Greece, Ireland and the crisis:

Varieties of Capitalism explaining responses and outcomes of the

economic adjustment programme designed by the troika

Master thesis Political Science

Specialisation: International Relations

Name: Dafni Alverti

Student number: 0220310

Supervisor: Prof. G.R.D. Underhill

Reviewer: Assoc. Prof. K.U. Becker

University of Amsterdam

Date: July 6th

2012

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Left photo: Athens. By Sotiris Dimopoulos

Right photo: Dublin. By Nico van Eeden

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Table of contents

Preface 4

Abstract 6

Introduction 7

§ 1. Review of the Literature 18

1.1 EMU: structural flaws 19

1.2 EMU pressures for convergence: pre- and post-accession 22

1.3 Domestic configurations: development of the VoC approach 25

1.4 Domestic configurations: responses and outcomes 29

1.5 Conclusion 31

§2. Background chapter: Greece and Ireland as VoCs and the lead-up to the crisis 32

2.1 Greece as VoC 32

2.2 Ireland as VoC 36

2.3 Greece: the lead-up to the crisis 39

2.4 Ireland: the lead-up to the crisis 42

2.5 EU´s unexpected reaction, financial assistance and the troika programme 44

2.6 Expectations 47

§3. Case study: Greece 49

3.1 The economic adjustment programme: “unprecedented in the scope of

national effort required” 49

3.2 VoC configurations and their effects 53

3.2.1 GSEE, ADEDY and SEV: vested interests opposing change

and reform? 53

3.2.2 Political dynamics 58

3.3 Conclusion 58

§4. Case study: Ireland 61

4.1 The economic adjustment programme: commitment to do ´whatever it takes´ 61

4.2 VoC configurations and their effects 63

4.2.1 ICTU and IBEC 63

4.2.2 Political dynamics 67

4.3 Conclusion 67

Comparisons and Conclusions 69

Bibliography 74

Appendix: figures 1-22 81

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Preface

The European sovereign debt crisis, accompanied with unprecedented adjustment and

austerity measures, has had an enormous impact in countries such as Greece, Ireland and

Portugal. The crisis has been one of the most frequent subjects in European media in recent

years, spreading prejudices and provoking a dichotomy mainly between the people of

Northern and Southern Europe. Writing about differences between North and South Europe is

not something new; the Roman senator and historian Tacitus (56-117 AD) elaborated in his

work Germania on differences between the Roman and the Germanic people.

Due to my personal background and my interest in international political economy I

chose to delve more into the European debt crisis and examine the domestic configurations of

countries facing a sovereign debt crisis. In this way I hope to contribute to a better

understanding of the diversity between European nations.

At this point I would like to thank my professor G.R.D. Underhill for his inspiring

lectures, his inexhaustible positive energy and enthusiasm and all his comments and help by

supervising my thesis. Moreover, I would also like to thank my father for providing me with

nice meals (!) and two very good friends (they know who I mean) for lending an ear during

the last months and supporting me.

Haarlem, July 2012

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More than other variants of modernity, the European one

has been strung between the poles of clear-cut individuality

and solidarily-constructed collectivity.

Goran Therborn, European Modernity and Beyond, 1995

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Abstract

This thesis focuses on a subject that is of major importance in the current state of the

European sovereign debt crisis: the economic adjustment process of countries that have been

bailed out, in this case Greece and Ireland. The research is concentrated on explaining the

responses and outcomes of the adjustment programme in both countries on basis of their

Varieties of Capitalism characteristics. The analysis begins with the origins of European

monetary integration, tracing its underlying problems and unintended consequences. We see

that the economic development of the EMU member states in the pre-crisis phase was

affected by both international dynamics of capital mobility and domestic VoC configurations.

However, the outbreak of the sovereign debt crisis was caused by a policy failure on

European level and not by the VoC characteristics of the individual countries. It is after both

Greece and Ireland have been confronted with a market-led adjustment programme imposed

by the troika (EC, ECB and IMF) that their VoC characteristics directly affect their responses.

The underlying argument is that as Greece is seen as a statist, mixed market and dual

economy with skewed, politicized interest representation, not used to market pressures, it will

cope worse with the market-led adjustment programme than Ireland, which is seen as a

liberal, competitition-focused market economy, used to market pressures.

Key words: EMU, sovereign debt crisis, external pressure, adjustment programme, Varieties

of Capitalism, interest representation, political culture.

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Introduction

February the 12th, 2012. Athens. More than one hundred thousand people gathered in the

centre of Athens in front of the parliament to protest against the new austerity measures

dictated by the troika and voted on by the Greek government. Even the famous Greek

composer Mikis Theodorakis (who had protested in the past against the junta) protested on

Syntagma Square and said that ´They are getting ready to vote for the death of Greece´. The

debate between the members of parliament about the second bailout package was

accompanied by demonstrations, riots and fires in the streets of Athens.

In Ireland, which is also following the troika program entailing austerity measures,

protests and demonstrations have been few and quite modest. Major public unrest has not

taken place until now. Are the Irish people reacting differently to these austerity measures?

What exactly are the differences in the political economic situation between Greece and

Ireland? It is interesting to examine these questions, especially if we take into account that

Greece has for years been called the ´black sheep´ of Europe due to bad economic

performance and Ireland was labelled the ´Celtic Tiger´ due to the economic miracle in the

1990s. The reality is now that the ´black sheep´ and the ´Celtic Tiger´ face the same imposed

troika programme.

How did these countries get to this point? In order to have a good understanding of the

reactions to the troika program in both Greece and Ireland, it is important to first look at the

roots of the crisis. What are the factors that contributed to the crisis? This question takes us to

the origins of the European Monetary Union (EMU) and the introduction of the Euro currency

in the member states, among them Greece and Ireland. By now it has become clear that the

EMU was not an island of stability as frequently assumed. Although monetary integration

provided all member states with benefits, it involved a series of trade-offs and had asymmetric

consequences for deficit and debtor countries. By the time of creation of the EMU, European

leaders did not set up a crisis management system for providing guidelines in case of a crisis

shock coming from outside or inside the EU. The EMU was thus incomplete and

institutionally weak. Politicians deliberately opted for a ´no bail-out´ approach to sovereign

finances. So when the external financial crisis (which ´flew´ over from the US but quickly

became in Europe a sovereign debt crisis) hit the vulnerable countries (not all the member

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countries shared the same economic strength and development) asymmetrically, Euro-Zone

leaders were unable to react quickly and adequately and failed to come up with a co-operative

solution. The crisis revealed the flaws in EMU governance as well as the domestic

weaknesses of the individual member countries.

The European Commission, the European Central Bank and the International

Monetary Fund (together called the troika) cooperated to develop a solution to the sovereign

debt crises in Greece and Ireland. The debt workout programmes that now have to be

implemented follow the conventional logic of the IMF´s structural adjustment programs. This

means that the measures include orthodox liberalization, deregulation and privatization

measures. Austerity measures like cuts in pensions, salaries and social welfare spending are

also part of the programme. Structural adjustment programmes assume that economies adjust

in similar ways and one-size more or less fits all. But successful adjustment will more likely

depend on an understanding of the nature of the domestic political economy. As the domestic

structure of political economy differs in Greece and Ireland -Greece is seen as a

Mediterranean, statist market economy while Ireland is seen as a liberal market economy- it is

not surprising to expect that reactions to the troika program will differ as well. The

information we get from the media makes us believe that this is indeed the case. Protests and

strikes are the order of the day in Greece, while in Ireland public unrest is limited.

Research questions

Intuition is not enough to understand and to explain the potentially divergent reactions and

adjustments in Greece and Ireland. Research into relevant documents will give us a more

objective picture of what is happening in both countries. What exactly are the responses of

both countries to the troika program? How can we explain the similarity or difference in

reactions? To what extent are these countries able to reform their economies? These are all

questions that stay unanswered without systematic research and analysis. This thesis will

focus on these issues, guided by the following central research question:

How do we explain the responses and outcomes of different domestic political

economies to the external pressures of international adjustment, in particular those involved

in the debt workout of the Euro sovereign debt crisis?

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By ´responses´ I mean the reactions of relevant actors and interest groups in both countries.

By ´outcomes´ I mean the policies and reforms (the adjustment process) that are implemented

or will be implemented and the economic performance as an outcome of the external pressure

of international adjustment. The external pressure of international adjustment is in this case

the troika program, which entails structural adjustment- and austerity measures.

The central research question implies a number of related sub-questions that will inform

this research. How do we explain the fact that Greece and Ireland were hit by a crisis? How

are Greece and Ireland depicted in the Varieties of Capitalism (VoC) literature? Do Voc

characteristics explain the reactions of Greek and Irish trade unions? Do VoC characteristics

explain the outcomes of the economic adjustment programme in both countries?

As mentioned before, the cases of Greece and Ireland are interesting to examine because

they represent two contrasting VoCs facing a similar debt workout. The sovereign debt crisis

has received much attention in recent years, as the crises in the European countries haven´t

yet been solved and continue to threaten the existence of the Euro and even of the European

project as a whole. The media has accused countries such as Greece of an unwillingness to

implement the required measures. They are also are blamed for the crisis on a European level.

In the context of these events, it is relevant to examine deeper the domestic structures of the

different political economies, which often seem poorly understood in the policy debate or are

excluded altogether. Thus, the research on domestic political economies and their responses to

the external pressures of international adjustment can give us a better understanding of the

domestic factors that play a role in crisis management. This can then contribute to a smoother

cooperation in crisis management between the international and the domestic levels.

This research can also contribute to our knowledge in the discipline of (international)

political economy. There are two schools in the field of IPE, the American and the British

one. As Cohen (2007:200) describes “Where the American school self-consciously restricts

itself mainly to mid-level theorizing—highlighting key relationships within larger, stable

structures—the British school aims for grander visions of systemic transformation or social

development.” Is has been observed that the American branch of IPE uses mainly quantitative

methods and relies more upon empiricism and economic theories of politics, whereas the

British branch uses more qualitative methods synthesizing different theoretical and

ontological perspectives, like historicism, constructivism and postmodernism. The American

school has received in the last years some criticism about being too limited in its scientific

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approach. As McNamara (2009:72) argues “The intellectual monoculture that we currently

observe in American IPE, based upon an allegiance to liberalism, rationalism and quantitative

methodology, is a misguided departure from the pluralism that once defined the discipline.”

McNamara (2009:76) gives an example of this intellectual monoculture:

most IPE students at these top programs will read no scholarship from the

historical institutionalist approach, which seeks to trace complex institutional

and societal interactions over time. Thus, the varieties of capitalism approach,

pioneered by Peter Katzenstein among others, is absent, despite being a major

school of scholarship explaining foreign economic policymaking for the past

several decades.

Following the argument of McNamara, mentioned above, I want to contribute to the scientific

knowledge in the British branch of IPE, using the varieties of capitalism approach and doing

an in-depth qualitative case study, which are both not very common in the American IPE

branch.

Theory and literature

This thesis is a contribution to both the debate on European monetary integration and the

understanding of the adjustment process in the countries facing a sovereign debt crisis. The

current crisis in Europe poses questions on the extent to which the architecture of European

monetary integration was well designed. Was the foundation of EMU a wise decision? The

Optimum Currency Area theory (OCA theory) provides a way to decide whether it makes

sense for a group of countries to abandon their national currencies and to form a monetary

union, but gives also insight into what characteristics are necessary to prevent or reduce

asymmetric economic shocks. “The theory develops a battery of economic and political

criteria which recognize that the real economic cost of giving up the exchange rate instrument

arises in the presence of asymmetric shocks—shocks that do not affect all currency union

member countries evenly or in the same way” (Baldwin & Wyplosz 2009:314-315). The OCA

theory gives us, thus, some criteria with which we can assess the development and the

viability of EMU and predict that economic shocks will hit the member countries in an

asymmetrical way. It explains the structural problems and developments that exist in a single

currency union but does not tell us enough about the nature of choices made by different

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countries to join EMU. Thus, the debate on European monetary integration starts by

questioning the foundation of EMU, its viability, effective functioning and consequences of

economic shocks, while using the OCA theory to provide the necessary criteria.

Whether the foundation of EMU made sense or not according to the OCA theory, the

EMU certainly constituted an external pressure for convergence and adjustment of member

countries. To join EMU, countries had to fulfil some requirements, for instance the 3 % rule,

that government deficit must not exceed three percent of GDP, and a maximum of 60 % of

GDP for government debt. European countries felt very attracted to the EMU and the will to

join it implied fast measures and adjustments to reach the 3 % and 60 % rates. How countries

would fulfil these financial requirements, did not matter. Countries followed different paths in

order to join EMU. Thus, EMU forced countries to converge and adjust but focused only on

the numerical, financial side and not on the content of convergence and adjustment on how

these would be reached. This was related to an assumption that member states, due to market

pressures, would ´automatically´ respond better and more ´convergently´ over time. Fiscal

stabilization was reached but this did not necessarily lead to fiscal sustainability.

It was not only during the pre-EMU phase that countries developed different ways to

reach the requirements of joining. In the subsequent years, after accession, they continued to

adjust in different, but not always sustainable, ways. Although it is often assumed that EMU

made the room for individual policy choices smaller for member states, as sharing a single

currency deprives countries from the exchange rate tool and from autonomous monetary

policy, reality was more complex and flexible. According to Jones (2003), EMU did

reconfigure the macroeconomic policy choices of states in different structural contexts, but let

deficit countries off the hook and made it easier to finance the current account. He explains

that: “Capital market integration increased macroeconomic flexibility through a mitigation of

the current account constraint and European states combined macroeconomic policies in a

manner that has taken advantage of greater flexibility on the current account.” (Jones

2003:197). Thus, also in the post-EMU accession phase prior to the crisis, member states,

assured of the flexibility and easy financing of the current account, continued to develop in

skewed and divergent ways, using different macroeconomic policies. This would eventually

lead to macroeconomic imbalances that turned out to be unsustainable.

It is therefore clear that conditionality for joining EMU had its limits and that EMU

did not strengthen the external pressures for adjustment on all fronts. Member states could

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pursue their own paths of adjustment and respond differently on market signals. This is also

part of what the Varieties of Capitalism literature tells us, as we will see later on; countries

respond to external pressures in accordance with domestic possibilities. Thus, in cases of an

external market pressure, member states would respond differently and as EMU did not have

institutionalised mechanisms to share the burden of adjustment between creditor and debtor

countries, it was very uncertain what would happen if an external crisis would hit the Euro-

Zone.

After an external financial crisis and a sovereign debt crisis hit the Euro-Zone, it is

important to discover how member states respond and adjust. In order to understand the

process of adjustment, it is necessary to examine the domestic institutional configurations of,

especially, the countries hit asymmetrically hard by the crisis, making use of the Varieties of

Capitalism literature. The Varieties of Capitalism literature makes use of an approach that

looks at the national, domestic level of political economy and tries to distinguish different

models and to group countries into these different models of political economy. In a liberal

market model such as Ireland, institutional co-ordination is based on market mechanisms,

whereas in a mixed market model like Greece, co-ordination is based on both market and non-

market mechanisms. In this way, the VoC approach can provide us information about the

countries examined in this thesis. The fact that we cannot categorize political economies

clearly into an ideal type is a limitation of the VoC approach that we have to be aware of.1

Nevertheless, the knowledge we get from the VoC literature about the domestic

configurations of a political economy can give us information about to what extent a

particular ‘model’ of capitalism—the domestic institutional configurations—deviates from the

imposed adjustment programme and how countries will respond to it. Furthermore, to what

extent do these economies really have room for own policy choices? And if they have room,

are their choices of adjustment path-dependent based on the model of capitalism or do they

shift towards another model? As the VoC approach has been elaborated through the years into

a more dynamic approach where change can be identified and accounted for, and where the

importance of politics and the state has been acknowledged, we can see, with the use of this

literature, how and under which conditions change and reforms may take place in countries

that are under pressures of international adjustment. We can expect countries, being different

varieties of capitalism, to respond and adjust in different ways to this common external

1 Becker has emphasized this in his book ´Open Varieties of Capitalism´ (2009). Political economies are

never ideal types, they are open and can change over time.

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pressure, even if the pressures for convergence are strengthened under the high degree of

capital mobility of EMU. At the extreme we might expect them to either defect from co-

operation if external pressures challenge key domestic constituencies, or to shift to a more

liberal model of capitalism. Apart from the model of capitalism, there are also other

intervening factors that influence the adjustment process that have to be taken into

consideration, for example electoral ones, interest representation and ideological discourse.

The Varieties of Capitalism literature can provide us with an understanding of the domestic

institutional configurations of different models of political economy and how they might

respond under the pressure of international adjustment.

Summarizing, we see that since the foundation of EMU until the outbreak of the

European sovereign debt crisis, many questions can be posed as well about the architecture

and viability of EMU as the development and adjustment process of the member states. EMU

was, on the one hand, a form of external pressure that forced countries to converge on some

criteria, but left, on the other hand, enough policy space for the individual member states to

follow their own, often diverging, paths to adjustment. In contrast to what is often assumed,

EMU made it possible and easy for countries to finance their current account and in this way

accumulate debt. As the Euro-Zone did not have an institutionalised mechanism that would

make clear how to share the adjustment burden in case of a crisis, it was very uncertain what

would happen if a crisis would hit the Euro-Zone. We expect different models to respond to

common external pressures in different ways. Political economies may co-operate or even

defect. To understand this process of adjustment, we need to take other intervening factors

into consideration such as electoral pressures, interest representation and ideological

discourse.

