Fiscal Policy in Financialized Times: Investor Loyalty, Financialization and the Varieties of Capitalism
Paper co-authored with Daniela Gabor (Bristol Business School) and Cornel Ban (Boston University)
Abstract: This paper argues that scholarship on the varieties of capitalism could provide a more complete understanding of fiscal policy convergence in the Eurozone after 2010 if it better examined the interdependencies between banks and sovereigns. According to recent research, the interaction between coordinated and liberal capitalisms, and their distinctive macroeconomic policy preferences, generates global imbalances and instability. Rebalancing can only occur if the incentives governing national polities change dramatically.
In Europe’s case, sudden stops in capital inflows from coordinated capitalisms triggered an asymmetric response, forcing deficit (liberal and mixed) economies to address such imbalances. As wage-setting institutions could not restore real exchange rate competitiveness a la Germany, governments were compelled to adopt the conservative macroeconomics of the coordinated economies in an institutional setting ill adapted to such policies. In contrast, our account highlights the constraints that financial actors in sovereign bond markets place on the conduct of fiscal policy. Drawing on recent contributions in the literature on financialization, we introduce the concept of the ‘collateral motive’ – investors’ demand for government bonds to meet their funding needs – and show how this becomes a pivotal mechanism for fiscal consolidation as the singular response to the ongoing Eurozone crisis. Without analyzing the process through which the collateral motive ignited a run on peripheral sovereign bond markets, which in turn and compelled states to stabilize these markets through austerity, a complete account of the ongoing Eurozone crisis cannot be provided.