of things that can go wrong, and with which you can get yourself and the bank in trouble if you default. In Germany, as everybody knows, you are not supposed to spend more than what you have, so you simply can’t go in the red. For British banks willing to take advantage of deregulated financial markets, having customers is almost a liability, which is why they need a lot more guarantees to make sure that they are reliable. However, banks cannot obtain these guarantees from the state because the state doesn’t want to interfere in your freedom, and they don’t want them from other private companies because they know that they are as greedy and untrustworthy as they are themselves, notably because they have all engaged in never-ending chains of subcontracting which dilute responsibility. The only way they found to get this insurance is by requiring endless piles of paperwork from you. More economic freedom, more paperwork, more soul-sucking bureaucracy.

Freer Markets, More Rules

Think of the following analogy: one day, you decide to no longer accompany your small son or daughter to school to leave them more freedom. However, to make sure that they won’t talk to strangers (which they might do) you make them fill in a 50-page questionnaire every day asking them if they understand all the different kinds of risks they may be exposed to, you call them every 30 seconds to check that they’re alright, you hire a private eye to check on them along the way, and another to monitor the first private eye. My understanding is that the British political economy works a bit along these lines. Governments have privatized, liberalized and outsourced, but every time they’ve done so, they’ve had to set up giant bureaucracies to monitor, control and repair the blunders of the market, and so do private companies to enforce and take advantage of competition. When you have freer markets, you need more rules. Britain and the United States have the most liberal labour and financial markets in advanced countries. Since there is so much freedom, why is there one CCTV for every eleven people living in Britain, and the United States have the largest rates of incarceration in the world? Since the UK doesn’t have ID cards and nobody is required to carry a document of identification to preserve individual freedom, it is actually easier for the police to take you to the policy station to identify who you are. While you seek to free market and individuals, you eventually end up establishing systems of control that are even more intrusive and alienating.

The problem is that when you don’t set up bureaucracies to monitor and control private markets, things usually go wrong, and the state has to step in to repair the damages with new bureaucracies, new commissions of enquiry and new regulatory authorities. Recently, Britain has privatized its probation services, or the monitoring of offenders on parole. It turned out that the company in charge of this had massively overcharged for this service, leading its chairman to step down. Now, you need more bureaucrats to check that the private service providers actually do their job, and more judges to sue them when they commit abuses, sometime dramatic ones. Security services are outsourced, but the army and police had to step in when G4S totally mismanaged the security of the 2012 London Olympics. Railways were privatized, but the company which managed the British Railway tracks had to be partly re-nationalised after a major crash. The British minimum wage is low not to outprice low-skilled workers, but the Treasury pays 3.2 billion a year in tax credits for low wages. It seems to be the same story time and again. The more market you have, the more state and bureaucracy you need after all.

Bureaucratization in British Universities

British universities are a particularly dramatic example of market-induced bureaucratisation. Since I have arrived, I discover the existence of a new rule, a new subcommittee or a new fancy job title (usually with word “strategic” in it) more or less everyday. If I go to a conference, I should fill in a risk assessment form listing 68 types of risks that I may face abroad, including whether I could be bitten by venomous snakes. I should also indicate the address of the closest hospital to the conference venue. The interesting thing about a large part of this bureaucracy is that it seems to have been created to respond to the needs of competition, while competition was supposed to make everything more efficient. Universities are in competition in the domain of teaching to attract students – and therefore income from fees – and in the domain of research, as government money is attributed on the basis of their research performance. As to teaching, as universities are desperate to attract as many students as they can, they have invested massively in marketing, recruitment and advertising services. In the US, for-profit universities are already spending more on marketing than in teaching (20% vs 17%, a report showed). Estimates for the UK are about 4 to 5% in marketing, but most experts predict a massive increase in future years. The consequence, in a context where resources do not increase because the total number of students is capped, is less money for what students actually want, teaching, and more to hire administrators and consultants in-house or – more often – hire private marketing firms. In short, the cost of selling the product to customers has gone up, and there is less money to actually produce it; then you need to rely on low pay to produce it with casual labour.