Argument

With the available theoretical knowledge in mind, we can now construct the argument of the

thesis. An important aspect of understanding the responses and outcomes of Greece and

Ireland to EMU leading up to the crisis and to the troika adjustment programme lies in

understanding each as a contrasting model of capitalism. The general hypothesis here is that

the more the model of political economy deviates from the adjustment model presupposed in

the bail-out, the more harsh the domestic reactions will be and the more difficult it becomes to

reform and adjust.

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Firstly, we expect the domestic problems of Greece to be, from the outset, greater than

Ireland´s. Already in the pre-crisis period, Ireland, as a liberal market economy, adjusted

better to EMU than Greece. Ireland was also performing economically better, as it did not

have a structural high level of sovereign debt like Greece. Nevertheless, both countries were

affected by the crisis, as clientelistic politics led Ireland into a deep banking crisis and Greece

into a huge level of sovereign debt.

Secondly, we expect, now that both countries are facing a structural adjustment

programme imposed by the troika, that Ireland will respond better to it than Greece. Until now

this seems to be the case. We expect this because, as said above, domestic problems were

from the outset smaller and because the characteristics of the model of political economy—or,

interchangeably, the variety of capitalism—deviate less from the programme imposed. The

Greek model of political economy deviates more than the Irish model of political economy

from the measures presumed under the adjustment programme—for example liberalization,

deregulation and privatization. As the Irish model of political economy is often assumed a

liberal market model in the VoC literature, measures concerning liberalization, deregulation

and privatizations are supposed to be closer to the already existing Irish liberal market model

than the Greek model. Following this logic, we expect the reactions of Greek actors and

groups to be more resistant to external pressure than those in Ireland.

Thirdly, we expect that the more the characteristics of the model of political economy

deviate from the measures presumed under the adjustment programme, the more difficult it

turns out to adjust readily and thus fewer reforms will be implemented successfully. This

expectation implies that Greece will adjust less readily than Ireland and that fewer reforms

will be implemented for two reasons. Firstly, more effort is needed to change institutions in

Greece, and secondly, reactions are harsher, meaning that there is less support for the

proposed changes and reforms. We might predict that Greece may defect from co-operation

and directly confront or challenge the imposed adjustment programme. Both Greece and

Ireland may defect from co-operation if adjustment proves too costly for key domestic

constituencies and challenges the very model of VoC.

To explain and understand the responses and outcomes of different domestic political

economies to external pressures of international adjustment like the troika structural

adjustment programme, it is important to look at the domestic model of political economy.

Both for the lead-up to the crisis and the phase of adjustment to the troika programme, we can

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state that the more the model of domestic political economy deviates from the measures

presumed under the adjustment programme, the harsher responses will be and the more

difficult it becomes to reform and adjust. As the Greek model of political economy deviates

more from the imposed measures in the adjustment programme than the Irish model, we

expect Greece to be more resistant and to adjust less readily than Ireland.

Methodology and Sources

This thesis is a process-tracing comparative case study that will proceed from analysing the

structural situation of Greece and Ireland, then relevant actors and the domestic institutional

(VoC) context, the actors´ preferences, the decision-making process and the outcomes. Greece

and Ireland are two comparable cases. They share some similarities; both are small and open

economies and both are EU and EMU members. Furthermore, they both have a history of

poverty, underdevelopment and migration. They went through a period of rapid

modernization and reaped the benefits of EU and EMU membership. Nonetheless, looking at

them as VoCs, we see substantial differences that make this comparative study interesting.

For an in-depth process-tracing case study and in order to find an answer to the question

posed and to elucidate processes and even causal mechanisms, a qualitative research method

is the most appropriate one. A quantitative one, using inferential statistics, is not appropriate

for this thesis, but descriptive statistics are useful in our case. Doing a quantitative analysis by

operationalizing responses, reforms, adjustments and models of political economy into

different variables will lead to a loss of subtle information. Therefore, a holistic, qualitative

methodology is required to really understand the interplay between domestic and international

politics and their intervening factors through models of political economy, responses and

reforms.

The thesis will draw on a range of empirical sources in order to support the argument.

We thus have to look for empirical sources which define the responses and adjustments in the

Greek and Irish case. For the Greek case, I will analyse documents from the General

Confederation of Greek Workers (GSEE, ΓΣΕΕ), the Civil Servants´ Confederation (ADEDY,

ΑΔΕΔΥ) and the Hellenic Federation of Enterprises (SEV, ΣΕΒ). These documents include

statements, interviews, speeches and press releases. The GSEE is the trade union for workers

in the private sector and the ADEDY is the union, as the name suggests, for civil servants, in

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the public sector. These two unions are important in the social and political life in Greece,

have quite a strong bargaining position and are thus of big relevance for the research.

Together, the GSEE and the ADEDY represent the labour interests. The SEV on the other

hand, represents employers´ and capital interests.

For responses from the Irish side, I will also use documents such as statements,

interviews, speeches and press releases published by the relevant actors and interest groups

from the labour and capital perspective. From the labour perspective, the Irish Congress of

Trade Unions (ICTU) is the single umbrella organization for trade unions in both the Republic

and Northern Ireland. It represents workers from the private as well as from the public sector.

To examine the responses from the capital perspective, I will use the documents of the IBEC,

the Irish Business and Employers Confederation, which represents the voice of capital in

Ireland.

To understand the interplay between the domestic and the international level and the

extent to which the troika programme is implemented successfully, I will also examine the

reports of the troika itself. Reports from the quarterly visits to Greece and Ireland are an

important source to get information about the reform capacity and the evaluation of both

countries.

The documents from the relevant actors and interest groups mentioned above, will be

for Greece from its first bailout in May 2010 until now and for Ireland from December

2010,as its rescue package was received on 28 November. It can be argued that a wider range

of documents should be used, for example a larger period and more sources like newspapers

and think tanks. The workability of the thesis, however, requires that the sources be limited to,

in my vision, the most important and the most systematic ones.

Structure

The structure of the thesis is as follows. Chapter One is the theoretical part where the relevant

literature and approach is outlined. It starts with the optimum currency area theory and other

economics literature that explains the structural problems of a monetary union and why

adjustment of individual member countries is asymmetrical. It will proceed to the Varieties of

Capitalism literature to describe the differences in domestic institutional configurations of

different models of political economy and to understand how these economies will respond in

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case of international adjustment pressure. Apart from the model of political economy in itself,

there are other intervening factors that play a role in understanding the process of adjustment

that are discussed in the theoretical chapter.

The second chapter is a background chapter. It describes the classification of Greece

and Ireland as models of political economy. How are these economies classified in the

Varieties of Capitalism literature and what does this imply for their choices in the adjustment

process? What do we expect them to do on basis of their model of political economy? What

does OCA theory lead us to expect from each ´model´ in terms of reaction to the pressures of

capital mobility and monetary integration? Will they defect from co-operation or shift to

another model? Will their choices be path-dependent or path-independent?

The Greek case is outlined in the third chapter of the thesis. In this part, the findings of

the analysis of the relevant documents are presented. We see what the reactions of the social

actors and interest groups in Greece are and in how far reforms and adjustments have been

announced or have been implemented. We will understand the process of adjustment and see

to what extent the empirical findings coincide with our expectations about the Greek case.

The Irish case is outlined in the fourth chapter. The same structure applies to this part

as in the third. We see what the reactions of the social actors and interest groups in Ireland are

and in how far reforms and adjustments have been announced or have been implemented.

Examining the sources will enhance our understanding of the process of adjustment and we

will also see to what extent the empirical findings coincide with our expectations about the

Irish case.

The last part of the thesis is the comparisons and conclusion part. A comparison

between Greece and Ireland is made, which gives us more explanatory power to answer

adequately the research question. An overview of the findings of each chapter is given as well

as recommendations for further research in this field of international political economy.

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§1. Review of the Literature

In order to find an answer to the research question and to understand the responses and

outcomes of different domestic political economies to the external pressures of international

adjustment, we have to examine theoretical explanations on, in our case, both the European

and the national-domestic levels of analysis. Responses and outcomes to external pressures of

adjustment will depend, as the literature suggests, on the intensity and form of pressure and on

the domestic model of political economy and the additional ´pull´ or constraining factors. The

literature provides outside-in as well as inside-out explanations to understand the adjustment

process. To illustrate this, this chapter describes the background on European monetary

integration during the pre- and post-accession phase. It will start with the observation that

EMU was not an Optimum Currency Area and an island of stability as hoped for.

Furthermore, the underlying motivations of joining EMU were divergent. Pressures of EMU

for convergence between its member countries were not strong enough and it was assumed

that setting common rules and a common macroeconomic policy stance would make

economies adjust sufficiently over time and converge structurally. EMU ignored in this way

the fact that member countries adjust according to their own domestic possibilities and that

structural convergence will depend on VoC-type factors as path-dependency, domestic

politics and the model of political economy.

These two dynamics contributed to a skewed economic development in the Euro-

Zone. The chapter will end with a discussion on the Varieties of Capitalism literature, which

tells us how different models of political economy are identified and how institutional change

and adjustment to international pressures may take place. We can conclude that, due to the

historical developments on both a European level and a national, domestic level, adjustment

processes will continue to be asymmetrical and based largely on domestic political,

socioeconomic and institutional context. This is, in fact, the way any federal monetary union

works, but that, as we mentioned earlier, was sometimes ignored by EMU policy and

pressure.

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1.1 EMU: structural flaws

Starting the discussion on the architecture of European monetary integration, we can state that

European politicians and policymakers were from the beginning aware of the fact that a

monetary union can never be a perfect Optimum Currency Area and that the diversity, both in

terms of asymmetric shocks and of domestic socio-economic structures turns out to be costly.

Given that an OCA is never perfectly achievable and is rather part of a theoretical discussion,

European politicians and policymakers had to look at how they would manage the policy

dilemmas that arise from monetary integration. Sharing the same currency certainly brings

benefits. For one, it reduces transaction costs and provides exchange rate stability, which are

both of great importance for firms which operate internationally. Looking at the (utopian)

criteria the Optimum Currency Area theory proposes, by which to judge the costs of sharing

the same currency, we will see why monetary integration can also have negative

consequences for member countries hit by an economic shock. After having established that

monetary integration, apart from benefits, can also bring costs, we will answer the question of

why then countries decided to join EMU.

First, which criteria should be fulfilled in order for a monetary union, like the

European one, to be successful? As Baldwin and Wyplosz (2009:322) write:

There are three classic economic criteria and an additional three which are

political. The first criterion looks at a way of minimizing the costs of an

asymmetric shock within a currency area. The next two economic criteria take a

different approach: they aim at indentifying which economic areas are likely to

be hit by asymmetric shocks infrequently or moderately enough to be of limited

concern. The last three criteria deal with political aspects; they ask whether

different countries are likely to help each other when faced with asymmetric

shocks.

The first criterion is the Mundell criterion, originally proposed by Robert Mundell, and is

about labour mobility. In order to eliminate the costs of sharing the same currency, labour

should be fully mobile across borders. Unemployment would then be a rare phenomenon. The

second criterion is the Kenen criterion, named after Peter Kenen, and is about production

diversification. In order to reduce the likelihood of asymmetric shocks, currency area member

countries ought to be well diversified and to produce similar goods (Baldwin & Wyplosz

2009:325). When countries specialize in the production of a narrow range of goods, the

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possibility of being negatively affected by a shock becomes greater. The third criterion is the

McKinnon criterion, proposed by Ronald McKinnon, and is about openness. To form an

optimum currency area, countries must be very open to trade and must trade heavily with each

other. In this way, competition will force prices to equalize and the distinction between

domestic and foreign goods loses much of its significance, meaning shocks will become more

moderate (Baldwin & Wyplosz 2009:326).

The last three criteria deal with political aspects. For the currency area to be

successful, countries have to agree to compensate each other for adverse shocks. This is called

the transfer criterion. A financial transfer mitigates the recession in one country and the boom

in other countries. Member countries of a currency area have to be willing to make financial

transfers to countries in need and to see this as a redistributive mechanism to support the

viability of a single currency union. Linked to the transfer criterion is also the homogeneity of

preferences criterion. Currency union member countries must share a wide consensus on the

way to deal with shocks, including crucially the ´who pays´ question (Baldwin & Wyplosz

2009:327). The last criterion is the solidarity criterion which says that “When the common

monetary policy gives rise to conflicts of national interests, the countries that form a currency

area need to accept the costs in the name of a common destiny” (Baldwin & Wyplosz

2009:329). Accepting the costs in the name of a common destiny is certainly not out of a mere

sense of solidarity. As mentioned earlier, the benefits of a monetary union are also

considerable.

Seen in the light of the OCA criteria, EMU is not an Optimum Currency Area, which

of course is not surprising due to the utopian character of an OCA. As Baldwin and Wyplosz

state (2009:340), it fulfils the trade openness and product diversification criteria, but fails on

the labour mobility, fiscal transfers (but also pooling of reserves and common debt

instruments) and partly on the homogeneity of preferences and solidarity criteria. Besides, it is

important to remark that although an ´average´ EMU fulfils some criteria quite adequately,

there is still quite a lot of diversity between countries in terms of economic development and

industrialisation. Parts of Southern and East Europe are at a lower level of development. A

financial shock will hit these parts significantly harder. Concerning the labour mobility

criterion, although European citizens are legally free to work in other European countries,

mobility is less perfect than desired due to obstacles as language and culture. Concerning

(fiscal) transfers, we see during the European debt crisis how these transfers to countries as

Greece are a point of discussion and discord. A systematic policy framework of transfer

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payments could have worked preventively, but would however not have eliminated the

pressure brought on by the crisis. Furthermore, in the case of EMU, the ECB had not been

given the mandate to issue and use common debt instruments or to pool reserves. Once more

we see that EMU was designed without rules about how the financial burden would be shared

in crisis time. The lack of homogeneity of preferences and solidarity, especially about sharing

the burden of adjustment and the provision of emergency finance, has furthermore aggravated

the crisis management situation.

This observation about the structural problems of EMU implies that if a financial

shock would hit the Euro-Zone, as eventually would happen, member countries—especially

the economically weaker ones—would be affected in an asymmetrical way. When

asymmetric shocks occur monetary union membership becomes seriously constraining due to

the loss of the exchange rate has negative consequences for those countries hit by a shock.

They cannot use the tool of adjusting their exchange rate by devaluation to remain

competitive in changing conditions.

Thus, the OCA theory tells us about the structural problems and consequences that a

monetary union faces, but not about the nature of political choices made by different countries

to join EMU. A question that arises, knowing the potential problems and costs of monetary

integration, is: why should countries decide to join EMU and share a single currency? Two

arguments are important in this respect. The first one is of a neo-liberal nature. The second

one is that joining EMU was a one-way ticket to wealth and growth. First, it is argued that

West European businesses from the wealthier countries lobbied for a neo-liberal design of

EMU, emphasizing the free-market aspects of the internal market. Barriers to the free internal

market such as different currencies (and the exchange rate risk accompanied) had to be

removed. As Van Apeldoorn (2006:310) argues: “The move towards a single currency has

been strongly supported by large sections of European transnational business, in particular as

represented by AMUE and ERT, with transnational capital clearly set to gain from the

removal of this particular ´non-tariff barrier´ to trade.” Thus, the wealthier, surplus countries

in Europe supported EMU because of the opportunities this would give to explore markets in

Europe, but also to integrate into the global economy. Second, deficit countries, mainly those

in Southern Europe, saw joining EMU and sharing the strong euro currency as a ticket to

growing prosperity and of easier financing their needs. Motivations for joining EMU were

thus different for the traditionally surplus and deficit countries, but the surplus countries

would have the biggest benefits: access to markets without devaluation risk.

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Concluding, we can say that on basis of the structural problems of EMU as explained

in the OCA theory and the divergent political motivations for joining it, asymmetrical

economical development and adjustment of member countries must not be a surprise.

Furthermore, Underhill (2002:34) observed already in 2002 that: “The Euro-Zone will

consequently encounter its share of disagreements among its members as the economic

development process yields differentiated distributional consequences across the national

economies”. As EMU did not build in institutional mechanisms to facilitate co-operation in

crisis-time (no debt workout, instead, a no bail-out clause), the share of disagreements is even

larger now that the Euro-Zone countries are hit by a financial shock.

1.2 EMU pressures for convergence: pre- and post-accession

At the time of EMU, economic development levels in member countries diverged

significantly, as did their economic structure and policy preferences. The goal of EMU was

convergence on the macroeconomic policy framework, which was aimed at promoting

adjustment so as to produce structural economic convergence between member states over

time. First, we will look at the pressures for convergence, in the form of conditionality policy,

during the phase of joining EMU. After that is understood we will see how pressures for

convergence during the post-EMU accession phase/pre-crisis phase were apparently not

strong enough and that economies did not adjust in the same ways.

