Growth Models, Interest Group Formation and Economic Adjustment in the Eurozone Crisis

This paper addresses the question of how interest groups shaped economic adjustment in the course of the eurozone crisis. While the crisis created a unique window of opportunity for political reforms, adjustment costs were not shared equally within these societies. I argue that this is the result of long-term economic growth models that created influential vested interests with firm preferences regarding economic reforms. Whereas the role of such “intense policy demanders” features prominent in the field of American Political Development, they are neglected as an explanatory factor in most analyses of policy-making in Europe as compared to traditional partisan politics. Bridging a theoretical gap, this paper identifies causal mechanisms between long-term growth models and short-term policy-making. It also sheds light on the role of the state in creating and maintaining these growth models.

Drawing on more than 40 interviews with government officials as well as representatives from interest groups and troika institutions, I conduct comparative case studies of labour and product market reforms in Ireland and Portugal. I find that Portugal’s adjustment strategy was responsive to organised interests representing large companies from sheltered sectors and especially the energy sector. In contrast, Ireland’s government was more willing to cut government spending but spared international corporations and exporting industries. I argue that this is because Portugal’s economic growth model is more inward-looking and demand-led than Ireland’s, which is relying on exports and the attraction of foreign direct investments.