As for research, the major instrument to allocate funding is the Research Excellence Framework, whose goal is to rank and assess the research output of universities. My understanding of the achievements of the REF is that it has primarily created a giant time-consuming bureaucratic machine. Here’s how it works: departments are asked to select the “best” research outputs of their staff, and for that they set up reading committees who read all the publications to rank them. These rankings are then transmitted to higher levels within the university where the ranking is assessed, and decides whether it is reliable (Universities want to predict their REF score, perhaps for future budgeting). If it is not considered reliable, it is sent to external experts who can re-rank and re-assess the publications. At my university, heads of department have had to attend workshops to explain them how to tell their staff if they had been submitted for the ref or not. So what you have is thousands of people spending thousands of hours ranking and marking their colleagues’ work instead of doing more and better research, which was the first goal of the REF. And I don’t even mention the requirement of writing “impact case studies”: University College London advertised three “editorial consultant”  positions to write them. Salaries were roughly equivalent to those of a lecturer.

In all these examples, the logic is similar. You try to enforce economic freedom, competition and free markets, but you end up creating exactly what you oppose because, as Polanyi argued, self-regulating markets simply cannot exist. Margaret Thatcher is often credited for the downfall of Communism, but she may have paved the way for a system that displays disturbing similarities.

The Vicious Circle of Inequality, Debt, Crisis, and Austerity

We are in a time of austerity. Public services are being cut, social benefits are being capped, and real wages are shrinking. In the last 5 years, the UK has gone through a big wage squeeze: real wages have declined by 5.5% since 2010, on par with countries such as Greece and Portugal. All these measures have fairly clear regressive distributional effects: low-wage earners (those that are more likely to receive benefits or use public services) are being much more deeply affected than the rich, who can buy these services in the market. We are told that this is just a necessary adjustment of the labour market, and that increasing inequalities and the decline of real wages at the bottom are better than an increase in unemployment.

But what if the increase in inequality and the decline of real wages at the bottom end were not only an effect but actually a cause of the crisis in the first place? What if inequality, debt, crisis and austerity were part of a vicious circle which unfolds over decades and that is simply repeating itself? If one pieces together a number of arguments that are out there, there is a grand narrative that emerges.

1. Labour was disciplined in the 1970s. After three decades of increasing real wages in line with productivity, full employment and increases in national wealth going to labour (the Golden Age, 1945-197), unemployment increased, and Keynesianism was discredited. The “excessive” power of labour unions was commonly blamed as a major cause of the crisis, and appropriate measures to discipline labour were taken. Anti-union legislation was passed in the US (Reagan) and the UK (Thatcher), but non-accommodating monetary policies prioritizing low inflation over full employment were implemented everywhere. That was the 1970s-1980s version of current austerity, only with longer sideburns.

2. Inequalities increased, Real Wages Stagnated. Since the early 1970s, productivity continued to increase, but real wages have stagnated (The Great Moderation). Accordingly, income inequalities have increased almost everywhere, and the share of income going to labour decreased again, while profit margins for capital increased. The income share of those at the top has soared, while those at the bottom remained in the slump.

3. Debt Increased to Compensate for the Stagnation of Real Wages. There are two things that have happened to compensate for the decline of real wages from the 1970s onwards. First, there has been a massive entry of women in the workforce. Of course this has to do with cultural change, but one can also understand this as a response by households to maintain or increase household income in the face of stagnating male wages. Second, and most importantly, there has been a massive increase in private debt. Who is going to buy all the cars, houses, videogames, fridges Ipods and iPhones that are produced in ever greater numbers if real wages stagnate? Supply-side economics tells us that supply generates its own demand, but it doesn’t seem to work by itself. The solution is: you give everybody credit cards. Colin Crouch calls this privatised Keynesianism: instead of supporting consumer demand via public spending, you provide easy credit to everyone, even to poor people. “Subprime”, as in “subprime mortgages”, is another word for “poor”.  In a context of austerity where you cannot expand public spending to boost demand, an alternative is to deregulate the financial sector so that citizen-voters can still buy houses via lower credit requirements, and without direct state involvement. Everybody’s happy until…

4. …The financial system bloats and explodes. Because the whole financial system works through complex chains where risks and insurance are sold, resold, and opaquely packaged in complex products, the connection between loans, interests and actual risks is severed. When people to whom loans shouldn’t have been granted in the first place cannot pay their debts anymore, the whole pyramid collapses.

