This seminar is part of the "Europe and the Global Economy" series.

With the creation of the euro, the European Union embarked on a grand experiment. From the beginning, member countries had widely different degrees of budget, or fiscal, transparency. Early warnings about the potential of moral hazard in public finances as a consequence of asymmetric information about fiscal decisions were largely disregarded. In this paper, we analyze the political origins of differences in adherence to the fiscal framework of the euro. We identify in detail how manipulation of subcomponents of Stock-Flow Adjustments in national accounts is used to produce electoral cycles under the radar of the budget surveillance system of the EU. We show how these domestic incentives to use fiscal policy for electoral purposes and respond to fiscal rules at the supranational level interacted with limited budget transparency at the level of national fiscal authorities to produce a systematic undermining of the Economic and Monetary Union through employment of fiscal gimmicks or creative accounting.

David Dreyer Lassen (PhD 2002, Copenhagen) is Professor of Economics at the University of Copenhagen. His research is in empirical political economy and public economics, and includes work on fiscal transparency, political budget cycles, the politics of budgeting, and quasi-experiments in political behavior and political attitudes. His publications includes articles in American Economic Journal-Economic Policy, American Journal of Political Science, American Political Science Review, Journal of Public Economics and the Journal of Law, Economics and Organization. He has been a visiting scholar at IQSS, Harvard University, and currently holds a Starting Grant from the European Research Council.

This seminar is part of the "Europe and the Global Economy" series.

How do political institutions shape the costs of responding to financial crises? Previous research contends that policy-makers in democracies choose policies less costly to taxpayers than politicians in autocracies. In this research note we re-evaluate Keefer's (2007) contribution to this body of research using an updated theoretical model as well as updated fiscal costs data, which is his dependent variable. We argue that political institutions shapes when politicians spend, rather than how much they spend, in response to financial crises.  In the updated theoretical model we include the possibility that politicians can shift crisis response costs into the future by using policies that create contingent liabilities. Politicians facing removal pressures--such as elections--have incentives to create contingent, rather than immediately realized liabilities. Empirically we illustrate this dynamic by first updating Keefer (2007) using new data on the fiscal costs of financial crises. We further substantiate our argument with Eurostat's detailed yearly, cross-country comparable data from the late 2000s financial crisis to show that politicians in democracies tend to increase contingent liabilities,  while also decreasing realized liabilities, before elections.

This seminar is part of the "Europe and the Global Economy" series.

The study of the political consequences of unemployment has a long history in political science. Regarding the electoral impact of unemployment, studies have focused both on its impact on political alienation, as well as its partisan effects. The financial crisis, which unfolded following the collapse of Lehman Brothers and rapidly spread to Europe, provides us with the opportunity to make several methodological improvements over the previous literature. In our empirical analysis, we use fine-grained registry-based data on the economic impact of the crisis and how it varied across Sweden’s more than 5000 electoral districts. We combine this with district-level data on vote-shares for all major parties in parliamentary elections before and after the crisis.

The economic impact varied a great deal across Sweden, mainly affecting industrial centers. Because the impact was so diverse across electoral districts, we are able to estimate the electoral impact of unemployment more efficiently than most previous studies. Moreover, the sources of the crisis were not domestic. Because the crisis was an exogenous shock to the Swedish economy, the selection bias that is usually inherent in estimating the electoral impact of unemployment is mitigated. According to the results, the electoral impact of crisis-induced unemployment was large, leading to a marked fall in the vote share of the established left parties and a corresponding increase in that of the main radical right party.

Kåre Vernby is Associate Professor at the Department of Government, Uppsala University, where he teaches courses in comparative politics and methods.  His research interests are in political economy and political behavior and his papers have been published or are forthcoming in academic journals such as American Journal of Political Science, Electoral Studies, European Union Politics and Politics & Society as well as several edited volumes. 

This seminar is part of the "Europe and the Global Economy" series.