Pressures for macroeconomic policy convergence and adjustment were notable for

countries which wanted to join EMU and share the common currency, but countries did not

follow the same strategy to achieve fiscal adjustment. To enter the Euro-Zone, countries had

to fulfil some requirements—the so-called Maastricht eligibility criteria. One of them was that

the budget deficit would not exceed three percent of annual GDP. The other one was a

maximum of sixty percent of annual GPD for government debt. The European Union did not

tell countries how they had to achieve this, however. Thus, countries could follow their own

paths to meet the criteria. As Blavoukos and Pagoulatos (2008:231) say: “EMU conditionality

set nominal accession targets without prescribing the modality of achieving them”. Thus,

whereas the conditionality policy, entailing the Maastricht criteria to join EMU, was ´hard´

and exercised intense pressure on aspirant members to bring about fiscal adjustment, the

pathway to achieve fiscal adjustment was not ´hard´ defined. Some countries followed a

consolidation strategy aimed at appropriate expenditure cuts and structural reforms and other

~ 23 ~

ones, like Greece, focused more on revenue-based consolidation. Blavoukos and Pagoulatos

argue that the former strategy of expenditure cuts and structural reforms as privatization,

liberalization, pension and labour market reform, produces more sustainable fiscal adjustment

than the latter one. They (2008:231) conclude: “...the external constraint was a ´push´ factor

to consolidation without ensuring fiscal sustainability. Only where additional ´pull´ factors

were at work did structural reforms take place”. The additional ´pull´ factors, Blavoukos and

Pagoulatos mention, are: the content and scope of reform, the context of reform (facilitating

or constraining, degree of social concertation) and the capability for reform (government

effectiveness). Where these ´pull´ factors were absent, structural reforms in the realm of

macroeconomic policy were limited, as was the case in Greece. In short, the pressures for

fiscal adjustment and convergence in the pre-EMU accession phase had the form of

conditionality policy and entailed ´hard´ criteria that had to be met by the aspirant member

countries. Nevertheless, EMU pressure for fiscal adjustment focused on numerical targets and

did not envisage any prescriptive pathway to fiscal consolidation. Countries followed thus

different strategies to meet the Maastricht criteria for joining EMU. Only when additional

domestic ´pull´ factors were present, were structural reforms possible, and these reforms went

at different paces in aspirant EMU member states.

Also in the post-EMU accession phase, during the lead-up to the crisis, we see that

adjustment processes in the Euro-Zone countries were influenced by both EMU architecture

and divergent domestic strategies. Once countries had entered the Euro-Zone they had to

comply with the rules of the Stability and Growth Pact (SGP) that was meant to ensure fiscal

prudence. Blavoukos and Pagoulatos (2008:233) state: “Compared to the ´hard conditionality´

of the pre-accession period, the SGP prescribed a softer and much more politicized form of

conditionality, unable to resort to equally powerful instruments of coercion”. This 'soft' period

included the fact that monitoring and corrective mechanisms of SGP were not effective and

there were no sanctions in the case that countries would offend the rules. As a consequence of

this softer conditionality, member countries continued to follow their own pathway of

adjustment and avoid structural reforms that involved high political costs. Member states

could free ride on the Euro credibility and partly relax the budgetary pressure of external

constraints (Blavoukos & Pagoulatos 2008:233). All states became, in order to avoid extended

recession, more lax after the DotCom bubble burst in 2000. Led by Germany, all states

relaxed the rules of the SGP a little. Furthermore, Jones (2003) argues that, instead of

decreasing national policy autonomy on fiscal aspects, EMU increased autonomy as it

~ 24 ~

enhanced the flexibility on the current account and limited the budgetary pressure. For most

countries it became easier and cheaper to finance their current account in a way that their

fiscal condition deteriorated through accumulation of government debt. Thus, as SGP rules

were ´soft´, member-states could follow their own path, avoiding structural reforms and

financing with low interest rates their current account. Member-states, especially those which

prior to EMU entry had relied on revenue-driven measures and not on structural reforms to

achieve fiscal adjustment, experienced in the post-accession phase a deterioration of their

fiscal condition. Fiscal lassitude was, nevertheless, not the source of the crisis. Even Germany

performed in the post-EMU phase worse on debt criteria than for instance Spain and Ireland2.

The outbreak of the crisis was an unexpected event, while states were trying to bring down

their debt and deficit levels. Thus, the post-EMU conditionality rules tell us something about

EMU architecture and its ´pressure´ on states to adjust, but the economic performance of the

member states cannot be indicated as the source of the crisis, which actually came from

outside as it started as an external financial shock.

In sum, we see from the historical evidence outlined in the literature that adjustment

processes of the individual European states, were affected by the form of pressure in the pre-

and post-EMU accession phase (´hard´ versus ´soft´ conditionality). When the external

pressure entails a form of ´hard´ conditionality and states see that fulfilling the conditions will

deliver them benefits, we can expect them to adjust to the pressure. As we discussed earlier,

this adjustment does not necessarily mean reform and convergence to the international

context. The content of adjustment may be different. We can expect that the response and

content of adjustment may differ even more if the external pressure consists of a ´softer´ form

of conditionality. Furthermore, borrowing from Featherstone (2008), the extent of adjustment

and adaptation of individual states will also depend on the level of ´policy misfit´ between the

international requirements and the domestic practice. The argument here is that the larger the

´misfit´, the longer adjustment will take, especially when core institutional structures are

challenged. This entails a gradual form of adjustment, which depends again on the ´hard´ or

´soft´ character of the pressure and the room states have for own policy decisions. Besides, we

see that the strategies of adjustment (either structural reforms or revenue-raising measures) of

the individual European states depended mainly on additional domestic ´pull´ factors, such as

2 In 2008 German government debt to GDP was 64.9%, whereas Spanish and Irish debt levels were

respectively 36.1% and 25%. See for more information www.tradingeconomics.com

~ 25 ~

the content, scope, context and capability to reform. To understand the domestic responses

and outcomes on international adjustment pressure, it remains important to examine the

domestic institutional configurations and other additional factors of different models of

political economy. In other words, it is not the economics debate (e.g. the budget

performance) that is important in understanding the way in which different political

economies actually adjust. In the next part, in order to understand the responses of countries

to international adjustment pressure, we will therefore examine the political economy

literature that focuses on the national/domestic level of analysis.

1.3 Domestic configurations: development of the VoC approach

In the previous part we discussed the external pressures for adjustment, represented especially

by the EMU. In this part we will focus on the national/domestic level of analysis, examining

mainly the Varieties of Capitalism literature, but also other strands. First we will discuss the

pre-VoC neo-corporatist and welfare regime literature and we will close with the Varieties of

Capitalism literature which is the most holistic approach. The different domestic

configurations outlined in the literature absorb the external pressures and shape the domestic

response to them. They mediate in the process of adjustment, change and reform. They thus

act as intervening variables.

Prior to the elaboration on the Varieties of Capitalism approach, which is considered

more holistic in its explanation of domestic configurations, the neo-corporatist and welfare

regime approaches were used to explain certain domestic developments, sometimes in

reaction to international developments. The neo-corporatist approach, which was particularly

popular in the 1970s, refers to the ability of a government to negotiate sustainable bargains

with union and employer organizations on subjects such as employment, wages and social

policy. The approach tried to explain the various forms of concertation and agreements that

existed in, mainly, the West-European states. But, as Featherstone (2008:46) argues, the

approach “has encountered in recent years a paradox: the existence of neo-corporatist type

agreements in systems apparently lacking the organizational preconditions for successful

concertation”. Neo-corporatism could no longer explain certain domestic developments.

In 1990 Esping-Andersen developed a typology with the focus on different, national

social models of welfare regimes. He defined, on the basis of indicators that measure

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institutional characteristics of social insurance, three distinct welfare regimes: a conservative,

a liberal and a social-democratic one. The argument is that the diverging institutional

characteristics of each welfare regime affect reform processes and levels of competitiveness,

thus the way in which economies adjust in reaction to either international or domestic

pressure. Welfare system reform is considered difficult to achieve by the government, as it

seen as a zero-sum game with winners and losers. Consequently, the level of adjustment will

depend on the political power to block reform of those who regard themselves as the current

winners and who are afraid of losing their privileged position. The typology on different

welfare regimes gave important information on the institutional characteristics of social

policy. However, it was still too narrow in its analysis to understand properly how economies

adjusted, and why their capacities to do so varied so widely. Implication was though that

structure and institutions had a major impact on capacity and mode of adjustment.

In 2001 Hall and Soskice ´broke new ground´ with their publication3 on the Varieties

of Capitalism approach; an approach which was more holistic and more influential than the

previous ones. They identified and categorized countries into different models of capitalism

by examining a broader spectrum of institutional characteristics like industrial relations,

vocational training and education, corporate governance, interfirm relations, and employees.

These institutional characteristics can create complementarities which enhance economic

performance and therefore adjustment capacity. Hall and Soskice distinguished in their

analysis two broad contrasting types of capitalism: the Liberal Market Economies (LMEs, like

Ireland) and the Coordinated Market Economies (CMEs, more like the Greek case). In the

first type institutional coordination is based on market mechanisms and in the second one on

non-market mechanisms. Furthermore, they focused their analysis on the level of the firm and

how the firm´s competitiveness is linked to the institutional comparative advantage of

national economies. Hall and Soskice´s analysis represented thus a “a clear attempt to shift the

focus of the ´neo-corporatist´ literature beyond the stress on the state´s relationship with

organized labour” (Featherstone & Papadimitriou 2008:49).

Hall and Soskice´s approach is not without its critics. In the introductory chapter of the

book Beyond Varieties of Capitalism: Conflict, Contradictions, and Complementarities in the

European Economy Hancké, Rhodes and Thatcher (2007:7) give an overview of the points of

3 Peter Hall and David Soskice, Varieties of Capitalism: institutional foundations of comparative

advantage, eds, idem, Oxford: Oxford University Press, 2000.

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contentions that the Hall and Soskice publication raised. Firstly, their analysis divides the

world into two reified notions of LME and CME archetypes and lacks the tools for moving

beyond this bifurcation. Secondly, their approach is too static and focuses on permanency and

path-dependence missing important dynamic elements of economic change. Thirdly, it has a

propensity to ´institutional determinism´ in its mechanistic conception of institutional

complementarities and neglect of underlying power structures, including social class. It is

´apolitical´, equilibrium-based and it downplays conflict. Fourthly, it is centred on the firm,

neglecting the role of the state. The last point of contention is that it treats nation-states as

´hermetically sealed´ and neglects the linkages between them and the forces of convergence

and globalization. Whether the criticism on Hall and Soskice´s dichotomy of LMEs and

CMEs, as well its static nature and neglect of power structures is fully fair or not, it did lead to

a ´flood´ of future research literature, in which the VoC approach got theoretically and

empirically enriched.

Amable (2003:14) stated in his book The Diversity of Modern Capitalism that the

dichotomous approach (LMEs versus CMEs) definitely simplifies empirical analysis, but is

nevertheless one-dimensional. Only the extent of market coordination is taken into

consideration, while the hierarchy of institutions is taken for granted. Examining other

dimensions of coordination and placing more institutions in the analysis certainly leads to

more types of capitalism. Amable proposed then, based on extensive data from sources like

the OECD, five models/ideal types of capitalism: a market based, a social democratic, an

Asian capitalist, a Continental European (Ireland belonged to this type according to Amable,

and not to the market based) and a South European one (where Greece belongs to). For each

model he gives evidential information on the five major institutional areas: product-market

competition, labour market institutions, financial intermediation/corporate governance, social

protection and education sector.

Amable went beyond a dichotomous typology and enriched the VoC theory with new

insights on the aspects of institutions. He argued that institutions are the expression of a

political compromise, which means that institutional change is an outcome of power and

interest structures:

Institutions are likely to affect the interest structure and hence the preference

that agents may express towards a certain pattern of institutional change. Rather

than optimal solutions to a given problem, institutions represent a compromise

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resulting from the social conflict originating in the heterogeneity of interests

among agents. What we consider to be different economic ´models´ are therefore

based on specific social compromises over institutions. The question of

institutional change is basically a question of political economy.

(Amable 2003:10)

Amable placed more emphasis on the political aspect of institutions and change than Hall and

Soskice did in their initial analysis. It is political strategies that lead to institutional change

and that means that change will not always lead to the more rational and efficient outcome

according to institutional complementarity. This is a far more agency-centred approach (in

contrast to a structural, functionalist approach) where power and interest play a greater role

and where there is more space left for change than in the initial analysis of Hall and Soskice.

Agent-centricity is important in this respect, as we discussed earlier that it is more the

political economy that enhances our understanding of domestic adjustment processes and not

the pure economics debate. Besides, it has implications for the analysis of the Greek and Irish

adjustment process. Amable´s approach indicates that it is more the domestic responses of

Greek and Irish political and social actors that count in the process of change than the mere

model of capitalism, and that change will therefore not always lead to the most efficient

outcome.

The dichotomy and rigidness of the Hall and Soskice VoC approach was also

contested by Becker, who in his book Open Varieties of Capitalism, Continuity, Change and

Performances (2009) pointed to the distinction between ideal types and empirical cases of

models of political economy as well as to the openness and space for change. He

distinguished four ideal types of political economies: the liberal type (to which Ireland is

assumed), the statist type, the corporatist type and the group or meso-communitarian type. On

basis of cultural and ideological criteria, he added also a clientelist subvariety, which is

mainly present in the Mediterranean countries like Greece. Furthermore, he understood

politico-economic systems as “open and relatively loosely ordered social entities revealing

some degree of systemness” (Becker 2009:6). Factors of openness are, according to Becker

(2009:7), the basis for institutional change but can also block it. As he (2009:169) concludes

about the process of change:

Change is the normal state of things in the empirical varieties of capitalism, but

at the same time change is kept in check by the forces of path continuity. In part,

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these forces are the same as those that bring about openness. Openness gives the

opportunity for change, but also that for blocking it. Uncertainty, stemming from

our limited knowledge about the best problem solutions and about unknown,

unintended consequences of action may paralyze action, sticking to routines by

bureaucratic apparatuses (public and private) may have a similar effect, and in

terms of power the forces opposing change might be stronger than the advocates

of change. Apart from this there is the classical argument of path dependence

saying that change does not take place as long as its costs are higher than that of

maintaining the status quo.

We see that making typologies of varieties of capitalism and accounting for

(institutional) change have been topics where scholars elaborated on the last years. These

different typologies give us important information about the domestic institutional

configurations of different models of political economy in order to understand and explain

responses and outcomes to international adjustment pressure which will study in more depth

in the next chapter for Ireland and Greece. Furthermore, models of political economy,

according to the literature, may change throughout the years from inside or from outside as a

response to international adjustment pressure. We can conclude that is more the domestic

configurations of VoCs that are decisive in the process of adjustment than the EMU pressures

concerning budget rules. As we stated earlier, EMU ignored these domestic VoC factors and

countries were assumed to converge structurally in a ´natural´ way. Now it is the troika

programme that we consider stimulating or even pushing (´push´ factor in the words of

Blavoukos and Pagoulatos) for change and adjustment; thus an exogenous shock, an external

pressure or in methodological terms, the independent variable. Adjustment in line with the

troika programme will once more depend largely on the domestic political economies

entailing various VoC type factors.

1.4 Domestic configurations: responses and outcomes

As we saw earlier, exploring the VoC and other literature, there are a lot of domestic factors

and actors (domestic configurations) that play a role in the process of change and that

influence the outcome. These act as intervening variables, or in the words of Blavoukos and

Pagoulatos (2008), as ´pull´ factors. The VoC literature made clear that political power and

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interest structures in state-capital-labour relations are important elements in the process of

change and adjustment. Political culture, ideology, legitimacy and party systems can

furthermore play a role. Other, more structural, factors are, as we already discussed, the

context and scope of reform measures and the government capability to reform.

The responses and outcomes to the international pressure of adjustment form the

dependent variable. According to Hall and Thelen (2009:21), states can respond in one of

three ways: reform, defection and reinterpretation. Reform is defined as institutional change

explicitly mandate or endorsed by governments. Defection occurs when actors stop following

the practices prescribed by an institution. Change can then be resisted due to path dependency

or continuity; a term often used in the VoC literature. As Becker (2009:7) says: “Path

continuity mainly results from transformation costs, the inertia of action, disagreement among

policy-makers and power relations that propel political economies along their paths”. The

latter route captures the ability of actors to choose informal ways of change to serve their

interests and thus goes beyond the analysis of formal rules in institutional change. “In the

process of reinterpretation, actors associated with an institution gradually change their

interpretation of its rules, and thus its practices, without defecting or dismantling the

institution itself” (Hall & Thelen 2009:25).

Given the three ways to respond, if domestic change takes place in a state, which

direction will it be? Towards which model of political economy? What will be, in other

words, effects of EMU and the crisis? In the context of the globalization debate in the 1990s,

it seemed the convergence thesis to be more pronounced, foreseeing convergence to the

liberal Anglo-Saxon model of capitalism. This thesis was much based on the ideological

belief that the liberal model of capitalism was also the one with the best economic

performance. Other scholars of the VoC literature refuted the neo-liberal convergence thesis

and showed that similar pressures are mediated differently across models of capitalism. They

argued that there is more than one way to achieve high performance in the global economy

(Kornelakis 2011:48). Amable (2003:23) also states that: “Different combinations of

institutional forms may in the end produce similar macroeconomic performance”. As

Kornelakis further pointed: “VoC effectively replaced the (single) convergence thesis with a

dual convergence thesis allowing for two options – rather the no alternative type of argument.

