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Greece, Ireland and the crisis:

Varieties of Capitalism explaining responses and outcomes of the


economic adjustment programme designed by the troika

Master thesis Political Science


Specialisation: International Relations
Name: Dafni Alverti
Student number: 0220310
Supervisor: Prof. G.R.D. Underhill
Reviewer: Assoc. Prof. K.U. Becker
University of Amsterdam
Date: July 6th 2012

Left photo: Athens. By Sotiris Dimopoulos


Right photo: Dublin. By Nico van Eeden

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Table of contents

Preface

Abstract

Introduction

1. Review of the Literature

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1.1 EMU: structural flaws


1.2 EMU pressures for convergence: pre- and post-accession
1.3 Domestic configurations: development of the VoC approach
1.4 Domestic configurations: responses and outcomes
1.5 Conclusion
2. Background chapter: Greece and Ireland as VoCs and the lead-up to the crisis
2.1 Greece as VoC
2.2 Ireland as VoC
2.3 Greece: the lead-up to the crisis
2.4 Ireland: the lead-up to the crisis
2.5 EUs unexpected reaction, financial assistance and the troika programme
2.6 Expectations
3. Case study: Greece

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22
25
29
31
32
32
36
39
42
44
47
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3.1 The economic adjustment programme: unprecedented in the scope of


national effort required
3.2 VoC configurations and their effects
3.2.1 GSEE, ADEDY and SEV: vested interests opposing change
and reform?
3.2.2 Political dynamics
3.3 Conclusion
4. Case study: Ireland

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53
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58
58
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4.1 The economic adjustment programme: commitment to do whatever it takes 61


4.2 VoC configurations and their effects
63
4.2.1 ICTU and IBEC
63
4.2.2 Political dynamics
67
4.3 Conclusion
67
Comparisons and Conclusions

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Bibliography

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Appendix: figures 1-22

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Preface

The European sovereign debt crisis, accompanied with unprecedented adjustment and
austerity measures, has had an enormous impact in countries such as Greece, Ireland and
Portugal. The crisis has been one of the most frequent subjects in European media in recent
years, spreading prejudices and provoking a dichotomy mainly between the people of
Northern and Southern Europe. Writing about differences between North and South Europe is
not something new; the Roman senator and historian Tacitus (56-117 AD) elaborated in his
work Germania on differences between the Roman and the Germanic people.
Due to my personal background and my interest in international political economy I
chose to delve more into the European debt crisis and examine the domestic configurations of
countries facing a sovereign debt crisis. In this way I hope to contribute to a better
understanding of the diversity between European nations.
At this point I would like to thank my professor G.R.D. Underhill for his inspiring
lectures, his inexhaustible positive energy and enthusiasm and all his comments and help by
supervising my thesis. Moreover, I would also like to thank my father for providing me with
nice meals (!) and two very good friends (they know who I mean) for lending an ear during
the last months and supporting me.

Haarlem, July 2012

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More than other variants of modernity, the European one


has been strung between the poles of clear-cut individuality
and solidarily-constructed collectivity.
Goran Therborn, European Modernity and Beyond, 1995

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Abstract

This thesis focuses on a subject that is of major importance in the current state of the
European sovereign debt crisis: the economic adjustment process of countries that have been
bailed out, in this case Greece and Ireland. The research is concentrated on explaining the
responses and outcomes of the adjustment programme in both countries on basis of their
Varieties of Capitalism characteristics. The analysis begins with the origins of European
monetary integration, tracing its underlying problems and unintended consequences. We see
that the economic development of the EMU member states in the pre-crisis phase was
affected by both international dynamics of capital mobility and domestic VoC configurations.
However, the outbreak of the sovereign debt crisis was caused by a policy failure on
European level and not by the VoC characteristics of the individual countries. It is after both
Greece and Ireland have been confronted with a market-led adjustment programme imposed
by the troika (EC, ECB and IMF) that their VoC characteristics directly affect their responses.
The underlying argument is that as Greece is seen as a statist, mixed market and dual
economy with skewed, politicized interest representation, not used to market pressures, it will
cope worse with the market-led adjustment programme than Ireland, which is seen as a
liberal, competitition-focused market economy, used to market pressures.