5. The Government steps in to bail out the banks, because they are “too big to fail”. What was private debt becomes all of a sudden public debt.

6. Governments face a fiscal crisis. The big hole in their national accounts due to the money they had to inject in the financial sector aggravates the problem you have in times of crisis: declining revenues because of lower growth and higher expenditures because of higher unemployment.

7. Back to square one. Governments carry out austerity to reduce debt, and they do so mainly by hitting the poor. Public services are cut, benefits are capped, wages shrink again, and labour is disciplined. Go back 6 paragraphs and start again.

A fairly similar story is provided by Pasquale Tridico here, and you can watch an excellent video by David Harvey here or another one by Mark Blyth here.

The Political Consequences of Austerity in Southern Europe

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Lisbon, July 2013

So I have written a blog post (both in Spanish on El Diario’s Agenda Publica and in English on the LSE’s Europp blog) that seeks to explain why the Portuguese party system has stayed relatively stable in the face of austerity policies while the Greek party system has exploded. The main arguments were

1)   that the more extensive nature of party patronage in Greece has made mainstream parties more vulnerable to austerity policies . Since they relied quite heavily on the distribution of rents (public sector jobs, pensions and social benefits targeted at specific groups) as a way to reward voters, they collapsed when these tools were ruled out by Troika-imposed austerity. Portuguese parties, by contrast, could not really rely on these strategies in the run-up to the crisis because of low growth and deteriorating public finances. No growth, no leeway to distribute rents, better resilience.

2)   that responsibility was easier to attribute in the Greek case, where PASOK ruled alone in the run-up and in the direct aftermath of the bailout, whereas the Portuguese PS and PSD formed an informal coalition which diluted responsibility. I wrote that in the political context of Southern Europe, where everything you do is bound to be unpopular, the only solution left for parties if they want to survive may be to form a political cartel to defuse blame.

A few points of background: I came up with the first part of the argument while working on a paper with two Greek colleagues. Obviously, it is quite difficult to test empirically but I thought it would be worth throwing it out there. The second was inspired by existing arguments about the politics of blame avoidance in welfare state reform (for instance here). Since, I only wrote about two countries, it is obviously difficult to say which mechanism is the most important. Moreover, one can think of a number of other reasons that can explain variations in outcomes, such as historical traditions, different cultures of protest, etc. I am personally skeptical towards cultural explanations because anything can be explained by culture, but it’s probably a matter of taste. As a political economist, I tend to favour explanations that involve some form of material/economic interest.

The post has generated a number of reactions. Some said it was just utter nonsense and that I didn’t know what I was talking about. I suspect that the argument may have come across as saying that democratic politics is alive and well in Portugal as compared to Greece where democracy is on the brink of collapse. This is really not what I meant. Recent polls indicate that 88% of Portuguese citizens do not trust the government (see this as well, which points to similar developments elsewhere in Southern Europe). The question is to know when this distrust and anger translates into the collapse of existing parties (as in Greece or Italy) and when it translates into abstention and apathy (as in Portugal and perhaps Spain). This latter occurrence is of course damageable for democracy, but as far as party competition is concerned, it does not change much.

Pedro Magalhães from the Insitute of Social Sciences in Lisbon has posted a well-thought reply that takes a critical take on some of the arguments. I am sincerely honoured that somebody took the time to take on these ideas. The points raised by Magalhães have to do with the generalizability of the argument, and the idea of the political cartel as the only viable option for parties to survive. These are very valid points and I thought I’d say a few things about them.