The pressures from globalization and liberalization are expected to accentuate the differences

between LMEs and CMEs”. Hancké, Rhodes and Thatcher (2007:9) agree on this point:

“...globalization will confirm rather than subvert the comparative institutional advantage of

~ 31 ~

nations”. Following the argument in the VoC literature, the current global economic crisis will

then enhance the differences between politico-economic types having comparative

institutional advantages—thus a better quality of their institutions—rather than diminishing

them. But what happens when the rules of the game are enforced upon countries, as is the case

with the troika programme? Countries can choose to defect, but the costs of defecting and the

level of social conflict certainly become much higher. In our case study the costs of defecting

would eventually be for Greece and Ireland the default of the country, returning to their

previous currency and all the socio-economic consequences accompanying these

developments.

1.5 Conclusion

In this chapter we explored the literature on external pressures of adjustment, using EMU as

an example of pressure that has given direction to the development of European states. We

also studied the literature on domestic institutional configurations, especially relating to the

VoC theory, in which different models of capitalism are defined. We concluded that, given

the structural flaws that all monetary unions face and the knowledge that a financial shock

would hit member states in an asymmetric way, the leaders of EMU had to build in

mechanisms in order to share the adjustment burden. Now that the crisis has hit the weaker

member states asymmetrically, they have to adjust to the external pressure of the troika

programme. The domestic elements of each VoC model will mediate in the response and

outcomes to this external pressure. This implies that same external pressures can lead to

different responses and outcomes as we see in Greece and Ireland, depending on the domestic

political and socio-economic configurations (see figure 1). In the next chapter we will

examine deeper the VoC characteristics of both Greece and Ireland.

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§2. Background chapter: Greece and Ireland as VoCs and the lead-

up to the crisis

In order to understand and explain the responses and outcomes of Greece and Ireland to

international adjustment pressure, in this case the crisis and troika programme, we have to

know what their domestic configurations are. In this chapter we will first look briefly at the

history of both countries and then examine the domestic configurations while making use of

the VoC literature. How are Greece and Ireland categorized and characterized? We will focus

on the models of capitalism, but also on interest representation and political culture. Secondly,

we will move on to the pre-crisis phase in order to see how these two countries developed

economically, got into a sovereign debt crisis and called for financial help. The background

information on both the domestic configurations and the pre-crisis phase is essential for

making expectations and finding an answer to our central research question.

2.1 Greece as VoC

Greece is a small and open economy that has a long history of ´colonial´ rule, wars and

political instability. After four centuries of Ottoman rule, Greece became an independent state

in 1830. The first century of independence was marked by subsequent foreign monarchies that

governed the country. This period was also an attempt to consolidate the state in its current

form. The initial Greek state entailed geographically only a part of the current one and the

wars that took place aimed at expanding the Greek state in order to include in its borders all

Greek speaking people. Political instability and discord about the expansion of the Greek state

were the order of the day and there was great social unrest due to large emigration and

immigration flows4.

4 The so-called Asia-Minor Catastrophe of 1922 was one of the worst episodes in modern Greek history.

After the Greek army had moved too far towards Ankara, the Turks burnt down the city of Smyrna (now Izmir),

a cosmopolitan city at that time with also a large Greek speaking population. The Greek speaking population fled

to Greece and an exchange of population was agreed between the Greek and Turkish government. Greek

speaking orthodox Christians had to move to Greece and Muslims who lived in Greece had to move to Turkey.

~ 33 ~

The Second World War was followed in Greece by a civil war between the

communist, revolutionary troops and the official state army which represented the

conservative, royalist, right-wing government. The communist troops were defeated and the

political national division between right and left wing parties is still noticeable today. From

1967 until 1975 Greece had a military junta regime. It was only after the fall of the junta in

1975 that Greece became a modern parliamentary democracy. Since then, governments of the

socialist party Pasok and the conservative party Nea Dimokratia have alternately been in

power. Greece joined the European Union in 1981 and the EMU in 2001 and enjoyed a

remarkable economic growth, but it is still a country with the classic political-institutional

weaknesses of a middle-to-high-income developing country. In this next section, we will

delve more into the economic performance of Greece, but firstly we will look at how Greece

is depicted in the VoC literature.

In the VoC approach, Greece is frequently seen as an outlier and thus difficult to

package as a model of capitalism. The dichotomy of Hall and Soskice seems in this sense

problematic because Hall and Soskice are largely about developed economies, while Greece is

a still developing economy. Schmidt (2002) elaborated further on a ´state capitalist´ model

that better approximates the Greek reality. In such a model the state has a greater mediating

role in the economy. “Business-government relations are state-directed, with the state

influencing business development through planning, industrial policy, or state-owned

enterprises (...) Government relations with labour also tend to be state-controlled although

more distant than its relations with business. Wage bargaining is largely determined by the

state, which often imposes its decisions on fragmented unions and business, while labour-

management relations are mostly adversarial”(Schmidt 2002:116). Schmidt´s description of

the ´statist´ model does indeed come close to the Greek state-economy characteristics, but is

not sufficient for modelling the interests and behaviour of the state, employers and unions.

Amable (2003), as described in the previous chapter, distinguishes a South European model of

capitalism to which Greece belongs. According to his findings, the state is involved in

product-market regulation; there is a dualism in employment—high protection and fulltime

employment in large firms and the public sector, low protection and temporary/part-time

~ 34 ~

employment in small firms—wage bargaining is centralized; social protection is moderate and

expenditures structure is oriented towards poverty alleviation and pensions.

Molina and Rhodes (2007) provide the Mixed Market Economies (MMEs) model

which encompasses the countries of South Europe, including Greece. While it is close to

Amable´s model, it has greater power in explaining interests and behaviour of actors and their

role in change and reforms. As the name already suggests, MMEs use both market and non-

market forms of coordination. In contrast to LMEs and CMEs, there is a misfit between

institutions that results in an absence of ´institutional complementarities´ (Kornelakis

2011:56). Therefore, the state has a ´compensating´ role. Greece is depicted as a ´hybrid´

model that is bound to under-perform (Kornelakis 2011:56). The state has an important role in

controlling the business and labour sector. State interference in, for example, the trade union

movement began already in 1910 under the premiership of Venizelos. Collective bargaining is

highly centralised and has been subject to extensive state regulation (Featherstone 2008:4).

Production systems are more fragmented than in LMEs and CMEs (large versus small firms).

Welfare systems and the labour market are fragmented, too. Mainly public sector employees

are well-protected and enjoy welfare benefits while private sector employees enjoy low

protection and welfare benefits. In contrast to LMES and CMEs, unions and employers tend

to have stronger organizational structures, but are more fragmented and unable to deliver

collective goods. Bargaining is often ad hoc and social dialogue is characterised by mistrust

and a lack of consensus. “Internal representation in both the union (GSEE and ADEDY) and

employer´s federations (SEV) is skewed towards certain groups, overplaying their interests”

(Featherstone 2008:7). The unions represent mainly the interests of the public sector

employees and the SEV represents mainly the interests of the few large firms. Small

enterprises—which constitute the largest part of the Greek economy—are thus not

represented. Greek unions are, due to their narrow interests, prone to defending the status quo

of over-protected employees in the dual labour market (Matsaganis 2007:551). Reforms and

change are frequently opposed. Featherstone (2008:7) argues that “interest representation

tends to reflect the legacy of risk-averse, statist and anti-competitive traditions of a

developmental state”. Furthermore, Greek unions have strong ties to political parties, which

makes the relations and the bargaining process quite politicized. Due to the fact that unions

and employers cannot deliver collective goods and sustain autonomous coordination in

collective bargaining, reform depends heavily on the capacity of the state to overcome these

problems.

~ 35 ~

According to Featherstone (2011:197), reform efforts are also immobilized by a

complementarity between rigid employment laws and an underdeveloped welfare system

together with a large ´black economy´ which is estimated at 26 per cent of GDP in 20115.

Featherstone concludes (2008:15) that “The creation of reform coalitions is more prolonged

and problematic than in LMEs and CMEs”. According to the Sustainable Governance

Indicators (Bertelsmann Stiftung 2011)6, reform capacity in Greece is low (4.5 on a scale of

10, while Ireland has as score of 6.8). This score puts Greece in the bottom group of the

researched countries. Policy implementation in Greece also scores low (3.8, while Ireland

scores a 5.4).

Apart from the characterisation of Greece as a MME, there is another aspect that plays

a significant role in social and political life and that affects all policies; clientelism. In

exchange for votes, Greek parties distribute favours to individual voters and groups. The two

major political parties which have been in power for more than thirty years, Nea Dimokratia

and Pasok, have made extensively use of this system. Becker (2009:59-60), who puts Greece

into a clientelist sub-variety of capitalism, argues that “Clientelist exchanges, for example in

the field of welfare benefits or regarding the allocation of jobs, undermine competition and

meritocratic principles and therefore the efficacy of the market and of general administrative

rules (...)”.

Summarizing, we can say that Greece is an economy where the state has a large

influence in its development. Having a history of struggles for independence, wars, political

instability, poverty and emigration, Greece enjoyed economic growth since its entry to EU

and EMU. The Greek model has a dual production, labour and welfare sector, with both

market and non-market mechanisms of coordination. Some sectors and employees in the

economy are highly protected by the state and are not used to market pressures and other

sectors and employees are excluded from protection or benefits and have to cope with market

5 See for more estimates of the shadow economy in OECD countries 2003-2011:

http://www.cesifo-group.de/portal/pls/portal/docs/1/1210208.PDF. Greece and Italy have the highest estimates in

this list of OECD countries.

6 For more results concerning governance indicators of Greece see: http://www.sgi-

network.org/index.php?page=countries_keyfindings&country=GRC

~ 36 ~

pressures. The former are mostly better organized and represented than the latter and have

thus more bargaining power. Nevertheless, coordination and consensus are difficult to achieve

due to institutional weaknesses and ideological divisions rooted in history. The mechanism of

coordinating the economy and politics is based on clientelistic relations. The lack of

institutional complementarities and the elements of clientelism and politicization often form

an obstacle to the functioning of the economy as well as to processes of adjustment and

reform. The Greek state and its model of political economy are thus quasi-dysfunctional.

2.2 Ireland as VoC

Ireland is, as Greece, a small and open economy that is marked by a history of ´colonial´ rule,

religious and political tensions and poverty. In the 19th

century Ireland belonged to the

political entity that was called The United Kingdom of Great Britain and Ireland and was in

fact under British rule. The issue of Irish self-government became in the 1870s the focus of

debate and this led to tensions between Irish nationalists fighting for independence and Irish

unionists who favoured maintenance of the union with the UK. The southern part of Ireland

was Catholic, nationalist and predominantly agrarian. The northern part of Ireland, which was

more industrially developed, was Protestant and preferred being part of the union with the UK

because the unionists there were afraid of losing political power and economic wealth.

The Home Rule Bill to establish self-government for Ireland was passed in 1914, but

was suspended for the duration of the First World War. The subsequent years were marked by

political violence and upheaval. The Irish War of Independence lasted from 1919 to 1921,

when the Anglo-Irish Treaty was signed. The southern part of Ireland became the Irish Free

State, a self-governing Dominion of the Commonwealth of Nations, while the northern part of

the island opted to stay within the UK. However, the Anglo-Irish Treaty was not fully

accepted in the Irish Free State. A civil war broke out between nationalists who were pro-

Treaty and saw the Irish Free State as a first step to full independence and nationalists who

were against the Treaty and wanted to fight until the Irish Republic was achieved. The anti-

Treaty nationalists were defeated by the official government, but the division between the

nationalists is still present in Irish politics today, especially between the two leading parties,

Fianna Fáil and Fine Gael.

~ 37 ~

Ireland became eventually a Republic in 1949 and joined the EU—then known as the

European Economic Community—in 1973. Ireland remained a democracy and did not have a

military junta regime. While its economy was mostly weak and based on agrarian activity, it

became more developed, open and export-led in the late 1980s due to a strategy change by the

Irish government. Taking advantage of EU membership, Ireland succeeded in attracting

capital on the global market and enjoyed huge growth, giving it the ´title´ the Celtic Tiger.

The Irish society developed as well; social values modernized as Church influence diminished

after various scandals. Ireland joined the EMU in 1999 and saw afterwards a slow infection of

its financial system with cheap money and a speculation on the property market, which will

be discussed later. First we will look at how Ireland is now depicted in the VoC literature.

Ireland is most often classified as an liberal market economy (LME) and an Anglo-

Saxon model of political economy (Hall and Soskice 2001), which is not surprising given

Britain's role in Ireland's past. Being an LME means that coordination is based more on

market structures. The organization of employers and unions is fragmented and politically

weak and the main role of the state is to guarantee the effective functioning of the market

without intervening too much. Amable (2003:136) puts Ireland into the cluster of Continental

European political economies and not in the market-based ones due to its high score on the

wage-bargaining-corporatism index, which reveals a strong social partnership structure. At

the same time Ireland has a less than average—and certainly less than Greece—regulated

product market. In the formal labour market, employment protection is lower and flexibility

higher than in Greece. In the field of social protection, Ireland has a private welfare system

associated more to a liberal market, whereas Greece has a public system—although with low,

mainly old-age state benefits and more traditional intermediary institutions such as Church

and family. In respect to political culture, it is observed that Greece and Ireland share the

same system of clientelistic relations, although the Irish political culture is more consensual,

without great ideological divides and left-right political cleavages which impede pragmatism

in decision making (Daly 2005:133). Becker (2009:58) also classifies Ireland into the liberal

type of political economy, although he remarks that it does not completely fit in this category.

According to his analyses and sources, we see that Ireland, concerning the level of

employment protection and product market regulation, is close to the liberal types of the UK

and the US. Nevertheless, looking at the institutional change between the mid 1990s and mid-

2000s, Ireland seems to be the most striking case compared to other developed countries

because it did not liberalize at all (Becker 2009:112). In sum, we can say that Ireland

~ 38 ~

combines a deregulated Anglo-Saxon political economy with a centralized, consociational

mechanism of interest representation (Antoniades 2007:22).

The Irish model emerged from its history under British rule. Irish society was used to

market pressures and survival in poverty. In the 1980s Ireland experienced a period of

economic crisis. It was this crisis that acted as an impetus for the establishment of the social

partnership model in 1987. Ireland became less LME-like and took on features of a co-

ordinated market economy. Wage bargaining became co-ordinated and centralized. Unions

and employers had a shared sense of responsibility to tackle the crisis, recognized their

interdependence and committed themselves to wage moderation. As Doherty (2011:379) says

“The Irish partnership model was distinguished by its all-encompassing nature (…) Those

focusing on the ´deliberative´ nature of the process have tended to emphasize its ´problem-

solving´ approach (…)”. It was in fact a pragmatic partnership with a focus on the promotion

of national growth and competitiveness. Daly (2005:151) argues that the partnership was

furthermore a way of generating legitimacy for taking measures—fiscal policy and reform—

to tackle the crisis. It was this social partnership together with a national strategy for

economic development towards internationalization and a liberal, deregulated regime for

international capital that created in the 1990s and early 2000s a period of large economic

growth, which is often called the Irish miracle. Daly (2005:133) describes Ireland as

“economy-oriented (and within that competition-oriented), carefully managed model of

national modernisation, which has self-consciously built a capital-friendly economic policy, a

consensus-oriented political culture and a model of society in which the ´social´ is subservient

to the economic”.

We have seen that it is not always easy to place countries into a certain variety of

capitalism. Countries are not fixed typologies, but instead approach to a lower or higher

degree a variety of capitalism. Comparing Greece to Ireland, we can state that, although they

share historical features as colonial rule, political instability, poverty7 (see figures 2 and 3)

and emigration, their nature of political economy is different. Greece approximates a model

(either it is called statist, South European, or mixed market) where the state has played and

7

Figures 2 and 3 show that both countries had a similar low GDP per capita in the 1980s and both experienced a

large growth afterwards.

~ 39 ~

still plays an interventionist role in business and labour relations. Production, labour and

welfare systems are highly fragmented and dualistic. Trade unions tend to be also fragmented,

highly politicized and advocate narrow and vested interests via clientelistic links to political

parties. Although they are strongly organized and able to organize mass mobilization, they are

unable to deliver collective goods. Reform proposals often lead to conflict and vetoes. The

elements of co-ordination suffer thus from institutional weaknesses and ideological divisions

while the state is quasi-dysfunctional. Yet there is an expectation that society—at least the

well-connected—will be protected by the state, thus raw market pressures are not much part

of the scene.

Ireland, on the other hand, approximates more the liberal market model, which it

inherited from the UK, and has been confronted more with market pressures. Product market

regulation is more liberal than in Greece and employment protection is less than in Greece.

The Irish state has been less interventionist in business and labour relations. However,

between 1987 and the beginning of the 2000s a social partnership structure (tripartite: state,

employers and unions) emerged where collective bargaining became more centralized and co-

ordinated. Thus, the Irish liberal market model took on some CME-like features. The social

pacts that were closed in that period were of an encompassing nature: a broad range of actors

addressing an array of policy issues (Doherty 2011:379). Agreements and consensus were

reached due to a shared sense of responsibility to the wider community. Furthermore, Ireland

launched in the late 1980s-early 1990s a new, export-led economic strategy focused on

competitiveness and growth, while in Greece there was not such a strategy. In contrast to

Greece, Irish politics are not divided and impeded by ideological factors, but Greece and

Ireland do share a widespread system of clientelism. This is a factor that has corrupted co-

ordination mechanisms in the years before the crisis hit and that is still a weakness of both

models of political economy.

2.3 Greece: the lead-up to the crisis

Having studied the domestic VoC characteristics of Greece, we can now have a closer look at

the economic performance of Greece prior to the crisis. We will see that the economic

performance was affected by some domestic VoC characteristics mentioned above and

simultaneously affected by the dynamics of EMU and capital mobility.