Key words: EMU, sovereign debt crisis, external pressure, adjustment programme, Varieties
of Capitalism, interest representation, political culture.

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Introduction

February the 12th, 2012. Athens. More than one hundred thousand people gathered in the
centre of Athens in front of the parliament to protest against the new austerity measures
dictated by the troika and voted on by the Greek government. Even the famous Greek
composer Mikis Theodorakis (who had protested in the past against the junta) protested on
Syntagma Square and said that They are getting ready to vote for the death of Greece. The
debate between the members of parliament about the second bailout package was
accompanied by demonstrations, riots and fires in the streets of Athens.
In Ireland, which is also following the troika program entailing austerity measures,
protests and demonstrations have been few and quite modest. Major public unrest has not
taken place until now. Are the Irish people reacting differently to these austerity measures?
What exactly are the differences in the political economic situation between Greece and
Ireland? It is interesting to examine these questions, especially if we take into account that
Greece has for years been called the black sheep of Europe due to bad economic
performance and Ireland was labelled the Celtic Tiger due to the economic miracle in the
1990s. The reality is now that the black sheep and the Celtic Tiger face the same imposed
troika programme.
How did these countries get to this point? In order to have a good understanding of the
reactions to the troika program in both Greece and Ireland, it is important to first look at the
roots of the crisis. What are the factors that contributed to the crisis? This question takes us to
the origins of the European Monetary Union (EMU) and the introduction of the Euro currency
in the member states, among them Greece and Ireland. By now it has become clear that the
EMU was not an island of stability as frequently assumed. Although monetary integration
provided all member states with benefits, it involved a series of trade-offs and had asymmetric
consequences for deficit and debtor countries. By the time of creation of the EMU, European
leaders did not set up a crisis management system for providing guidelines in case of a crisis
shock coming from outside or inside the EU. The EMU was thus incomplete and
institutionally weak. Politicians deliberately opted for a no bail-out approach to sovereign
finances. So when the external financial crisis (which flew over from the US but quickly
became in Europe a sovereign debt crisis) hit the vulnerable countries (not all the member

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countries shared the same economic strength and development) asymmetrically, Euro-Zone
leaders were unable to react quickly and adequately and failed to come up with a co-operative
solution. The crisis revealed the flaws in EMU governance as well as the domestic
weaknesses of the individual member countries.
The European Commission, the European Central Bank and the International
Monetary Fund (together called the troika) cooperated to develop a solution to the sovereign
debt crises in Greece and Ireland. The debt workout programmes that now have to be
implemented follow the conventional logic of the IMFs structural adjustment programs. This
means that the measures include orthodox liberalization, deregulation and privatization
measures. Austerity measures like cuts in pensions, salaries and social welfare spending are
also part of the programme. Structural adjustment programmes assume that economies adjust
in similar ways and one-size more or less fits all. But successful adjustment will more likely
depend on an understanding of the nature of the domestic political economy. As the domestic
structure of political economy differs in Greece and Ireland -Greece is seen as a
Mediterranean, statist market economy while Ireland is seen as a liberal market economy- it is
not surprising to expect that reactions to the troika program will differ as well. The
information we get from the media makes us believe that this is indeed the case. Protests and
strikes are the order of the day in Greece, while in Ireland public unrest is limited.

Research questions
Intuition is not enough to understand and to explain the potentially divergent reactions and
adjustments in Greece and Ireland. Research into relevant documents will give us a more
objective picture of what is happening in both countries. What exactly are the responses of
both countries to the troika program? How can we explain the similarity or difference in
reactions? To what extent are these countries able to reform their economies? These are all
questions that stay unanswered without systematic research and analysis. This thesis will
focus on these issues, guided by the following central research question:
How do we explain the responses and outcomes of different domestic political
economies to the external pressures of international adjustment, in particular those involved
in the debt workout of the Euro sovereign debt crisis?