How do geopolitical forces influence international capital markets? In particular, do market actors condition their responses to crisis lending initiatives on the political incentives of major lenders? In this paper, Randall Stone and co-writers Terrence Chapman, Songying Fang and Xin Li  analyze a formal model which demonstrates that the effect of crisis lending announcements on international investment flows is conditional on how market actors interpret the political and economic motivations behind lending decisions on the part of the lender and borrower. If investors believe the decision to accept crisis lending is a sign of economic weakness and lending decisions are influenced by the political interests of the major donor countries, then crisis lending may not reduce borrowing costs or quell fears of international investors. On the other hand, if market actors believe that crisis lending programs, and attendant austerity conditions, will significantly reduce the risk of a financial crisis, they may respond with increased private investment, creating a "catalytic effect."  In this model, the political biases of key lending countries can affect the inferences market actors draw, because some sovereign lenders have strategic interests in ensuring that certain borrowing countries do not collapse under the strain of economic crisis. Although this theory applies to multiple types of crisis lending, it helps explain discrepant empirical findings about market reactions to IMF programs. The implications of their theory is tested by examining how sovereign bond yields are affected by IMF program announcements, loan size, the scope of conditions attached to loans, and measures of the geopolitical interests of the United States, a key IMF principal.

Randall Stone (Ph.D. 1993, Harvard) is Professor of Political Science at the University of Rochester.  His research is in international political economy and combines formal theory, quantitative methods, and qualitative fieldwork.  He is the author of Controlling Institutions:  International Organizations and the Global Economy (Cambridge University Press 2011), Lending Credibility:  The International Monetary Fund and the Post-Communist Transition (Princeton University Press, 2002) and Satellites and Commissars:  Strategy and Conflict in the Politics of Soviet-Bloc Trade  (Princeton University Press, 1996), as well as articles in the American Political Science Review, International Organization, International Studies Quarterly, the Journal of Conflict Resolution, Review of International Organizations, and Global Environmental Politics.  He has been awarded grants by the NSF, SSRC, NCEEER, and IREX, was the last recipient of the Soviet Peace Prize (1991), and has been a Senior Fulbright Scholar visiting the Stiftung Wissenschaft und Politik in Berlin.  He speaks German and Russian fluently and Polish moderately well, and reads all Slavic languages. 

This seminar is part of the "Europe and the Global Economy" series.

The Trans-Atlantic Trade and Investment Partnership (TTIP), if successful, will eliminate trade barriers between the US and the EU, both of which already have free trade agreements with many other countries, including several that are in FTAs with both (Canada, Korea, Mexico to name just a few).  Is TTIP therefore achieving true free trade with this larger group?  No. Restrictive rules of origin apply, and these can potentially interfere with trade and reduce welfare even when compared to a world without any of these FTAs.

Alan V. Deardorff is John W. Sweetland Professor of International Economics and Professor of Economics and Public Policy, University of Michigan.  With a Ph.D. in economics from Cornell University, he has been on the faculty at the University of Michigan since 1970, where he has served as Chair of Economics and now Associate Dean of the Gerald R. Ford School of Public Policy.  His research has included both contributions to the theory of international trade and, with Robert M. Stern, development of the Michigan Model of World Production of Trade, used for analysis of multi-country, multi-sector changes in trade policy.

The process of joining an IO may cause liberalization before membership. Thus studies that only evaluate compliance after membership underestimate the effects. Conditional membership may be one of the most important sources of leverage for IOs.  The rule-makers establish rules that don't go far beyond what they would otherwise do, but rule-takers often must accept a broad range of policy reforms they would not otherwise consider. The influence of accession conditions has been studied in the context of EU and NATO, where sizeable benefits and formal conditions motivate major concessions by applicants. This paper proposes to examine a much less powerful organization, the OECD. Here the qualifications for membership are ambiguous and leave open room for informal pressure for a range of economic reforms. The politics of joining organizations touch closely on concerns about status and legitimacy as well as functional demands for cooperation in complex issue areas. I will examine how OECD membership has motivated specific reforms in regulatory policies and trade in a comparison of the East European transition economies accession with that of Japan, Mexico, and Korea. Statistical analysis of patterns of when countries apply for membership will test for the role of economic and political conditions as well as the political relations among members.