The Fake Reflationary Alternative: The Institutional Roots of Austerity in European Post-Crises Macroeconomic Adjustment

The Euro crisis is not just a sovereign debt crisis, but also a crisis of macroeconomic imbalances. The Eurozone countries can react internally by either reflation in the Northern economies or austerity in the Southern ones. That they choose the latter over the former is usually explained by the constraints of the common currency regime, which is habitually contrasted with the supposedly more flexible exchange rate coordination prior to the introduction of the Euro. Yet my research finds that when under the European Monetary System – the monetary union’s predecessor regime – similar problems arose, policy-makers chose similar solutions. Although the member countries had the opportunity to use de- and revaluations to reestablish competitiveness, the eventual solutions usually involved austerity, fiscal consolidation, and non-accommodating monetary policy in the deficit countries. Hence, there is a strong similarity to the policy outcomes that can be observed currently in the Southern European countries. The paper takes a historical institutionalist perspective. It argues that the dominance of austerity as prevailing policy solution can be explained by persistent constraints on the available policy alternatives resulting from the institutional heterogeneity of the European political economies. This heterogeneity is connected to the configuration of their wage setting regimes, central bank independence, and fiscal policy regimes and was able to endure through the change from a fixed exchange rate regime to a monetary union. If austerity is to be challenged, reforms in such areas – not only with regard to exchange rates – need to be envisaged.