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By responses I mean the reactions of relevant actors and interest groups in both countries.
By outcomes I mean the policies and reforms (the adjustment process) that are implemented
or will be implemented and the economic performance as an outcome of the external pressure
of international adjustment. The external pressure of international adjustment is in this case
the troika program, which entails structural adjustment- and austerity measures.
The central research question implies a number of related sub-questions that will inform
this research. How do we explain the fact that Greece and Ireland were hit by a crisis? How
are Greece and Ireland depicted in the Varieties of Capitalism (VoC) literature? Do Voc
characteristics explain the reactions of Greek and Irish trade unions? Do VoC characteristics
explain the outcomes of the economic adjustment programme in both countries?
As mentioned before, the cases of Greece and Ireland are interesting to examine because
they represent two contrasting VoCs facing a similar debt workout. The sovereign debt crisis
has received much attention in recent years, as the crises in the European countries havent
yet been solved and continue to threaten the existence of the Euro and even of the European
project as a whole. The media has accused countries such as Greece of an unwillingness to
implement the required measures. They are also are blamed for the crisis on a European level.
In the context of these events, it is relevant to examine deeper the domestic structures of the
different political economies, which often seem poorly understood in the policy debate or are
excluded altogether. Thus, the research on domestic political economies and their responses to
the external pressures of international adjustment can give us a better understanding of the
domestic factors that play a role in crisis management. This can then contribute to a smoother
cooperation in crisis management between the international and the domestic levels.
This research can also contribute to our knowledge in the discipline of (international)
political economy. There are two schools in the field of IPE, the American and the British
one. As Cohen (2007:200) describes Where the American school self-consciously restricts
itself mainly to mid-level theorizinghighlighting key relationships within larger, stable
structuresthe British school aims for grander visions of systemic transformation or social
development. Is has been observed that the American branch of IPE uses mainly quantitative
methods and relies more upon empiricism and economic theories of politics, whereas the
British branch uses more qualitative methods synthesizing different theoretical and
ontological perspectives, like historicism, constructivism and postmodernism. The American
school has received in the last years some criticism about being too limited in its scientific

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approach. As McNamara (2009:72) argues The intellectual monoculture that we currently


observe in American IPE, based upon an allegiance to liberalism, rationalism and quantitative
methodology, is a misguided departure from the pluralism that once defined the discipline.
McNamara (2009:76) gives an example of this intellectual monoculture:
most IPE students at these top programs will read no scholarship from the
historical institutionalist approach, which seeks to trace complex institutional
and societal interactions over time. Thus, the varieties of capitalism approach,
pioneered by Peter Katzenstein among others, is absent, despite being a major
school of scholarship explaining foreign economic policymaking for the past
several decades.
Following the argument of McNamara, mentioned above, I want to contribute to the scientific
knowledge in the British branch of IPE, using the varieties of capitalism approach and doing
an in-depth qualitative case study, which are both not very common in the American IPE
branch.

Theory and literature


This thesis is a contribution to both the debate on European monetary integration and the
understanding of the adjustment process in the countries facing a sovereign debt crisis. The
current crisis in Europe poses questions on the extent to which the architecture of European
monetary integration was well designed. Was the foundation of EMU a wise decision? The
Optimum Currency Area theory (OCA theory) provides a way to decide whether it makes
sense for a group of countries to abandon their national currencies and to form a monetary
union, but gives also insight into what characteristics are necessary to prevent or reduce
asymmetric economic shocks. The theory develops a battery of economic and political
criteria which recognize that the real economic cost of giving up the exchange rate instrument
arises in the presence of asymmetric shocksshocks that do not affect all currency union
member countries evenly or in the same way (Baldwin & Wyplosz 2009:314-315). The OCA
theory gives us, thus, some criteria with which we can assess the development and the
viability of EMU and predict that economic shocks will hit the member countries in an
asymmetrical way. It explains the structural problems and developments that exist in a single
currency union but does not tell us enough about the nature of choices made by different

