Klaus Armigeon (University of Bern) and Stefano Sacchi (University of Milan)

“Three ways to Austerity”

Abstract

In 2010-2014, 26 of 31 democratic countries pursued austerity: they consolidated a lean state (Switzerland) or planned to cut back deficits (25 nations, among them Germany, Portugal and Italy). Why do democratic governments embark on austerity policies? A statistical analysis shows that the extent of deficits change is mainly a function of the previous level of deficits and the interest rates on government bonds. The higher the interest rates and the deficits, the stronger the planned reduction of deficits. In addition, membership in the Eurozone makes a difference. In a qualitative analysis we focus on four nations and their austerity policies: Italy, Portugal, Germany and Switzerland. We identify three roads to austerity: There were alternatives to austerity in Portugal and Italy in terms of ideas and political majorities. However these policies could not be pursued due to external pressures by international markets and the intervention by EU and IMF. In contrast, in Germany and Switzerland there was no strong external pressure. Germany opted for modest austerity because there were no alternative ideas that were supported by a majority or at least a sizeable part of the citizenry. In Switzerland, there were alternative ideas to austerity, but they could not win a majority of the citizens. Even more importantly, institutions biased the political decision process against expansionary policies.