~ 40 ~

The period from 1981, when Greece became a member of the EU, until the mid-1990s

is characterized by a rise in debt levels (see figure 4). These higher levels are mainly a result

of domestic policies. The current account deficit reached its highest point in 1986 but declined

afterwards (see figure 5). Vamvakidis (2006) argues that Greece´s economy was diverging in

the first fifteen years after EU-entry due to a lack of macroeconomic policies such as fiscal

consolidation and structural reforms. Prime Minister and leader of the socialist party PASOK

at that time, Andreas Papandreou, followed economic policies that were mainly focused on

government expenditures in order to build a welfare state, while increasing the wealth of

Greek families and the investments in the education and health sector. After the experience of

the Greek Civil War (1946-1949), the junta (1969-1975) and successive conservative and

repressive governments, Papandreou´s social and economic policy was like a relief and the

people welcomed him as a hero. Instead of investing in the private sector and in

industrialization, Papandreou chose to expand the public sector and to award favours to trade

unions that supported his party. Seen in the historical context, it was the cheapest and easiest

solution, as other European countries started also to de-industrialize and to move

manufacturing to lower labour cost countries. The expansion in the public sector often

occurred via clientelistic links and not on basis of meritocratic principles. People could get

well-paid jobs for life in the public sector in contrast to jobseekers who did not have the right

connections to the political party in power and who got jobs in the private sector that were

frequently worse paid than in the public sector. A consequence was that under-qualified

people got positions in public administration, leading to further weakening of the functioning

of the state and the bureaucratic machine. This weakness also stems from poor intra-

governmental co-ordination, efficiency and resources (Featherstone 2011:195). A lack of co-

ordination and control is also reflected in the processes of budget management. A poor budget

management system with a lack of knowledge on which to assert effective accounting control

leaves enough space for clientelistic and corrupt practices (Featherstone 2011:196). In the

Corruption Perceptions Index 1995 of Transparency International, Greece had one of the

worst scores in Europe; a 4.04 out of ten (with ten being the best score) while Ireland had a

score of 8.578.

8

See for more results: http://archive.transparency.org/policy_research/surveys_indices/cpi/previous_cpi

~ 41 ~

The first fifteen years of EU membership were thus marked by a low appetite for fiscal

adjustment and structural reforms together with an expansion of the public sector and

clientelistic, corrupt practices. Competitiveness did not improve as much as it could have.

Although EU structural funds were used, a vibrant industrial and services export sector did

not emerge. This is part of the dual economy problem, as described in the VoC literature. The

small and medium size businesses, where we would expect entrepreneurial energy, were, and

still are, excluded from core benefits provided by the state. Shipping magnates, and others,

having political connections, however, did get benefits. In short, the domestic policies in the

political economy of Greece contributed to the development of structural weaknesses.

In the run-up to EMU accession, Greece took measures to fulfil the Maastricht criteria.

As we can see in the figures, the government debt level stabilized and the deficit level

improved—though it would deteriorate again. Greek GDP was growing more than the EU

average and even Germany's (see figure 4). As EMU membership was very attractive to

Greece, EMU requirements formed an exogenous pressure to adjust its economy. It is argued

that Prime Minister Costas Simitis used EMU as a tool of empowerment and legitimacy to

push measures through. Blavoukos and Pagoulatos (2008) point out that fiscal consolidation

in Greece relied heavily on the rise of public revenues and much less on curtailment of public

expenditure. Besides, the record of structural reforms was mixed. “Labour market reforms,

initiated in 1997, failed to address the key weaknesses of the Greek labour market, being

neither radical nor consensual and failing to produce any meaningful results in curbing the

most important labour market rigidities” (Papadimitriou 2005:382, 392). Lyrintzis and

Matsaganis (2011:7, 2007:537) speak of repeated failure of reforms due to union opposition.

We see thus that Greece performed economically quite well in the run-up to EMU.

Nevertheless, structural reforms remained difficult to implement due to resistance from vested

interest groups such as trade unions, which had gained much power in the 1980s under

Papandreou.

In the post-EMU accession period, we see that Greece, as a emerging economy, did

not do poorly in terms of growth, debt and deficit levels (see figures 4, 5 and 6). The export

sector was also growing (see figure 7). Nevertheless, macroeconomic imbalances between

Euro-Zone countries were built up over time, as monetary integration made financing on the

~ 42 ~

international capital market easier and cheaper. As Jones (2011:333) illustrates: “…monetary

integration brought German lenders and Greek borrowers together by lowering the risk

associated with Germans lending to Greeks, while at the same time lowering the cost

associated with Greeks borrowing from Germans”. Furthermore, Jones (2011:333) states that:

“…numerous Austrian, Belgian, Dutch, German, and French banks ended up lending vast

amounts of money to governments, firms, and individuals in Greece, Ireland, Italy, Spain, and

Portugal”. The unintended result of monetary union and capital market integration was the

accumulation of imbalances (see figure 8) throughout the Euro-Zone. The capital inflows (see

figure 9) in Greece led to a deterioration of the deficit level, a higher rate of inflation and thus

problems of competitiveness that are linked to the lack of labour market flexibility. The

opposite happened in countries like Germany. Instead, they showed current account surpluses,

low rates of inflation and thus improved competitiveness.

Summing up, we can say that the Greek economy itself, although it did suffer from

domestic institutional weaknesses and political clientelism, did not perform poorly in the

period before the outbreak of the crisis. It went through large growth and steady debt and

deficit levels. Nevertheless, from 2001, the dynamics of monetary integration and capital

mobility created growing imbalances between the Euro-Zone countries. Capital flows

intensified in the run-up to the crisis and resulted in dramatically larger deficit levels for

Greece.

2.4 Ireland: the lead-up to the crisis

As discussed earlier, Greece and Ireland share historical developments but form a different

model of political economy. We will see that, due to the successful export-driven economic

strategy that was adopted in the late 1980s/early 1990s, Ireland showed a better performance

than Greece in terms of debt and deficit levels. Even so, the economy was destabilized, as in

the case of Greece, by similar international capital mobility such as domestic elements

including clientelism.

The export-led economic strategy that was launched in the late 1980s/early 1990s was

aimed at enhancing growth and competitiveness. Looking at the government debt and deficit

levels, we can state that this strategy was successful. Ireland achieved an enormous reduction

in government debt, from 107.5 % of GDP in 1989 to 25% of GDP in 2008 (figure 10).

~ 43 ~

Current account deficits (figure 11) became surpluses in 1992. Looking at figure 6, we see

that Ireland enjoyed from the mid-1990s high (higher that Greece and Germany), but

declining GDP growth. The export sector grew explosively but has stabilized since 2001

(figure 12).

The Irish economic miracle of the 1990s came to an end in the 2000s. As we can see

in figure 9, in 2001 surpluses again became deficits. The Irish economic performance was

destabilized by the dynamics of capital mobility despite strong export competitiveness. As

explained earlier, monetary integration made borrowing easier and cheaper. In contrast to

Greece, in Ireland it was the financial sector that borrowed heavily on international capital

markets and financed in this way a property bubble. When in 2008 the global financial crisis

hit, Irish banks were saved by the government, leading to a rise in Irish sovereign debt levels

(figure 10). Ireland became the second state, after Greece, to call for financial help from the

EU.

Not only the international dynamics of capital mobility but also domestic elements

contributed to the dire state of the Irish financial sector. One factor was a weak and ineffective

regulatory regime. ´Why did regulation fail?´ is the question that keeps the minds of scientists

and policymakers busy. According to Chari and Bernhagen (2011:7-10) it was not only the

lack of regulation and the promotion of self-regulation for financial institutions, but also a

symbiotic relationship between banks, the state and developers (house and construction),

which turned out to be an ´agency capture´ or ´regulatory capture´ story. All three actors

formed part of an institutionalized clientelistic network. Historically there has been a close

relationship between banks and the state apparatus. Regulators switched easily in senior

positions between these institutions. Central Bank directors moved from their positions in the

state apparatus to positions in commercial banks. “The result has been a historical lack of

regulation of the sector by the Central Bank” (Chari & Bernhagen 2011:8). Chari and

Bernhagen (2011:8) give the example that, when banks were regulated by the Central Bank,

they encouraged their clients to invest in offshore accounts in the Cayman Islands in order to

avoid tax payments. The Irish Financial Services Regulatory Authority (IFSRA), set up in

2003, failed as well in regulating and mitigating the levels of systemic risk. The main reason

of failing regulation is that the Central Bank and the IFSRA never acted fully in a independent

way and they simply overlooked the practices of the financial sector, believing that self-

regulation was the best way to manage risk. From the other side, there is also evidence of

~ 44 ~

private interests capturing agency, mainly in the form of lobbying between corporate actors

and the government, in this case the Fianna Fáil party.

The state apparatus did not only have a close relationship with the banks but also with

the developers. Chari and Bernhagen (2011:10) show that “the Fianna Fáil government

brought in different tax rules that would encourage the building barrage from which

developers benefited”. The state itself benefited as well from the tax revenues that were

generated due to the construction boom. Another dimension of this symbiotic relationship was

the fact that political parties were financed by developers. By financing political parties (in

this period the Fianna Fáil party), developers had access to policymaking. This is another

example of agency capture by private interests.

The third relationship in this institutionalized network was the link between banks and

developers. Banks gave massive loans to the construction developing companies, relying

again on foreign borrowing. As banks were weakly regulated, they had the room to compete

for the business of property developers. In this way, Ireland witnessed the highest increase in

house prices. Property prices doubled between 2000 and mid-2007, when they reached their

peak (Chari & Bernhagen 2011:12).

Despite a well-oiled market adjustment machine in the form of an economic strategy

and a co-ordination mechanism to negotiate the cost sharing of adjustment (the social

partnership model), a clientelistic institutionalized network undermined a workable situation

in circumstances of growing international structural imbalances.

2.5 EU´s unexpected reaction, financial assistance and the troika

programme

Although Greece and Ireland—as emerging economies—performed quite well in the pre-

crisis period, they eventually got into economic turbulence. The rescue of Irish banks resulted

in high government indebtedness. In 2009 the newly elected Pasok government in Greece,

with George Papandreou as prime minister, tried to discredit its predecessor (Nea Dimokratia)

by being honest and transparent about debt figures that were actually higher than the previous

government had stated. The mere fact of indebtedness is not what caused the sovereign debt

crisis. The trigger was when Germany made clear that countries had to sort out their own

~ 45 ~

problems and that the EU was not going to provide the required collective goods. As stated

earlier, the EMU had not set up crisis-management mechanisms and there was no agreement

on how the costs of adjustment would be shared. It was thus clearly a policy failure that

turned the sovereign debt problems into a crisis. The EU/German reaction on the debt

problems was not in line with market expectations and it is at this point that sovereign bond

spreads began to diverge rapidly (see figure 13 and 14). This means that it became much more

expensive for Greece and Ireland to borrow on the financial markets. Speculation, especially

concerning Greece, was thriving and rating agencies downgraded continuously the

creditworthiness of both countries. Eventually, Greece and Ireland were ´forced´ to call for

financial assistance from the Euro-Zone.

On May 2nd

2010 the Greek government and the troika (EC, ECB, IMF) agreed on a

three-year programme that provided a loan package of 110 billion Euros consisting of

bilateral loans (80 billion) and a loan from the IMF (30 billion). The main objectives of the

programme were based on two pillars: fiscal consolidation and the improvement of the

economy´s competitiveness. To reach these objectives and to receive the loan tranches, the

socialist Pasok government was forced to take unprecedented austerity measures—based on

the conditionality principle of the loan package. This measures were of a neoliberal variety

that contradicted, as we know by now, not only the party´s ideological profile, but also the

party´s whole historical course and past political practice (Lyrintzis 2011:16-17). Voskeritsian

and Kornelakis explain (2011:1-2) that:

The first pillar entailed a drastic elimination of the budget deficit through cuts in

public expenditure and increases in public revenues. To achieve the former, the

agreement involved cuts in public investment and in public sector wages, a

reform of the pension system [an increase of retirement age to 65 and the

merging of pension funds], and a general slimming of the public sector

[including the firing of 200.000 public employees till 2015 (Tsitsas 2011)], while

the latter is pursued via a restructuring of the taxation system and the fighting of

tax evasion, the elimination of corruption, and the privatization of a large

section of public sector enterprises and utilities. The second pillar, on the other

hand, aimed at creating a more attractive environment for investment. To this

end, the government was bound to reduce the labour cost in the private sector,

via a process of internal devaluation and through changes in the collective

bargaining system, the opening up of any remaining ´closed professions´, the

~ 46 ~

simplification of the processes to set up new enterprises, and the elimination of

bureaucracy.

Ireland also received a financial rescue package of 85 billion Euros after signing an

agreement with the troika on November the 28th

in 2010, almost seven months after the

agreement with Greece. The main objectives of the adjustment program for Ireland were:

- An immediate strengthening and comprehensive overhaul of the banking sector.

- An ambitious fiscal adjustment to restore fiscal sustainability; correction of

excessive deficit by 2015.

- Growth enhancing reforms, in particular on the labour market, to allow a return to

a robust and sustainable growth.9

In the Memorandum of Understanding on Specific Economic Policy Conditionality

(December 3rd

2010)10 we can read that, for the financial sector, recapitalization and

deleveraging measures were required, whereas fiscal consolidation had to be reached through

tax increases and a reduction in welfare and public expenditure (for instance social protection

expenditure cuts, a reduction of public service employment and a reduction of existing public

service pensions). The troika also asked the Irish government to implement structural reforms

in the labour market—for instance a reduction in the nominal level of the current national

minimum wage—in order to facilitate adjustment. Finally, they demanded a change in the

unemployment benefit system in such a way as to provide incentives for an early exit from

unemployment. The implementation of the programme for both Greece and Ireland is

assessed by the troika, which makes quarterly visits to these countries.

Although the Greek and Irish political economy had their own weaknesses, the trigger

for the sovereign debt crisis lays in policy failure on the European level. Both countries are

9 Source:

http://ec.europa.eu/economy_finance/eu_borrower/ireland/index_en.htm, accessed on July 5th 2012.

10 Source:

http://ec.europa.eu/economy_finance/articles/eu_economic_situation/pdf/2010-12-07-mou_en.pdf, accessed on

July 5th 2012.

~ 47 ~

now faced with a one-size-fits all programme of market-led adjustment. As is argued here, the

adjustment process will depend mostly on domestic configurations. Internal weaknesses and

strengths will become more significant. What can we expect from the adjustment process in

Greece and Ireland, on the basis of the historical and VoC-background we now have on both

countries?

2.6 Expectations

What do we expect from the adjustment processes in Greece and Ireland, looking at both the

external pressure and the domestic configurations of each country? First, the external

pressure, the troika programme or in other words the Memorandum of Understanding, is a

´hard´ form of pressure because it is a loan package based on the conditionality principle.

Both countries have to commit to the conditions, otherwise the loan tranches will not be

given. We expect Greece and Ireland, in the first instance, to follow the programme.

Furthermore, the content of the programme is quite precisely defined. That means that Greece

and Ireland do not have much room for their own policy decisions and that they have to adjust

in the prescribed way in order to meet their obligations.

Second, we know that Greece´s problems are from the outset greater and that the

model of capitalism differs from the Irish one. Looking at debt and deficit levels in the pre-

crisis phase, Greece performed worse than Ireland. Greece´s competitiveness did not improve

as much as might have been expected, partly due to structural institutional weaknesses that

built up over time. The focus of the Irish economic strategy has been on economic growth,

competitiveness and internationalization. The liberal and international orientation of the Irish

economy fits better to the dominant, international and European economy and to the

programme imposed by the troika. Thus, we expect Ireland from the outset to adjust better to

the troika programme than Greece.

Next, looking at politics and political culture, we have seen that Irish political culture

is, in contrast to Greek political culture, more consensual, without great ideological divides

and political cleavages between left and right. We expect that the Irish adjustment process

will be easier due to more consensus in politics. In Greece we expect more political cleavages

between right and left political parties which can resist or block the adjustment process.

Furthermore, we expect dialogue with social partners in Ireland to be more consensual and

~ 48 ~

will defend encompassing interests. In Greece we expect that interests will be more ´narrow´-

defined and that social dialogue will develop less smoothly.

Looking at interest representation and power structures, we expect that market

liberalizing reforms and measures as prescribed in the troika programme will encounter in

Greece a weak domestic constituency for support as the structure of interest representation is

skewed towards the interests of the public sector and the privileged position of few large

enterprises. We expect the Greek trade unions (GSEE, ADEDY) to resist greater labour

market flexibility, pension reform and privatization because they are afraid of losing their

privileged, protected position and fear low welfare protection. The employer´s federation,

SEV, which represents the interests of major employers, will also oppose reforms and

adjustments as liberalization and deregulation because major employers enjoy advantages that

stem from the high level of regulation (for example barriers to market entry). In short, we

expect Greek unions and federations to oppose more fiercely the troika programme than the

Irish unions (ICTU, IBEC). Irish unions will, on the one hand, protest against austerity

measures and reforms, but will, on the other hand, take a more problem-solving approach,

defending, not mere ´narrow´, but more ´encompassing´ interests.