Magalhães rightly points that the two countries where the party system seems to have been substantially transformed are precisely those where technocratic governments were formed, namely Italy and Greece. In these countries, technocratic governments or grand coalitions have generated a backlash, with the electoral surge of Beppe Grillo’s Movimento Cinque Stelle in Italy and Syriza or Golden Dawn in Greece. I think that this evolution has a lot in common with the rise of the populist radical right in so-called “consensus” democracies such as Austria, Switzerland, Denmark or the Netherlands. In these countries, coalition governments have de facto constituted a political cartel that isolated policymaking from electoral pressure for years. Writing about Switzerland and Austria in 2000, Richard Rose wrote that “a grand coalition is vulnerable to becoming a monopoly unresponsive to new issues. Sooner or later, some citizens will abandon established loyalties and vote for the rascal they do not know in preference to those that they know too well”. In many ways, this could apply very well to what has happened in Greece and Italy, and goes along Magalhães’s argument. When you seek to insulate policymaking from electoral politics, you are bound to face severe anti-system protest and electoral setbacks.

Now, when I wrote that forming a political cartel was probably the only viable option for parties to survive, I was probably wrong. In fact, after giving it some thought, I think that there are two strategies mainstream parties (those with an aspiration to govern) can pursue in the context of the crisis, and each of them has severe electoral drawbacks. Basically, there is the “plague” option and the “cholera” option.

  1. They can collude and form a cartel to implement austerity and commit not to blame each other (Kent weaver calls it « circling the wagons »), which sooner or later may cause an electoral backlash and the strengthening of anti-system parties as discussed above. This is the Greek and Italian case.
  2. Opposition parties can oppose austerity and blame the government for licking the boots of the Troika (“jump on the bandwagon”). The problem of this strategy is that agenda control in Southern Europe is extremely reduced in the current set of supranational/economic constraints. If you blame the government for austerity but want to stay in the eurozone, you will probably have to carry out the very same type of policies that you oppose when you come back to office. One way or another, you will have to betray your voters and face the electoral consequences. You can make voters believe that normal political competition can take place and that alternative agendas exist, but there is in fact only one policy option and it is largely dictated from outside.

There are still a number of questions that I still can’t figure out. For instance, why has Syriza become the first party on the left in Greece, while the Portuguese Bloco de Esquerda or the Communist party do not seem to have benefitted from the crisis? As I said elsewhere, I suspect that there is a pervasive tendency of Portuguese citizens to choose exit rather than voice, notably through emigration and/or abstention, while this tendency is not present in Greece. I would be quite curious to discover ways to investigate this link empirically.

How Austerity Killed Greek Parties, While Portuguese Parties Survived

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This shows the electoral score of the two mainstream parties in Greece and Portugal in 2009 (before the outbreak of the crisis) and in 2011 (in Portugal) and 2012 (in Greece), after the outbreak of the crisis. For Greece, this shows the results of the May elections; new elections were held in June as no governmnet could be formed. What is striking is how mainstream Portuguese parties have been resilient compared to Greek parties, and especially PASOK, which completely collapsed. The cumulative vote share of the PS and the PSD remained stable, while it lost 42% in Greece. As we know, support for fringe parties has soared in Greece (Syriza, Golden Dawn) while radical left  parties in Portugal (Bloco de Esquerda and the Communist Party) have remained at astonishingly low levels.

I see two explanations for this. First, as I argued here, Portuguese citizens seem to prefer “exit” (abstention, emigration) over “voice”. Second, the base of support for Greek parties drew heavily on a spoils system (public sector jobs, pensions, cartelistic rights) and they didn’t differ much ideologically. By reducing public spending and removing these cartelistic rights, austerity directly undermines their base of support. Since PASOK and ND could no longer offer rents to voters because the money was gone, voters abandoned them. In Portugal, austerity had started before the crisis, as the 2000s were a lost decade in terms of growth (no real estate bubble). Hence, parties could not rely on the kind of spoils system that PASOK and ND drew on. There is some data on party patronage that shows these differences.

