Ideas, Institutions and Policy-Making in Hard Times: The Case of Southern European Labour Reforms

The long-running debate on institutional change in political economy has tended to emphasize continuity, with incrementalism as the key form of endogenous change, and exogenous shocks the main sources of radical change. The current crisis provides a major challenge to this approach, as the biggest exogenous shocks of the post-war era, far from leading to any inversion of the existing policy trend, have if anything reinforced and accelerated the pattern of liberalizing reforms and welfare state retrenchment. This paper explores the theoretical limitations of the literature on incrementalism through a comparative case study of labour market reforms in Spain and Italy. It argues that by neglecting the political and economic ideas that underpin institutional arrangements, the historical institutionalism literature misses the real sources of institutional continuity and change. The crisis may have starkly revealed the failure of existing policies, but it has also been interpreted through the paradigm that underpins European Monetary Union, whilst the forces of resistance to further liberalization have largely failed to develop an alternative narrative. This suggests that institutional inertia should be seen as a sign of the nature of ideational power in the political economy, rather than as an endogenous feature of institutions.