Given all these factors, it can be expected that Greek society will respond to and resist

more fiercely the adjustment programme than Ireland will. Adjustment and reform will be

more difficult to achieve in Greece than in Ireland. This emanates from the fact that problems

were from the outset larger in Greece and that the degree of discord between the imposed

measures and the VoC model of Greece is larger than in Ireland. Furthermore, domestic

factors as political culture, ideology and interest representation strengthen our expectation.

Greece is more likely to defect or to reinterpret the imposed measures (to the extent there is

room for own policy choices), whereas Ireland is more likely to reform according to the

imposed programme.

~ 49 ~

§ 3. Case study: Greece

We have arrived at the part of the thesis where we will examine the adjustment process in

Greece, from May 2010, when the economic adjustment programme started, until now.

According to our expectations outlined in the previous chapter, Greece will respond and resist

fiercely the imposed troika programme. Therefore, adjustments and reforms will be difficult

to achieve. Are our findings, after analysing the relevant documents, in line with our

expectations based on the Greek VoC characteristics? Step by step we will look at the

development of the adjustment as assessed by the troika, the discourse and responses of the

GSEE, ADEDY and SEV, and at how VoC factors determined and continue to determine the

way in which Greece is adjusting.

3.1 The economic adjustment programme: “unprecedented in the scope of

national effort required”

As known by now, the Greek prime-minister George Papandreou of the Pasok party, together

with the Euro area and the IMF, agreed in May 2010 on a three-year financial support and

economic adjustment programme. According to Olli Rehn and Dominique Strauss-Kahn the

programme was “unprecedented in the scope of national effort required, as well as in the scale

of financial support, 110 billion euro´s” (European Commission (EC) 2010). They further

stated that a multi-year effort was required in order to bring down Greece´s debt and to spur

competitiveness. For the programme to be successful, national commitment going beyond

political party lines would be needed. Rehn and Strauss-Kahn recognized that a great sacrifice

was demanded from the Greek people.

In exchange for financial support, the Greek government had to follow the

programme, taking measures to achieve fiscal consolidation and to enhance growth and

competitiveness. Contrary to the adjustment process in the pre- and post-EMU accession

phase where external pressure left more room for individual policy choices, the current

external pressure in the form of the troika programme is much more defined and prescriptive.

Joint EC/IMF/ECB missions made quarterly visits to Greece to assess compliance with the

~ 50 ~

terms and conditions of the economic adjustment programme required for the quarterly

disbursements of bilateral financial assistance.

By August 2010, when the first quarterly review mission took place, the programme

had made a strong start. “Greece has managed impressive budgetary consolidation during the

first half of 2010. It has also achieved impressive progress in major structural reforms which

will help to transform the economy” (EC 2010a:9). All budgetary performance criteria were

met and pension and labour market reforms were ahead of plans. Nevertheless, the European

Commission stated that to implement other structural reforms, such as the opening-up of

closed professions and deregulation, the government would have to overcome resistance from

entrenched vested interests. The EC thus had indicated from the beginning that vested

interests, as the ones from trade unions, were a possible obstacle to the implementation of

structural reforms.

The second and third review missions, that took place respectively in November 2010

and February 2011, stated that the programme was broadly on track and that there had been

further progress, mainly in reducing the fiscal deficit. “Key reforms on the pension system,

the liberalization of the transport sector and the increase of labour market flexibility were

implemented in the early months of the programme” (EC 2010b:2). Unit labour costs were

brought down, a measure the troika sees as one that boosts competitiveness. A new

investment and competition law, and new rules on licensing were adopted, in order to create a

more business-friendly environment. Furthermore, the programme was effective in

safeguarding financial sector stability. Thus, the overall assessment of the troika was positive.

However, it was observed that the downturn in domestic demand was deeper than expected.

Raising revenues through tax collection remained problematic due to weak tax apparatus and

clientelistic practices. Moreover, the troika observed that policy implementation had become

more difficult (EC 2010b:1). “Progress since the summer has been slower with, for instance,

reforms of the remuneration system is the public sector and of the wage bargaining system

facing significant delays. Slower progress reflects the need to overcome vested interests and,

in a few cases, objective technical and legal challenges” (EC 2010b:2). We see that reforms in

the public sector and the labour market are delaying, which may indicate structural

weaknesses as a low reform capacity, but even more Greek VoC factors as skewed interest

representation, clientelism and politicization. As the economy was deteriorating, the Greek

government acknowledged the need for additional fiscal measures and structural reforms and

prepared its medium-term fiscal strategy, which would cover reforms in public enterprises,

~ 51 ~

healthcare, tax policy, public employment etc. It also committed to scale up its privatization

programme in order to raise 50 billion euro by 2015. The troika concluded that “More than

ever, the next steps in the implementation of the programme will require the government´s

determination, political coordination and the consensus of the Greek society” (EC 2011a:3).

In compliance with the findings of the fourth review mission (EC 2011b), further steps

were taken in the implementation of the medium-term fiscal strategy addressing key

weaknesses of Greek public finances. Legislation to modernize public administration, reform

healthcare, improve the functioning of the labour market, remove barriers to set up businesses

and liberalizing transportation was passed. A privatization fund that would deal with the

privatization of state-owned assets was legislated. In a newsletter of the Greek Ministry of

Finance (19 May 2011) we can read that Greece achieved in the first year of the programme

the largest annual fiscal consolidation ever by a Euro-Zone economy (a deficit reduction of 5

% of GDP). There were large expenditure cuts in wages, pensions, fixed term contracts,

employment and social spending, mainly in the public sector and tax increases. Retirement

age was raised to 65. Firm level agreements were introduced in the labour market. Closed

professions were partly liberalized. Despite these reform efforts, the recession was more

severe than expected. The troika concluded that reforms had to be reinvigorated and that

political and social consensus remained a prerequisite for success. The weaknesses in

institutional capacity in Greece were addressed by sending a Task Force from the European

Commission to provide technical assistance. The Euro-Zone leaders recognized at the Euro

summit in Brussels (July 21st) “the need for a broader and more forward-looking policy

response to assist Greek government in its efforts to bolster debt sustainability”.11

In the following period, until the announcement of a second economic adjustment

programme in February 2012, the economic recession continued to be deeper than previously

projected. Greece was and still is in a deep recession with GDP growth declining by around

7% (see figure 15). The deficit was reduced but the debt burden, given the high interest rates,

continued to rise and to be unsustainable (from 129.4% in 2010 to 165.3% in 2012, see figure

16). Unemployment had risen tremendously, especially since the start of the programme (see

figure 17). The troika concluded in February 2012 that “Greece made mixed progress towards

the ambitious objectives of the first adjustment programme”. The pace of implementation of

11

Source: http://ec.europa.eu/economy_finance/focuson/crisis/2011-07_en.htm, accessed on July 5th

2012.

~ 52 ~

growth-enhancing reforms was insufficient. Factors as political instability12, social unrest,

issues of administrative capacity and the recession hampered the implementation of structural

reforms. The European Commission stated that “These reforms have not yet reached the

critical mass that is necessary to boost productivity and transform the investment climate in

Greece”. The privatization agency was created but there were delays in the implementation

due to technical and legal hurdles and worse market conditions. Thus both institutional

weaknesses and a low market appetite for Greek assets impeded the privatization process. A

second economic adjustment programme was launched, that according to the president of the

EC, Mr. Barroso, would focus more on reforms, competitiveness and growth in order to give

hope to the Greek people. The EC stated that the success of the second programme depended

chiefly on Greece and warned that implementation risks (weak administrative capacity, social

unrest and political tensions) would remain very high. It was once more emphasized that the

implementation of reforms and thus the success of the programme, would require the

government´s determination, enhanced political coordination and the consensus of the whole

Greek society.

Concluding, we see that, due to the hard external pressure and conditionality of the

programme, Greece made strong efforts and took, often painful, measures to adjust. It actually

followed the programme to a certain level, although the Greek variety of capitalism is quite

far from measures imposed, as we saw in the previous chapter. Thus, our findings are quite in

line with our expectations, that Greece will initially follow the programme. However, from

2011 on, implementation of structural reforms as privatization, liberalization and deregulation

became more and more difficult to implement due to political and institutional weaknesses,

vested interest groups and social tensions of which the troika was aware. The troika reviews

thus indicate that VoC-like weaknesses play a role in the adjustment process. There is no

evidence that the programme actually works, as the economy is still in a deep recession, with

high unemployment rates and unsustainable debt levels. Economic market-led adjustment was

thus poor, partly due to VoC-like structural weaknesses and forces of path continuity, which

will be examined further in the next part.

12

It is important to note that in November 2011 prime minister George Papandreou proposed to hold a

referendum for the acceptance of the terms of the Euro-Zone bailout deal. Due to external opposition from other

Euro-Zone leaders, he abandoned the plan. He agreed with the leader of the opposition to form an interim

government. Papandreou stepped aside and a new national unity government was formed, headed by the former

Vice President of the ECB, Lucas Papademos.

~ 53 ~

3.2 VoC-configurations and their effects

3.2.1 GSEE, ADEDY and SEV: vested interests opposing change and reform?

In the previous chapter we argued that the troika programme will encounter a weak domestic

constituency for support as the structure of interest representation in trade unions is skewed

towards the public sector. Measures like wage cuts, labour flexibility and privatization of

state-owned enterprises would fiercely be opposed by the GSEE and the ADEDY, as these

affect their deeply rooted interests.

As we expected, examining the statements and announcements of the GSEE and the

ADEDY leads to the conclusion that both are against the adjustment programme as imposed

by the troika. They see the European Commission as a representative of a capitalist,

conservative logic, which hides itself behind the IMF and imposes its neoliberal practices on

Greece. They see the troika as a kind of ´loan shark´ who lends money to Greece at extreme

high interest rates, thus making profit out of the loans. Furthermore, Greece is, in their vision,

attacked by the neoliberal financial markets and their speculation. In their vision, ´the

European Commission uses Greece as a laboratory animal with which to conduct experiments

concerning the welfare state´13. Greece is being treated as a colony and not as an independent,

sovereign state. This vision of the relation between the troika or Europe in a broader sense,

and Greece, poses directly a legitimacy problem. The programme is seen as imposed on the

country by a foreign power in order to make its economic situation worse instead of better.

The relation between the trade unions and the Greek government is characterized by

distrust. The ADEDY says that the government imposes its measures in a dictatorial way. The

government is accused of acting only in the interest of the creditors and not in the interest of

the Greek people. They just obey to the troika and do not want to engage in social dialogue.

The GSEE says that ´the government must not proceed ´sloppily´ to the irrational demands of

the troika´.14 With the support of the IMF and the European Union the Greek government

wants to form a new model in order to save the neoliberal system. Furthermore, the Greek

government does not communicate clearly and in a consistent way; they act differently from

13

“Για την Ευρ.Επιτροπή αυτά που απαιτεί χρησιμεύουν ώστε να «δείξει» την Ελλάδα ως

«πειραματόζωο» για τις επιδιώξεις της αναφορικά με το ΚΟΙΝΩΝΙΚΟ ΚΡΑΤΟΣ για τους εργαζόμενους στην

Ευρώπη” (GSEE Statement, June 7th 2010). All Greek texts are translated by the author.

14 “…δεν επιτρέπεται στην Κυβέρνηση και στο πολιτικό σύστημα να υποχωρήσει ατάκτως στις

παράλογες απαιτήσεις των δανειστών” (GSEE Statement, February 2nd

2012).

~ 54 ~

what they say. In short, the government is accused of not being loyal to the Greek interests.

They obey too easily to the measures the troika wants to impose. The relation between trade

unions on the one side and the Greek government and the troika on the other side, is

characterized by a lack of trust and legitimacy for the adjustment programme.

The programme itself–also called the memorandum–is seen as unfair and ineffective

because the burden is unequally placed on the shoulders of the working class and the retired

people. The programme is undermining the social welfare state and creating labour relations

like those in China and India. The goal of the GSEE and the ADEDY is to protect the rights of

the workers, the unemployed and the retired. They stress several times that they are against

the anti-social and anti-growth measures, a reduction of labour cost, the abolition of the 13th

and 14th

salary, labour market flexibility, the decentralization of collective bargaining, the

abolition of collective agreements and the privatization of national assets, without proposing a

social dialogue where there is room for negotiation. The GSEE explicitly says that ´we do not

refuse to engage in social dialogue, but our standpoints are non-negotiable´.15

The GSEE and

the ADEDY state that they and those they represent are not to blame for the crisis. As causes

of the dire state of the Greek economy and the problems in the public sector they see mainly

tax evasion by big businesses and entrepreneurs, the black economy and the two party

clientelistic system. Thus, for the problems in public finances, they blame the big

entrepreneurs who do not pay taxes, the SEV who represents these entrepreneurs and the

Greek political system. Greek politicians ´betrayed´ the country in the past by being involved

in corrupt practices and scandals16

. In short, the GSEE and ADEDY are against the measures

of the troika programme because they affect disproportionately hard on those who are not to

blame for the crisis. Furthermore, the unions state that wage and pension cuts do not improve

competitiveness and do not lead to a more productive and effective public governance. The

adjustment programme is in their vision ´the wrong recipe´. As the GSSE said after ten

months of implementing the memorandum: ´the medicine is worse than the illness´.17

To solve

the crisis, other steps have to be taken. According to the trade unions, the politicians who

misused their power for private gains should be punished and imprisoned. First, trust must be

15

“Εμείς δεν αρνούμεθα τον διάλογο θέτουμε όμως την αδιαπραγμάτευτη θέση μας” (GSEE Statement,

December 2nd

2010).

16 The Vatopedi and Siemens controversies of 2008 are well-known scandals entailing bribery and

corruption. For more information see: http://www.pfhub.com/top-7-political-scandals-in-greece/

17 “...το φάρμακο είναι χειρότερο από την αρρώστια” (GSEE Statement, February 23

rd 2011).

~ 55 ~

regained in the political system. Secondly, meritocracy must be enhanced and corruption

eliminated. Thirdly, labour rights have to be protected. Unless these steps are taken, the

unions will have ´the responsibility to act, to be in the streets every day and to become their

nightmare´.18

The slogan used by the unions is ´we do not owe anything, we do not sell

anything, we do not pay´.19

This fierce reaction shows the unwillingness and anger of the

unions and of Greek society. Numerous strikes and demonstrations have taken place, mainly

in the streets of Athens, in the last two years. In May 2011, the so-called Indignant Citizens

Movement—a civilian, not partisan movement—started to protest against the austerity

measures in different Greek cities.

Examining the statements of the employer´s federation SEV, we see a different and

sometimes adversarial reaction. The first adjustment programme was seen by the SEV as a

´therapy and not a punishment´.20 The chairman of the SEV, Dimitris Daskalopoulos, urged

for a direct implementation of the programme, ´without the denial of reality´.21 He stressed the

national responsibility of Greece for following the programme and taking measures that had

to be taken long time ago. ´It does not depend on our European partners if we stand up or if

we default´,22 said Mr. Daskalopoulos. ´Apart from what Europe can do or must do for us,

with or without the memorandum, with or without the support mechanisms, our salvation, the

exit from the economic impasse, depends on our mindset, lies in our hands´.23 The SEV

stressed the need for social and political consensus: ´the memorandum must not divide the

Greek people but unify them´24 and ´political parties have to speak with one voice´.25

18

“Οι συνδικαλιστικές πλειοψηφίες έχουν ιστορικές ευθύνες…Να βρισκόμαστε κάθε μέρα στους

δρόμους. Να γίνουμε ο εφιάλτη τους.” (ADEDY Announcement, May 5th 2010).

19 “δεν χρωστάμε, δεν πουλάμε, δεν πληρώνουμε” (ADEDY Announcement, December 2

nd 2011).

20 “όχι τιμωρία αλλά θεραπεία” (SEV Statement, April 23

rd 2010).

21 “χωρίς άρνηση της πραγματικότητας” (SEV Statement, May 5

th 2010).

22 “Δεν εξαρτάται από τους ξένους αν θα ορθοποδήσουμε ή θα χρεοκοπήσουμε” (SEV Statement,

February 2nd

2011).

23 “Ανεξάρτητα από το τί περισσότερο μπορεί ή πρέπει να κάνει για μας η Ευρώπη, με ή χωρίς το

μνημόνιο, με ή χωρίς τους κοινοτικούς μηχανσμούς στήριξης, η σωτηρία μας, η έξοδος από το οικονομικό

αδιέξοδο, εξαρτάται από τα δικά μας μυαλά, βρίσκεται στα δικά μας χέρια” (SEV Statement, March 11th

, 2011).

24 “το μνημόνιο δεν πρέπει να διχάζει αλλά να ενώνει τους ΄Ελληνες” (SEV Statement, September 9

th

2010).

25 “τα κόμματα πρέπει να μάθουν να μιλάνε με μια φωνή...” ( SEV Statement, January 4th 2012).

~ 56 ~

Thus, the SEV profiled itself initially as a proponent of the adjustment programme.

According to the SEV, the programme can create a more business and investment friendly

climate. Daskalopoulos stated that innovation and entrepreneurship in Greece have to be

enhanced. He further argued that he wants to protect the collective bargaining system, the 13th

and 14th

salary and the minimum wage, as he does not think that Greece is facing a problem

of labour cost. It is the clientelistic system and the obese and overspending public sector with

its vested interests that are seen as cause of the crisis. These factors as well as political party

interests impede the proper implementation of the programme. Therefore, the national unity

government formed in November 2011 was seen by the SEV as the last hope for Greece. In

short, the SEV welcomed the adjustment programme with cuts in the public sector and the

abolition of hurdles for the business sector. The SEV opposed cuts in the private sector as this

sector is not to blame for the crisis. Besides, cuts in the private sector were not considered a

solution for the crisis. We see that while in the beginning the SEV was an advocate of the

programme (agreeing with cuts in the public but not in the private sector), it became an

opponent of the second adjustment programme, indicating that austerity had reached its limits.

