The Politics of Bad Options Why it has been difficult to resolve the Eurozone’s problems Stefanie Walter Ari Ray Nils Redeker Raphael Reinke University of Zurich University of Zurich University of Zurich Swiss National Bank Sample chapters of book manuscript Word count: 58067 December 2018 1 Table of Contents1 1. INTRODUCTION ......................................................................................................................... 5 A SHORT PRIMER ON THE EUROZONE CRISIS ....................................................................................................... 8 THE UNEQUAL DISTRIBUTION OF CRISIS-RESOLUTION COSTS ........................................................................15 BAD OPTIONS, DIFFICULT CHOICES ......................................................................................................................19 THE ARGUMENT IN BRIEF .......................................................................................................................................23 PLAN OF THE BOOK..................................................................................................................................................28 CONCLUSION .............................................................................................................................................................32 2. PUTTING THE EUROZONE CRISIS EXPERIENCE IN PERSPECTIVE ...........................34 THE ARGUMENT: VULNERABILITY PROFILES AND CRISIS RESPONSES ...........................................................38 RESEARCH DESIGN ...................................................................................................................................................45 HOW IS THE EURO CRISIS DIFFERENT? PUTTING THE EUROZONE CRISIS IN CONTEXT............................52 CRISIS DYNAMICS: CHANGING VULNERABILITIES IN THE EUROZONE CRISIS .............................................61 CONCLUSION .............................................................................................................................................................63 3. DISTRIBUTIVE CONFLICT AND INTEREST GROUP PREFERENCES IN DEFICIT COUNTRIES* 4. CRISIS POLITICS IN DEFICIT COUNTRIES: BETWEEN DOMESTIC AND EXTERNAL PRESSURE* 5. CRISIS MANAGEMENT IN SURPLUS COUNTRIES: FINANCIAL HELP BUT NO ADJUSTMENT* 6. DISTRIBUTIVE CONFLICT AND INTEREST GROUP PREFERENCES IN SURPLUS COUNTRIES.................................................................................................................................67 DOMESTIC TRADE-OFFS, VULNERABILITY PROFILES AND ADJUSTMENT IN SURPLUS COUNTRIES ...........70 RESEARCH DESIGN: STUDYING INTEREST GROUP PREFERENCES IN SURPLUS COUNTRIES.......................74 POLICY-SPECIFIC PREFERENCES ON EUROZONE CRISIS MANAGEMENT .......................................................77 POLICY SALIENCE .....................................................................................................................................................91 TRADE-OFFS AND DIFFICULT CHOICES BETWEEN EXTERNAL ADJUSTMENT, INTERNAL ADJUSTMENT, AND FINANCING ........................................................................................................................................................93 VULNERABILITY PROFILES AND PREFERRED CRISIS RESPONSES .....................................................................96 7. CRISIS POLITICS IN SURPLUS COUNTRIES ....................................................................... 104 VOTER PREFERENCES ABOUT HOW TO RESOLVE THE EUROZONE CRISIS ................................................. 106 VOTERS, INTEREST GROUPS, AND EUROZONE CRISIS POLITICS IN SURPLUS COUNTRIES ....................... 116 EUROZONE CRISIS POLITICS IN GERMANY, AUSTRIA, AND THE NETHERLANDS ..................................... 120 NOT AN OPTION: EXTERNAL ADJUSTMENT ..................................................................................................... 122 THE VOCAL POLITICS OF FINANCING IN SURPLUS COUNTRIES..................................................................... 124 CONTEXT MATTERS: THE POLITICS OF INTERNAL ADJUSTMENT ................................................................. 127 CONCLUSION .......................................................................................................................................................... 139 APPENDIX: LIST OF INTERVIEW PARTNERS ..................................................................................................... 141 8. CONCLUSION* 1 Chapters are not included among the sample chapters sent for review. 2 List of Figures Figure 1.1: Eurozone current account imbalances before and after the outbreak of the Eurozone crisis ................................................................................................................................................. 9 Figure 1.2: Creditor country bank claims on deficit countries ...................................................................11 Figure 1.3: Varieties of adjustment: Deficit and surplus countries in the Eurozone crisis ....................16 Figure 1.4: Crisis cost for selected Eurozone countries ..............................................................................17 Figure 1.5: Classification of vulnerability profiles and preferred policy response ...................................25 Figure 2.1: Vulnerability profiles and expected crisis responses ................................................................43 Figure 2.2: Vulnerability profiles of the Eurozone crisis countries and all other crisis episodes ..........53 Figure 2.3: Vulnerability profiles in the 1992 EMS and the Eurozone crises ..........................................57 Figure 2.4: Vulnerability profiles in the Asian financial and the Eurozone crises ...................................58 Figure 2.5: Eastern European states in 2008 and the Eurozone crisis......................................................60 Figure 2.6: Current accounts and vulnerability profiles of Eurozone crisis countries, 2007-2014 .......62 Figure 6.1: Policy-specific vulnerability profiles to internal adjustment ...................................................72 Figure 6.2: Net international investment positions and average growth rates for Eurozone surplus countries ........................................................................................................................................75 Figure 6.3: Average policy evaluations for the three possible crisis strategies .........................................80 Figure 6.4: Interest group evaluations of different Eurozone-breakup scenarios ...................................82 Figure 6.5: Interest group evaluations of internal adjustment policies .....................................................84 Figure 6.6: Interest group evaluations of different forms of financing ....................................................87 Figure 6.7: Effect of interest groups’ material exposure on their policy evaluations ..............................90 Figure 6.8: Salience of adjustment strategies .................................................................................................92 Figure 6.9: Customized construction of choice set for the three different crisis strategies ...................94 Figure 6.10: Choice between most-preferred and least-preferred crisis strategies ..................................95 Figure 6.11: Vulnerability profiles for highest-ranked and lowest-ranked policies .................................97 Figure 6.12: Predicted probabilities of choosing internal adjustment and financing at different levels of vulnerability towards internal adjustment. ....................................................................... 101 Figure 7.1: Overall evaluation of the Euro between 2013 and 2015 ...................................................... 108 Figure 7.2: Should crisis countries remain in the Eurozone? Responses from Germany ................... 109 Figure 7.3: Public opinion on various forms of internal adjustment in Germany ............................... 111 Figure 7.4: Public opinion on various forms of internal adjustment in Austria ................................... 112 Figure 7.5: Public opinion on various forms of internal adjustment in the Netherlands.................... 112 Figure 7.6: Public opinion on financing ..................................................................................................... 114 Figure 7.7: Macroeconomic developments in Germany .......................................................................... 129 Figure 7.8: Salience of economic issues for German voters .................................................................... 129 Figure 7.9: Macroeconomic developments in Austria .............................................................................. 132 Figure 7.10: Salience of economic issues for Austrian voters ................................................................. 133 Figure 7.11: Macroeconomic developments in the Netherlands ............................................................ 135 Figure 7.12: Salience of economic issues for Dutch voters ..................................................................... 136 3 List of Tables Table 1.1: Policy options to resolve balance of payments imbalances ......................................................20 Table 2.1: Indicators measuring national vulnerabilities to internal and external adjustment ...............49