The Size of Austerity

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Cumulative size of austerity packages as a % of GDP, 2010-2013

The data come from Andrew Watt’s and Sotiria Theodoropoulou’s ETUI report, (p. 14) based on a survey of country experts. Some data, from Italy and Spain most notably, are missing. This is partly based on 2011 estimates, and as we know forecasts have been all but reliable. There is more data on this on the Washington Post’s wonkblog and the Guardian writes this about the UK.

What the Guardian doesn’t explain is whether the coalition wants to “shrink the state” through (1) net cuts in spending or (2) by keeping its progression lower than economic growth. From the data it seems that it’s been (1) until now and it should be (2) from now on. Of course, (2) depends on the return of growth, but since it’s still waiting for the confidence fairy, we may be stuck with (1).

Portugal’s Political Crisis, or the Ordeal of Junior Coalition Partners

On Monday, the Portuguese Finance Minister Vitor Gaspar resigned. Gaspar was the main architect of  Portugal’s austerity drive since its bailout two years ago. His political charisma was akin to a flat bike tyre, but he was considered a major guarantee of credibility for the Troika and Portugal’s creditors. Apparently, he had already asked to resign last year after the constitutional court invalidated a number of the austerity measures contained in his budget for 2013. However, his resignation was then denied by the Prime Minister Pedro Passos Coelho.

Yesterday, the Minister for Foreign Affairs and leader of the minority coalition partner CDS-PP, Paulo Portas also asked to resign to protest against the nomination of Gaspar’s replacement, Maria Luis Albuquerque. Earlier this year, he had already expressed his disagreement with some of the austerity measures carried out by his own government, notably an increase in the taxation of pensions. This would badly hurt his traditional electorate of pensioners, but he acquiesced because it was a condition imposed by the Troika.  Since he is the leader of the minority coalition partner, it would have been difficult to imagine his party staying in the coalition, and early elections were probably the most likely outcome. However, once again, Pedro Passos Coelho refused Portas’s resignation, saying it was premature. Passos Coelho said he wouldn’t resign either despite the unpopularity of his government. We don’t really know what’s going to happen now. Passos Coelho said he would talk to the CDS-PP to maintain a majority, but all its ministers seem to have their resignation letter ready. Nobody knows what’s happening next, but Portuguese bond yields have soared, making another bailout quite likely.

There are two conclusions that can be drawn from this.

First, excessive employment protection may indeed really be a problem in these PIGS countries. Two ministers want to quit (perhaps to do something more productive, like pet food taster or nude cruise worker), and they simply won’t let them. However, this may only apply to ministers, because liberalising the labour market doesn’t seem to improve things for everybody else.

Second, this shows the dilemma of small parties like the CDS-PP when they coalesce with conservative parties that implement austerity. Even if there is no real populist radical right party  (PRRPs) in Portugal, the electorate of the CDS-PP is pretty similar to that of PRRPs elsewhere in Europe: pensioners, farmers and other groups that often depend on government transfers. These parties have electorates that are attached to the welfare state, but they can only coalesce with right-wing parties that are likely to retrench it. As a consequence, they take the blame for policies that they don’t really want in the first place. Something very similar happened with the Austrian FPÖ when they were in a coalition with the conservative ÖVP between 1999 and 2006. They supported a number of retrenchment policies which hurt their own electorate, and the party collapsed in 2002, giving birth to a splinter group, the BZÖ. More recently, in the Netherlands, Geert Wilders’s PVV agreed to support the first (minority) right-wing cabinet of Mark Rutte (VVD) without formally taking part in government. The government engaged  in harsh austerity measures in the aftermath of the financial crisis, and Wilders eventually withdrew his support because of disagreements about the size of austerity measures, notably about pensions, causing the cabinet to fall. In the following elections, the PVV lost a third of its votes. Similarly, even if their electorate is different, the electoral prospects of the Liberal Democrats in the United Kingdom look fairly grim after they had to betray a number of their electoral promises, notably not to raise tuition fees. For these parties, it seems really difficult to hold office and keep voters at the same time.