Measures to improve the business and investment climate in Greece were positive, but more

austerity measures in both the private and the public sector would deteriorate the economic

situation in Greece and affect entrepreneurship. Daskalopoulos argued that the reaction of the

Greek people (protests and strikes) was a natural consequence of a 40% wage cut. Europe has

to show more understanding to the Greek people.

We see that both labour and employer´s voices (GSEE/ADEDY and SEV) were—and

still are—as we expected, against the adjustment programme of the troika and that they

oppose austerity measures. Change and structural reforms, such as labour market flexibility,

liberalization and privatization which would shift the Greek economy towards a more liberal

market model, are especially opposed by the GSEE and the ADEDY. The rhetoric of the

GSEE and the ADEDY indicates the distrust and lack of consensus that exists between unions

and the state. SEV´s rhetoric is softer, but also mentions the lack of social and political

consensus. Nevertheless, the mere fact that Greek trade unions oppose the adjustment

programme is not explained by the Greek variety of capitalism, as unions from different VoC

countries, such as Irish ones, might also oppose it. Seen in the light of current deep recession,

their reactions are quite reasonable. Therefore we have to look behind their rhetoric to see

their VoC characteristics.

~ 57 ~

The GSEE represents formally the private and the broader public sector workers.

However, representation is skewed towards the public sector. For the private sector to be

unionized, enterprises must have more than twenty employees. As 97% (EIROnline 2009) of

the private sector in Greece consists of small-medium enterprises of less than twenty

employees, most private sector workers are thus not represented by the GSEE. In certain areas

of the public sector, union density reaches 90% (EIROnline 2009). Therefore, the GSEE and

the ADEDY, which represents employees in public administration, tend to protect the

interests of the public employees. As we referred to in the previous chapter, the public sector

is politicized. The two major parties, Pasok and Nea Dimokratia, ´gave´ during the last thirty

years jobs to people, in exchange for votes—a practice given the Greek name ´rousfeti´. The

governing board of unions is also appointed by managers from the DEKO (ΔΕΚΟ), the state-

owned companies. The enterprises´ federation SEV has a small coverage of firms in total,

because of the same fact, that the plethora of small- and medium-sized enterprises do not have

a voice. Thus, the SEV represents mainly large corporations. Although the SEV rhetorically

espouses liberalizing reforms, it remains committed to consensus-driven ones, as most of the

large corporations in Greece benefit from anti-competitive regulations (Featherstone 2008:30-

31). The politicization and skewed representation of Greek trade unions leads to great

opposition against the liberalizing structural reforms required by the troika programme.

As we read in the reviews of the European Commission, the implementation of

growth-enhancing structural reforms was insufficient. This results from the clientelistic

relations between politics and trade unions. Although there is a lot of mistrust between them,

they both try to ´protect´ each other in order not to lose their privileges. This means that some

reforms asked by the troika are resisted while austerity measures are broadly imposed and hit

especially the people who are on the non-protected side of the dual economy. The way in

which the programme is implemented ignores thus the dual economy characteristics and sends

the economy deeper into the recession. In VoC-terms we can say that the Greek trade unions

are agents who oppose change and stick to path continuity because the costs of change are

higher than maintaining the status quo. Furthermore, the way the programme is implemented

produces more non-complementarities which worsen the economic situation.

~ 58 ~

3.2.2 Political dynamics

Apart from the VoC characteristic of interest representation, political developments played a

great role in the adjustment process. After the first turbulent year of adjustment, the Pasok

government of George Papandreou was replaced in November 2011 by a national unity

government. The technocrat Lucas Papademos, the new prime minister, tried to keep Greece

on track and to implement more reforms. As this national unity government was not elected

democratically and legitimacy was thus low, it was dissolved, and new elections were held on

May 6th

2012. Nea Dimokratia and especially Pasok had lost in the meantime much of the

Greek people´s trust. Both parties were ´punished´ in these elections and the left-wing party

Syriza, which was an anti-memorandum, thus anti-programme advocate, became for the first

time in Greek politics the second largest party, breaking in this way the two-party system. Nea

Dimokratia, who was in favour of the programme, lost votes but was still the largest, while

Pasok came third. The new anti-memorandum party Independent Greeks (Ανεξάρτητοι

Έλληνες) came fourth. New elections were held on June 17th

, as a coalition government could

not be formed on the basis of the previous election results. The results of the last elections did

not differ much, but Nea Dimokratia was able to form a coalition, with Pasok and Dimar, a

small left-wing party. The changes in the political realm have certainly affected and slowed

down the adjustment of Greece. Once more the lack of trust and consensus in the political

system have proved to make adjustment difficult. Furthermore, the upswing of the leftist party

Syriza in the last two elections and the creation of the new anti-memorandum party

Independent Greeks indicate the mass opposition of Greek people towards the troika

programme.

3.3 Conclusion

Concluding, we can state that according to our expectations, Greece initially followed the

troika programme and tried to pass liberalising measures. It thus tried to shift its political

economy towards a more liberal model. Nevertheless, having examined the reports of the

European Commission and the economic figures, we see that later on the implementation of

the adjustment programme became more difficult and that the economy experienced—and

still is—a deep recession with unsustainable debt levels. We can thus say that the economic

adjustment programme for Greece has not been successful. Although there were attempts to

reform, the economic result of the programme shows a defection of the desired targets.

~ 59 ~

As expected, the reactions of the Greek trade unions towards the programme have

been fierce. The programme was eventually opposed by all unions. The analysis of the

unions´ documents and discourse gives us an indication of the relationship between unions,

the Greek state and Europe, at least the way the unions see this relationship. The lack of trust,

consensus and determination in Greek political culture is once more emphasized in their

discourse. The Greek unions´ mere opposition towards the economic adjustment programme

cannot be explained by the Greek domestic VoC characteristics because unions from

countries with other VoC characteristics may react the same way.

What Greek domestic VoC characteristics do shape and explain, however, is the

outcome of the economic adjustment programme. The development of Greece´s political

economy over the last thirty years led to a skewed representation and politicization of trade

unions intertwined with clientelistic practices. The trade unions tend to oppose liberalising

measures fearing to lose their privileges and their protection from the state. The state, the

political parties in fact, depend on the unions to get votes. Furthermore, as the Greek labour

market and the welfare system are dual and institutional complementarities to alleviate and

counterbalance are absent, trade unions fear that liberal measures will not have the expected

growth-enhancing effect. The opposite is expected; the liberal measures are feared by the

unions to push Greece further in an economic recession, which actually happened.

Historically the Greek people, especially the protected core, are not used to market

pressures and market led adjustment. Demonstrations, protests and riots have been paramount

the last two years. This has also been noticeable in Greek politics. Electoral opposition has

grown, new anti-memorandum parties were established and the major victory of the leftist

party Syriza broke for the first time in thirty years the two party system. These developments

show the anti-memorandum sentiment of the Greek people but also the political turbulence

which definitely has affected the proper implementation of the adjustment programme.

Moreover, the implementation has also been impeded by technical weaknesses; Greece has a

weak state apparatus with a low level of reform capacity. Worse market conditions further

hindered reform measures such as privatization.

In sum, the economic adjustment process has been impeded by Greek agents who stick

to path continuity as long as the costs of change are higher than the benefits and by structures

which pose technical problems. As the newly elected government is committed to continue

~ 60 ~

with the economic adjustment programme, developments are still going on and outcomes will

heavily depend on the domestic forces of path continuity and change.

~ 61 ~

§ 4. Case study: Ireland

In this chapter we will examine, in the same as the Greek case, that of Ireland. First, we will

look at how the implementation of the economic adjustment programme was assessed by the

troika. Second, we will see what the reactions of the Irish trade unions were and how these

and other VoC characteristics played a role in the adjustment process. Finally, we will draw

conclusions by comparing the Irish case to the Greek one.

4.1 The economic adjustment process in Ireland: commitment to do

´whatever it takes´

On November 28th

2010, the Irish authorities agreed with the European Commission, the IMF

and the ECB to an 85 billion euro financial assistance programme. It included loans not only

from the EU and the IMF, but also bilateral loans for the UK, Sweden and Denmark and an

own Irish contribution through the Treasury cash buffer and the investments of the National

Pension Reserve Fund. Prior to the call for financial assistance, Ireland had tried to restore

public finances. Despite the implementation of five fiscal consolidation packages since mid-

2008, general government budget deficit and debt were increasing. The troika programme had

to tackle these problems. As described in the third chapter, “the funding from the programme

partners is conditional on speedy action to clean up Ireland´s financial sector, to put the public

finances on a sustainable path and to implement a structural reform package” (EC 2011c: 5).

The banking sector had to become smaller and the banks had to get recapitalized and

deleveraged. Regulation and supervision of the financial sector had to be reformed.

Expenditure, especially in the public sector, had to be reduced and the labour market had to be

reformed in order to enhance competitiveness and growth.

According to the joint EC/ECB/IMF mission (EC 2011d) to Dublin that took place in

July 2011, the programme was well on track and important progress was made in the areas of

fiscal consolidation, strengthening of the domestic financial sector and growth-enhancing

structural reforms. The government deficit for 2011 was projected to be well below the 10.6%

of GDP programme ceiling. The recapitalization of the domestic banks was completed by the

end of July deadline. Progress was made towards the agreed deleveraging targets and two

~ 62 ~

planned mergers (Allied Irish Banks with EBS Building Society and Anglo Irish Bank with

INBS) were completed, while bank boards were renewed. Concerning structural reforms, the

Irish government was working with the social partners to reform the framework of sectoral

wage agreements. The government also passed legislation increasing the pension age from 65

to 68 by 2028 and there was progress towards liberalizing sheltered sectors such as the legal,

medical and pharmacy profession. Irish exports were doing quite well, whereas domestic

demand remained subdued. The troika stated that the determination of the Irish government to

implement the programme enabled a noticeable reduction of yields on Irish sovereign bonds

(from 14% in July to 9% in September, see figure 14).

In the autumn of 2011, the troika mission stated that Ireland continued to perform well

under the programme. Growth exceeded expectations in the first half of 2011 (actually, GDP

growth returned after years of contraction, see figure 18) and exports were still strong. Fiscal

consolidation remained in line with the programme. In the financial sector, progress was made

in strengthening the supervision of credit institutions and banks´ sales of non-core assets were

broadly on track, despite the generally weakened market sentiment in the Euro Zone. In the

field of structural reforms, programmes were prepared to invest in training of unemployed

people. Work continued towards the end of year commitment to identify state assets suitable

for privatization. In short, the programme was still well on track and the troika stated that

“strong programme implementation (…), has led to a sharp improvement in market perception

of Ireland´s riskiness since the last review” (EC 2011e:3). The only challenges that remained

important for Ireland were the worsened macro outlook on a global scale, the developments in

the euro area debt crisis and the higher than anticipated domestic unemployment.

The next mission of the troika, that took place in January 2012, stated that “Against an

increasingly challenging background, the Irish authorities continue to rigorously implement

their adjustment programme (…)” (EC 2011f:3). The export sector was still strong (see figure

19), thus contributing to GDP growth. Fiscal consolidation was well below the programme

ceiling and for the 2012 budget the Irish government was committed to do ´whatever it takes´

to achieve a deficit reduction. In the financial sector everything proceeded in line with the

programme and bank deleveraging even exceeded the programme´s targets. Reform of

sectoral wage agreements made progress by introducing legislation which aims at making

wage-setting more responsive to economic conditions. A draft document was shared with the

contours of the privatization strategy with the aim of reducing rising public debt (see figure

20), increasing overall efficiency and funding some job-creating investments. In sum, we see

~ 63 ~

that implementation of the programme remained strong and that some further liberalizing

structural reforms were under way.

The assessment of the troika during its last mission in April 2012 (EC 2012) continued

to be positive. The implementation was on track and market confidence had improved—bond

spreads had stabilized. The government launched additional plans (Pathways to Work

Strategy, Action Plan for Jobs) to tackle the challenge of unemployment and enhance the

economy´s competitiveness and flexibility. Furthermore, the troika argued that efforts to

strengthen the quality of bank assets intensified through strategies for dealing with mortgage

and SME loan arrears.

We see that the Irish authorities continued and continue to abide to the adjustment

programme with determination and commitment. The result of the economic adjustment

programme has been that the economy returned to growth and the deficit again became a

surplus (see figure 21). Exports were still doing well. Nevertheless, the debt burden was

rising. Challenges and risks that have to be taken into account are the low domestic demand

and high unemployment (see figure 22) as well as external developments in the global

economy and the European sovereign debt crisis.

4.2 VoC-configurations and their effects

4.2.1 ICTU and IBEC

The Irish Congress of Trade Unions (ICTU) is the largest civil society organization,

representing and campaigning on behalf of approximately 800000 workers in the public and

private sector. How did the ICTU respond to the troika programme and the measures taken by

the Irish government?

As we expected, reactions of the ICTU towards the troika programme were (as in the

Greek case) negative. Failing of financial regulation is seen as one of the reasons of the Irish

problems and not the social partnership model. “The Congress described attempts to blame

social partnership for the economic crisis as a facile exercise in scapegoating designed to

obscure the true cause of the collapse: banks, builders and toxic Government policy” (ICTU

2011b). Therefore, austerity measures like wage and pension cuts are considered to be unfair

and not part of a solution. The measures are “penalizing the poorest and lowest paid, for the

~ 64 ~

reckless behaviour of others” (ICTU 2010c). The economic advisor of the ICTU, Mr. Paul

Sweeney, argues that the government has a skewed sense of priorities, by choosing for wage

cuts and not for jobs (ICTU 2010a). The government is giving taxpayers´ money to the banks,

thereby putting the interests of bankers over those of citizens. The ICTU accuses the

government of “taking measures only to appease the financial markets” (ICTU 2010b). The

ICTU believes such austerity measures, including previous ones before the troika programme

was agreed, do not work. Rather, they lead to a higher unemployment rate and a higher

deficit. Exports may be growing, but domestic demand and retail sales are declining and

businesses are closing. As Sweeney said: “The austerity programme is crippling the domestic

economy. It is choking off demand, closing businesses and costing us jobs. Even the most

ideological of zealots must now concede that the programme is self-defeating as it is killing

that which it purports to try and save” (ICTU 2011d). In short, the ICTU argues that the

austerity measures are undermining the chance of growth and recovery and they blame the

government for its policies of deregulation and liberalization as well as the bankers and

builders for their reckless behaviour.

Concerning privatization of state-owned assets, the ICTU thinks that this will only

exacerbate the crisis. The General Secretary of the ICTU, Mr. Begg, warned that a “clearance

sale of state assets to pay off bank debt would mean surrendering our capacity to restart the

economy”. He further stated that “We need to start seeing state companies as potential agents

of recovery” (ICTU 2011a).

While the ICTU acknowledges that domestic policy failures played a role in the Irish

crisis, they believe that the EU and the ECB also bear responsibility. Mr. Begg stated that:

“Economic and Monetary Union was based on the idea of an optimal currency area. Monetary

policy dominated and the ECB operated an interest rate policy that suited France and

Germany but was pro-cyclical for Ireland and unsuitable. Moreover, deregulation of financial

markets combined with low interest rates was irresistible to the Irish banks and at least

facilitated the orgy of lending” (ICTU 2011c). Thus, according to the ICTU, the policies of

the EU and the ECB facilitated borrowing and lending and operated in a way that was not

suitable for Ireland. Mr. Begg furthermore stated that: “(..) the European Social Model at the

heart of the European project is being ´torn asunder´ by the same neoliberals whose

deregulation of Europe’s financial system has led to the current crisis”. Mr. Begg also

contrasted the disastrous impact on peoples' lives and livelihoods with the fact that the

European financial system that gave rise to the crisis remains entirely unreformed. He

~ 65 ~

condemned the attempt by the bailout troika to make Ireland into an economic laboratory in

which they can pursue the neoliberal experiment. He said it was an experiment driven entirely

by ideology. The ICTU thus blames not only the Irish government policies of the last years

but also the policies on a European level.

What has to be done according to the ICTU to resolve the Irish problems? Austerity

has to stop in order to achieve growth in the now subdued domestic demand. Measures have

to be taken to create jobs and invest in training and re-developing skills in order to tackle

unemployment. The terms of the deal with the troika have to be revised; otherwise, a

disorganized default will be the consequence. As the Irish crisis is seen as a manifestation of a

EU wide crisis, the ICTU proposes fair burden sharing in the EU, creating a transfer union

and a restructured democratically accountable ECB. Eurobonds and coordinated investment

strategies will contribute to more solidarity and stability in Europe as a whole. The ICTU

concludes that the crisis can also be seen as a chance of shifting the balance in favour of the

working people.

Whereas the ICTU opposes wage cuts and austerity, the Irish Business and Employers

Confederation (IBEC) argues that labour cost reductions are the only way to restore

competitiveness. A reduction in minimum wage is needed to support job creation. According

to the IBEC, growth on jobs is the most important part of a solution of the crisis and they

think this can be achieved by pay restraints. They see a total overhaul of regulated wage rules

as necessary because wage rules put business in jeopardy. Ireland must thus focus on reducing

costs and improving competitiveness, hereby creating more jobs and restoring public finances.