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countries to join EMU. Thus, the debate on European monetary integration starts by
questioning the foundation of EMU, its viability, effective functioning and consequences of
economic shocks, while using the OCA theory to provide the necessary criteria.
Whether the foundation of EMU made sense or not according to the OCA theory, the
EMU certainly constituted an external pressure for convergence and adjustment of member
countries. To join EMU, countries had to fulfil some requirements, for instance the 3 % rule,
that government deficit must not exceed three percent of GDP, and a maximum of 60 % of
GDP for government debt. European countries felt very attracted to the EMU and the will to
join it implied fast measures and adjustments to reach the 3 % and 60 % rates. How countries
would fulfil these financial requirements, did not matter. Countries followed different paths in
order to join EMU. Thus, EMU forced countries to converge and adjust but focused only on
the numerical, financial side and not on the content of convergence and adjustment on how
these would be reached. This was related to an assumption that member states, due to market
pressures, would automatically respond better and more convergently over time. Fiscal
stabilization was reached but this did not necessarily lead to fiscal sustainability.
It was not only during the pre-EMU phase that countries developed different ways to
reach the requirements of joining. In the subsequent years, after accession, they continued to
adjust in different, but not always sustainable, ways. Although it is often assumed that EMU
made the room for individual policy choices smaller for member states, as sharing a single
currency deprives countries from the exchange rate tool and from autonomous monetary
policy, reality was more complex and flexible. According to Jones (2003), EMU did
reconfigure the macroeconomic policy choices of states in different structural contexts, but let
deficit countries off the hook and made it easier to finance the current account. He explains
that: Capital market integration increased macroeconomic flexibility through a mitigation of
the current account constraint and European states combined macroeconomic policies in a
manner that has taken advantage of greater flexibility on the current account. (Jones
2003:197). Thus, also in the post-EMU accession phase prior to the crisis, member states,
assured of the flexibility and easy financing of the current account, continued to develop in
skewed and divergent ways, using different macroeconomic policies. This would eventually
lead to macroeconomic imbalances that turned out to be unsustainable.
It is therefore clear that conditionality for joining EMU had its limits and that EMU
did not strengthen the external pressures for adjustment on all fronts. Member states could

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pursue their own paths of adjustment and respond differently on market signals. This is also
part of what the Varieties of Capitalism literature tells us, as we will see later on; countries
respond to external pressures in accordance with domestic possibilities. Thus, in cases of an
external market pressure, member states would respond differently and as EMU did not have
institutionalised mechanisms to share the burden of adjustment between creditor and debtor
countries, it was very uncertain what would happen if an external crisis would hit the EuroZone.
After an external financial crisis and a sovereign debt crisis hit the Euro-Zone, it is
important to discover how member states respond and adjust. In order to understand the
process of adjustment, it is necessary to examine the domestic institutional configurations of,
especially, the countries hit asymmetrically hard by the crisis, making use of the Varieties of
Capitalism literature. The Varieties of Capitalism literature makes use of an approach that
looks at the national, domestic level of political economy and tries to distinguish different
models and to group countries into these different models of political economy. In a liberal
market model such as Ireland, institutional co-ordination is based on market mechanisms,
whereas in a mixed market model like Greece, co-ordination is based on both market and nonmarket mechanisms. In this way, the VoC approach can provide us information about the
countries examined in this thesis. The fact that we cannot categorize political economies
clearly into an ideal type is a limitation of the VoC approach that we have to be aware of. 1
Nevertheless, the knowledge we get from the VoC literature about the domestic
configurations of a political economy can give us information about to what extent a
particular model of capitalismthe domestic institutional configurationsdeviates from the
imposed adjustment programme and how countries will respond to it. Furthermore, to what
extent do these economies really have room for own policy choices? And if they have room,
are their choices of adjustment path-dependent based on the model of capitalism or do they
shift towards another model? As the VoC approach has been elaborated through the years into
a more dynamic approach where change can be identified and accounted for, and where the
importance of politics and the state has been acknowledged, we can see, with the use of this
literature, how and under which conditions change and reforms may take place in countries
that are under pressures of international adjustment. We can expect countries, being different
varieties of capitalism, to respond and adjust in different ways to this common external
1

Becker has emphasized this in his book Open Varieties of Capitalism (2009). Political economies are
never ideal types, they are open and can change over time.

