Voters or the Market? The Politics of Credibility Since the Great Recession
The 2008 global financial and fiscal crisis occurred despite a wide-spread consensus that the rise of technocratic governance and the de-politicization of economic policy improved government credibility and, hence, economic stability. Most Western countries checked all the boxes regarding their economic governance. They had independent central banks- and most of them the most independent central bank in the world, the European Central Bank- to ensure voters and investors that monetary policy would not be used for short-term political reasons but instead only for monetary stability. They also had privatised their banking system so that it would not be subject to political interference and harmful political appointments. But despite these efforts to generate so-called ‘optimal’ policies, governments were not able to prevent economic and social destabilization.
The failure to ensure economic stability despite a serious reduction in political accountability in economic policy raised discontent among voters. The removal of economic policymaking from democratic politics to gain economic credibility seems poorly justified if technocratic governance does not deliver on its promises in terms of economic stability. For example, for the Financial Times, central banks face “a crisis of confidence” as their monetary models fail to address problems in the current monetary and financial environment. More broadly, the question to what extent governments can gain economic credibility without alienating voters is central for the legitimacy of the political-economic order underlying modern democracies, and therefore for the theme of this year’s APSA conference “Democracy and Its Discontents”.
To address these challenges, this panel revisits the debates on the tension between political accountability and economic credibility. We build on previous research that has questioned the sufficiency of formal delegation to resolving long-term problems of policy commitment. The Great Recession confirms this view and has put pressure on policymakers and scholars to re-consider their models of economic governance. We investigate the limits of fiscal and monetary delegation, e.g. by highlighting to what extent political pressures that the purely economic models ignore can undermine the original, stabilizing intentions of a policy.
The papers in this panel examine the politics of economic credibility utilizing new, unique data. First, they show theoretically and empirically that formal delegation does not really de-politicize policy. Markgraf shows that the privatization of banks does not preclude political interference in the form of political appointments. Second, they find that policies that were traditionally associated with low economic stability can in fact have a stabilizing effect in critical economic circumstance. Ferrara, Peterson and Sattler find that the expansionary shift of the European Central Bank was crucial to enhance the credibility of contractionary fiscal policies because it reduces political opposition against domestic stabilization. Third, they show that policy delegation benefits markets over voters, particularly since the 2008 Great Recession. Alexiadou finds that delegation of fiscal policy to independent experts, in the form of the appointments of technocrat finance ministers, reduces the cost of borrowing during financial crises, independently of the political and societal situation in indebted countries. Similarly, Gray shows that since the Great Recession, investors are less likely to reward stable, democratic systems than they did prior to the recession. The findings of the four papers have important implications for economic governance and on the relationship between markets and voters in the post-2008 democracies.
Despina Alexiadou, University of Strathclyde (Chair)