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Comparative Institutional Advantage in the European Sovereign Debt Crisis

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https://ir.library.oregonstate.edu/concern/articles/th83m111x

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  • Excessive fiscal spending is commonly cited as a root of the current European debt crisis. This paper suggests, like others, that the rise of competitiveness imbalances contributing to national imbalances in total borrowing are a better explanation for systemic differences towards EMU countries’ exposure to market speculation. We identify one driver of this divergence: a country’s capacity to limit sheltered sector wage growth, relative to wage growth in the manufacturing sector. Corporatist institutions which linked sectoral wage developments together in the surplus countries provided those with a comparative wage advantage vis-à-vis EMU’s debtor nations, which helps explain why the EMU core has emerged relatively unscathed from market speculation during the crisis despite the poor fiscal performance of some of the core countries during EMU’s early years. Using a panel regression analysis, we demonstrate that rising differentials between public and manufacturing sector wage growth, and wage governance institutions which weakly coordinate exposed and sheltered sectors, are significantly correlated with export decline. We also find that weak governance institutions are significantly associated with more prominent export decline inside as opposed to outside a monetary union.
  • Keywords: European Monetary Union, Sectoral Wage Bargaining, Corporatism, European Debt Crisis
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  • Johnston, A., Hancké, B., & Pant, S. (2014). Comparative institutional advantage in the European sovereign debt crisis. Comparative Political Studies, 47(13), 1771-1800, doi:10.1177/0010414013516917
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  • 47
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  • 13
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  • The authors wish to thank financial support from Oregon State University’s School of Public Policy seed grant competition.
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