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pressure, even if the pressures for convergence are strengthened under the high degree of
capital mobility of EMU. At the extreme we might expect them to either defect from cooperation if external pressures challenge key domestic constituencies, or to shift to a more
liberal model of capitalism. Apart from the model of capitalism, there are also other
intervening factors that influence the adjustment process that have to be taken into
consideration, for example electoral ones, interest representation and ideological discourse.
The Varieties of Capitalism literature can provide us with an understanding of the domestic
institutional configurations of different models of political economy and how they might
respond under the pressure of international adjustment.
Summarizing, we see that since the foundation of EMU until the outbreak of the
European sovereign debt crisis, many questions can be posed as well about the architecture
and viability of EMU as the development and adjustment process of the member states. EMU
was, on the one hand, a form of external pressure that forced countries to converge on some
criteria, but left, on the other hand, enough policy space for the individual member states to
follow their own, often diverging, paths to adjustment. In contrast to what is often assumed,
EMU made it possible and easy for countries to finance their current account and in this way
accumulate debt. As the Euro-Zone did not have an institutionalised mechanism that would
make clear how to share the adjustment burden in case of a crisis, it was very uncertain what
would happen if a crisis would hit the Euro-Zone. We expect different models to respond to
common external pressures in different ways. Political economies may co-operate or even
defect. To understand this process of adjustment, we need to take other intervening factors
into consideration such as electoral pressures, interest representation and ideological
discourse.

Argument
With the available theoretical knowledge in mind, we can now construct the argument of the
thesis. An important aspect of understanding the responses and outcomes of Greece and
Ireland to EMU leading up to the crisis and to the troika adjustment programme lies in
understanding each as a contrasting model of capitalism. The general hypothesis here is that
the more the model of political economy deviates from the adjustment model presupposed in
the bail-out, the more harsh the domestic reactions will be and the more difficult it becomes to
reform and adjust.

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Firstly, we expect the domestic problems of Greece to be, from the outset, greater than
Irelands. Already in the pre-crisis period, Ireland, as a liberal market economy, adjusted
better to EMU than Greece. Ireland was also performing economically better, as it did not
have a structural high level of sovereign debt like Greece. Nevertheless, both countries were
affected by the crisis, as clientelistic politics led Ireland into a deep banking crisis and Greece
into a huge level of sovereign debt.
Secondly, we expect, now that both countries are facing a structural adjustment
programme imposed by the troika, that Ireland will respond better to it than Greece. Until now
this seems to be the case. We expect this because, as said above, domestic problems were
from the outset smaller and because the characteristics of the model of political economyor,
interchangeably, the variety of capitalismdeviate less from the programme imposed. The
Greek model of political economy deviates more than the Irish model of political economy
from the measures presumed under the adjustment programmefor example liberalization,
deregulation and privatization. As the Irish model of political economy is often assumed a
liberal market model in the VoC literature, measures concerning liberalization, deregulation
and privatizations are supposed to be closer to the already existing Irish liberal market model
than the Greek model. Following this logic, we expect the reactions of Greek actors and
groups to be more resistant to external pressure than those in Ireland.
Thirdly, we expect that the more the characteristics of the model of political economy
deviate from the measures presumed under the adjustment programme, the more difficult it
turns out to adjust readily and thus fewer reforms will be implemented successfully. This
expectation implies that Greece will adjust less readily than Ireland and that fewer reforms
will be implemented for two reasons. Firstly, more effort is needed to change institutions in
Greece, and secondly, reactions are harsher, meaning that there is less support for the
proposed changes and reforms. We might predict that Greece may defect from co-operation
and directly confront or challenge the imposed adjustment programme. Both Greece and
Ireland may defect from co-operation if adjustment proves too costly for key domestic
constituencies and challenges the very model of VoC.
To explain and understand the responses and outcomes of different domestic political
economies to external pressures of international adjustment like the troika structural
adjustment programme, it is important to look at the domestic model of political economy.
Both for the lead-up to the crisis and the phase of adjustment to the troika programme, we can