As for privatization of state-owned assets, the IBEC is not against that, but warns that the

state must be cautious to sell assets beneath market levels.

Therefore, the IBEC is in favour of the troika programme which entails austerity

measures and reforms in the labour market. As Director General Danny McCoy states: “The

agreement provides much-needed certainty” (IBEC 2010). Deviation from the current

economic targets of the programme is thus not desirable, as it will be punished by higher

interest rates. The IBEC argues that Ireland´s place is in the Euro-Zone; the single currency is

vital to future economic prosperity. In contrast to the ICTU, the IBEC does not blame the EU

for wrong policies contributing to the crisis. On the other hand, both the IBEC and the ICTU

support a European approach and solution to the crisis.

~ 66 ~

Despite the bad economic climate in Ireland, Irish businesses are doing quite well

according to the IBEC. They have shown flexibility and resilience and they are well

diversified and positioned to drive recovery. As senior economist Reetta Suopera says: “Irish

industry has shown itself to be exceptionally flexible and companies have been able to cut

costs and improve productivity in response to the crisis” (IBEC 2011a). Furthermore, the

export sector is doing well and Ireland remains attractive for FDI. “Ireland has a number of

high value sectors which are relatively immune to normal business cycle trends and these are

helping to underpin our continued healthy export performance” (IBEC 2011c).

Contrasting Greece´s debt problem to that of Ireland IBEC Director General Danny

McCoy said: “The Greek solution26

was one for an insolvent state. Ireland does not fall into

this category. The restructuring of Greek debt will come at a painful cost for its people and

business community. It means a significant further loss of sovereignty, major additional

damage to its international reputation and a constraint on its ability to attract future

investment. Ireland must not go down this road. Ireland's economy has already started its

recovery and has the potential to grow at about twice the European average. Ireland can

outgrow its debt burden” (IBEC 2011b).

In sum, we see that whereas the ICTU is against the troika programme and its entailed

austerity measures, the IBEC is mainly in favour. As argued in the previous chapter, the mere

fact that trade unions oppose or support the programme cannot be explained by differing VoC

characteristics. Nevertheless, VoC characteristics are indicated in the unions´ discourse. The

ICTU points to the failing of financial regulation and to the symbiotic, clientelistic

relationship between the state, banks and developers. As the ICTU does not have these

clientelistic relations with other actors, it has less power to affect the implementation of the

measures. The IBEC points to the high level of competitiveness and resilience of Irish

businesses which so far cope well with the bad economic conditions and the adjustment

programme.

26 The term ´Greek solution´ is meant to refer to the private sector involvement (PSI deal) that was part of the

debt restructuring of Greece.

~ 67 ~

4.2.2. Political dynamics

Looking at the political developments in Ireland, we can state that these have not been as

turbulent as in Greece. General elections were held on February 25th

2011, a few months after

the agreement on a loan package with the troika was signed. The governing coalition of

Fianna Fáil and the Green Party was criticized for accepting the deal with the troika and for

endangering Ireland´s sovereignty. The parties in the opposition, Fine Gael and the Labour

Party, called for elections in order to seek political certainty. The elections resulted in huge

losses for Fianna Fáil, the republican nationalist party which had been in power since 1997

and had maintained clientelistic relations with the banks and construction corporations. Due to

its acceptance of the troika programme it was punished by the Irish electorate. The Christian

democratic, economically liberal party Fine Gael won the elections, becoming for the first

time in Irish history the largest party and formed a coalition together with the centre-left

Labour Party. Since then there has been political stability and determination, as we read in the

reports of the EC, to commit to the adjustment programme. Irish politics are characterized by

legitimate, coalition governments and consensual politics. Fianna Fáil, the party which was

seen as carrying the responsibility for the Irish problems, has lost its place in government and

the victory of Fine Gael invigorates the liberal, pro-European choice of the Irish people. The

referendum vote in favour of the European Union´s new fiscal treaty on May 31st 2012 is

another example of the Irish people´s pro-European preference. Furthermore, social unrest has

been quite limited in Ireland. The Irish people seem to accept market led pressures and

adjustments.

4.3 Conclusion

Having examined the relevant Irish documents and the economic figures we can state that, as

we expected, the Irish economy is coping well with the market-led adjustment programme. It

continues on the path of a liberal market economy. The troika has been quite positive about

Ireland´s performance and about the ´rigorous´ implementation of the measures agreed in the

adjustment programme. Ireland has managed to return to growth and a surplus, although

levels of sovereign debt and unemployment remain high.

This is explained on the one hand by the fact that the Irish economy was from the

outset performing well and on the other hand by its domestic VoC characteristics. The Irish

~ 68 ~

economy turned its focus in the 1990s to export-led growth and competitiveness, while social

policy was subdued to economic policy. Thus Irish labour and business were more used to

market pressures. This familiarity with market pressures also came with Ireland's legacy of

liberal British institutions.

Looking at the reaction of trade unions, we see that the ICTU opposed the troika

programme, whereas the IBEC was in favour of it. Nevertheless, as explained previously, the

reaction of trade unions cannot be explained by VoC characteristics. Their discourse gives us

information about their visions on causes and solutions of the crisis. The ICTU tells us for

instance about the Irish clientelistic relations which are noticeable between the state, banks

and developers; an element that contributed to the dire situation of Irish banks.

What VoC characteristics can explain is the outcome and process of the adjustment

programme. The fact that the Irish economy and society are used to liberal market pressures

and that the country has a social partnership model that is in general more consensual and

conducive to growth and competitiveness strategies, explain us the societal acceptance—

electoral opposition and social unrest has been limited—and the good economic performance

until now. Furthermore, Irish politics, are as we saw, consensual—making coalition

governments. The elections were won by Fine Gael, the party with a pro-European outlook.

We see thus that domestic forces that oppose change and reform are not very strong in

Ireland. The domestic actors are more used to change and to liberal measures and do not stick

easily to path-continuity.

~ 69 ~

Comparisons and Conclusions

Comparisons between Greece and Ireland

Having examined the relevant Greek and Irish documents and the economic figures we can

state that, as we expected, the Irish economy is coping better with the market-led adjustment

programme than the Greek economy. Whereas Greece is in a deep recession with high levels

of debt, deficit and unemployment, Ireland has managed to return to growth and a surplus,

although levels of sovereign debt and unemployment remain high.

This is explained on the one hand by the fact that the Irish economy was from the

outset performing better than the Greek economy and on the other hand by the domestic VoC

characteristics of each state. Greece´s problems were from the outset greater than the Irish, as

they entailed structural weaknesses built up over time. Whereas the Greek economy was

characterized by a core of the labour and business sector protected by the state and not used to

market pressures, the Irish economy turned its focus in the 1990s to export-led growth and

competitiveness, while social policy was subdued to economic policy. Thus Irish labour and

business were more used to market pressures. This familiarity with market pressures also

came with Ireland's legacy of liberal British institutions.

Looking at the reaction of trade unions, we see that both the Greek and Irish unions

representing labour opposed the troika programme. The Greek trade union representing

business opposed in the end the programme as well—especially the austerity measures—

while the Irish union representing business was more in favour of the measures included in

the adjustment programme. The reaction of trade unions cannot be explained by VoC

characteristics as both unions representing labour oppose the programme. Their reactions are

quite reasonable and are not determined by the variety of capitalism per se. However, looking

closer at interest representation and behind the discourse of the unions, we see differences.

Interest representation in Greece is skewed towards the public sector and politicized. The

unions tend to overplay their ´narrow´ interests in order to maintain their privileged position

and their benefits. Liberalizing reforms will thus be impeded. Via their clientelistic relation

with politicians and the state apparatus, they are able to influence political decisions and thus

the adjustment programme. The Irish unions and social partnership model do not have this

influence and clientelistic relations with the state. In contrast to Greece, Irish clientelistic

~ 70 ~

relations are noticeable between the state, banks and developers; an element that contributed

to the dire situation of Irish banks. Furthermore, whereas coordination mechanisms in Greek

trade unions are weak and cannot provide policy alternatives, Ireland seems to have the best

of two worlds. Irish economy and society are used to liberal market pressures and the country

has a social partnership model that is in general more consensual and conducive to growth and

competitiveness strategies.

Political dynamics in both countries have further affected the implementation of the

adjustment programme. We saw that politics in Greece are more divided and less consensual

as coalition governments are not common practice. The lack of political consensus led to the

establishment of the national unity government of Lucas Papademos without democratic

elections. New, anti-troika programme parties were set up and the leftist party Syriza gained a

lot of votes. These developments indicate the rise in electoral opposition towards the

adjustment programme. In Ireland political parties are used to forming coalitions and are more

consensual. Elections took place just a few months after the deal with the troika was signed.

Fianna Fáil—the party held responsible for the Irish problems—lost the elections and the

liberal Fine Gael with a European outlook formed together with the Labour party a new

government. In Ireland there were no new, anti-programme parties established, as was the

case in Greece. Electoral opposition and social unrest has been limited, while demonstrations

and civilian movements in Greece have affected the proper implementation of adjustment

measures.

We see thus that it is mainly domestic VoC configurations as economic structure,

interest representation, political dynamics and social unrest that affect the way in which

Greece and Ireland cope with the economic adjustment programme. In contrast to liberal

Ireland, Greece, a mixed market and dual economy, copes worse with market-led adjustment

due to these domestic forces which oppose change and reforms and stick to path-continuity. In

Ireland, these forces are more used to market pressures and thus acceptance of market pain is

easier. Opposition to change is thus less fierce.

Conclusions

In order to find an answer on the main research question ‘How do we explain the responses

and outcomes of different domestic political economies to the external pressures of

~ 71 ~

international adjustment, in particular those involved in the debt workout of the Euro

sovereign debt crisis?’ we started our theoretical analysis with the OCA theory which shows

us what problems and policy dilemmas exist when deciding to form a monetary union. States

from both Northern and Southern Europe wanted to form and become members of EMU, as

monetary integration had important benefits, especially for the capital sector which could do

business without exchange rate risks. But EMU also entailed costs, which would become

evident if a financial crisis would hit the Euro-Zone and therefore dramatically hurt the

already economically weaker countries. Thus, although the states´ level of economic

development diverged and European leaders were aware of the costs of monetary integration,

member states did not set up a crisis management mechanism and did not agree on how the

burden of adjustment would be shared. The opposite was the case; a no-bail out clause was

included in the agreement.

Looking at the pre- and post EMU-accession phase, we saw that the conditions and

adjustment pressures for being an EMU member were not a ´hard´ form of external pressure.

Member states followed their own policies to fulfil the pre- and post-accession criteria. This is

of course not strange, but as a consequence states did not converge structurally as much as it

was assumed by setting common rules and a common macroeconomic policy. We stated that

EMU ignored in this way the fact that member countries adjust according to their own

domestic possibilities and that structural convergence will depend on Varieties of Capitalism-

type factors including path-dependency, domestic politics and the model of political economy.

Furthermore, instead of what is frequently thought, we stated that monetary integration

presented member states with greater macroeconomic flexibility to finance their current

account. These dynamics of capital mobility eventually led to the accumulation of

macroeconomic imbalances between surplus and deficit countries. We concluded that both

dynamics—VoC-factors and monetary integration, thus capital mobility—affected the way

member states developed economically in the pre-crisis phase.

Examining the pre-crisis development of our two case countries, Greece and Ireland,

we concluded that although VoC-type factors contributed to their structural weaknesses, it

was not these VoC-characteristics that directly caused the sovereign debt crisis. When the

problems in Greece and Ireland became evident, the European Union, and especially the more

powerful states like Germany, seemed to ignore the interdependence between member states

and announced initially that countries in trouble had to solve their own problems. As this was

an unexpected reaction, financial markets started to panic and sovereign bond yields rose

~ 72 ~

enormously. Greece and Ireland could not finance themselves any more on the financial

markets and called for financial assistance.

As both Greece and Ireland were faced with a market-led adjustment programme

attached to the loan package agreed with the troika, how do we expect them to respond and

adjust given the fact that they are different models of capitalism? It is at this point that

historical and VoC characteristics play a role. We concluded that although Greece and Ireland

share some historical developments and are thus comparable cases, they belong to different

varieties of capitalism. Greece is seen as a statist, mixed market economy, using both market

and non-market co-ordination mechanisms. Ireland is seen as a liberal market economy with

mainly market mechanisms of co-ordination but also with a social partnership structure to co-

ordinate economic and social policy. Greece has a dual economy which consists of employees

and employers enjoying benefits and protection from the state and of employees and

employers which do not enjoy benefits and protection. We stated that interest representation

in trade unions is skewed toward the public sector and politicized, while maintaining

clientelistic relations with the state. Furthermore, political dynamics are polarized and not

consensual. The Greek economy has not been as competitive as it could have been due to the

fact that small entrepreneurs—the largest part of Greek economy—are not represented and are

left out of the privileges of the state. Ireland has managed by its export-led growth strategy to

become competitive and to attract FDI. Businesses as well as society are more used to market

pressures and adjustment. Social partnership has been used as an instrument to enhance

growth strategies; thus social policy was subdued to economic policy. Trade unions do not

have a clientelistic relationship with the state and promote, in contrast to the Greek ones, not

´narrow´ but ´encompassing´ interests. Irish political culture is more consensual and united in

contrast to the Greek one.

Having examined the documents of the European Commission which report on the

findings of the troika missions, we concluded that Greece is coping worse with the adjustment

programme than Ireland based on their vastly different varieties of capitalism. The Greek

economy is in a deep recession while the Irish is ameliorating. The EC documents give

evidence of the fact that VoC characteristics such as ´vested interests (skewed representation)

and political instability´ affect the Greek adjustment process, whereas in the documents on

Ireland nothing like that is mentioned.

~ 73 ~

Having analysed the documents of Greek and Irish trade unions from the labour and

business sector, we concluded that the variety of capitalism does not explain the fact that

unions are pro- or against the adjustment programme, but it does explain the developments

and outcomes of the adjustment process. We saw how factors such as interest representation,

political dynamics and social unrest have affected the implementation of the programme in

Greece and have acted as forces opposing reforms, sticking to path continuity. In Ireland,

these forces are less fierce and have less power. Society and business are more used to

market-led adjustment and therefore accept the measures easier. Social unrest has thus been

limited. Political dynamics have also been more stable than in Greece.

Trying to generalise the findings, we can state that VoC characteristics definitely play

a role in adjustment processes imposed by external pressures. These characteristics mediate in

the adjustment process and influence the ´Putnamian´ two-level game that takes place

between international and national politics. Furthermore, the same market-led external

adjustment programme can have different outcomes on the national level. Therefore, policy

officers should take these characteristics more into account when proposing adjustment

measures but also in order to better understand certain outcomes.

To better explain the outcomes of adjustment processes, more research into VoC

characteristics is required. In depth research into different economic sectors such as the labour

or business sector or research into welfare policy will enrich the VoC literature as well as the

field of political economy. Moreover, interviews with, for instance, the chairmen of trade

unions or high state officials will lead to a better and completer understanding of VoC factors

such as interest and power structures. As VoC´s are not static and may change over time, they

remain an interesting and endless subject of research.

~ 74 ~

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~ 81 ~

Appendix: Figures 1-22

Figure 1. Model for understanding and explaining responses and outcomes to international adjustment

pressure.

Figure 2. Greece: GDP per capita, 1981-2012

Independent variable = international

adjustment pressure

•´hard´ vs ´soft´ measures

•content and scope of measures/ degree of misfit

Intervening variable = domestic

configurations

•models of capitalism (VoC), state-capital-labour relations, power-interest structures

•political culture, ideology

•legitimacy, discourse

•reform capacity

Dependent variable = response and outcomes

• (Dual) Convergence or divergence?

•Reform

•Defection

•Reinterpretation

~ 82 ~

Figure 3. Ireland: GDP per capita, 1981-2012

Figure 4. Greece: government debt to GDP, 1981-2012

Figure 5. Greece: current account to GDP, 1981-2012

~ 83 ~

Figure 6. Real GDP growth rate. Source: Eurostat

Figure 7. Greece: exports in million euro´s, 2001-2012

~ 84 ~

Figure 8. Growing imbalances in the Euro-Zone.

Source: http://www.tnr.com/article/economy/95989/eurozone-crisis-debt-dont-blame-greece, accessed

on June 26th 2012

Figure 9. Greece: private capital flows; total (BoP; US dollar), 1981-2012, Source:

www.tradingeconomics.com

~ 85 ~

Figure 10. Ireland: government debt to GDP, 1989-2012

Figure 11. Ireland: current account to GDP, 1981-2012

Figure 12. Irish export in million euro´s, 1981-2012

~ 86 ~

Figure 13. Greece: implied yield on 10 Year government bonds, 2001-2012

Figure 14. Ireland: implied yield on 10 Year government bonds, 2010-2012

Figure 15. Greece: GDP annual growth rate, 2010-2012

~ 87 ~

Figure 16. Greece: government debt to GDP, 2008-2012

Figure 17. Greece: unemployment rate, 2007-2012

Figure 18. Ireland: GDP annual growth rate, 2010-2012

~ 88 ~

Figure 19. Ireland: exports, 2008-2012

Figure 20. Ireland: government debt to GDP, 2008-2012

Figure 21. Ireland: current account to GDP, 2008-2012

~ 89 ~

Figure 22. Ireland: unemployment rate, 2010-2012