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state that the more the model of domestic political economy deviates from the measures
presumed under the adjustment programme, the harsher responses will be and the more
difficult it becomes to reform and adjust. As the Greek model of political economy deviates
more from the imposed measures in the adjustment programme than the Irish model, we
expect Greece to be more resistant and to adjust less readily than Ireland.

Methodology and Sources


This thesis is a process-tracing comparative case study that will proceed from analysing the
structural situation of Greece and Ireland, then relevant actors and the domestic institutional
(VoC) context, the actors preferences, the decision-making process and the outcomes. Greece
and Ireland are two comparable cases. They share some similarities; both are small and open
economies and both are EU and EMU members. Furthermore, they both have a history of
poverty, underdevelopment and migration. They went through a period of rapid
modernization and reaped the benefits of EU and EMU membership. Nonetheless, looking at
them as VoCs, we see substantial differences that make this comparative study interesting.
For an in-depth process-tracing case study and in order to find an answer to the question
posed and to elucidate processes and even causal mechanisms, a qualitative research method
is the most appropriate one. A quantitative one, using inferential statistics, is not appropriate
for this thesis, but descriptive statistics are useful in our case. Doing a quantitative analysis by
operationalizing responses, reforms, adjustments and models of political economy into
different variables will lead to a loss of subtle information. Therefore, a holistic, qualitative
methodology is required to really understand the interplay between domestic and international
politics and their intervening factors through models of political economy, responses and
reforms.
The thesis will draw on a range of empirical sources in order to support the argument.
We thus have to look for empirical sources which define the responses and adjustments in the
Greek and Irish case. For the Greek case, I will analyse documents from

the General

Confederation of Greek Workers (GSEE, ), the Civil Servants Confederation (ADEDY,


) and the Hellenic Federation of Enterprises (SEV, ). These documents include
statements, interviews, speeches and press releases. The GSEE is the trade union for workers
in the private sector and the ADEDY is the union, as the name suggests, for civil servants, in

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the public sector. These two unions are important in the social and political life in Greece,
have quite a strong bargaining position and are thus of big relevance for the research.
Together, the GSEE and the ADEDY represent the labour interests. The SEV on the other
hand, represents employers and capital interests.
For responses from the Irish side, I will also use documents such as statements,
interviews, speeches and press releases published by the relevant actors and interest groups
from the labour and capital perspective. From the labour perspective, the Irish Congress of
Trade Unions (ICTU) is the single umbrella organization for trade unions in both the Republic
and Northern Ireland. It represents workers from the private as well as from the public sector.
To examine the responses from the capital perspective, I will use the documents of the IBEC,
the Irish Business and Employers Confederation, which represents the voice of capital in
Ireland.
To understand the interplay between the domestic and the international level and the
extent to which the troika programme is implemented successfully, I will also examine the
reports of the troika itself. Reports from the quarterly visits to Greece and Ireland are an
important source to get information about the reform capacity and the evaluation of both
countries.
The documents from the relevant actors and interest groups mentioned above, will be
for Greece from its first bailout in May 2010 until now and for Ireland from December
2010,as its rescue package was received on 28 November. It can be argued that a wider range
of documents should be used, for example a larger period and more sources like newspapers
and think tanks. The workability of the thesis, however, requires that the sources be limited to,
in my vision, the most important and the most systematic ones.

Structure
The structure of the thesis is as follows. Chapter One is the theoretical part where the relevant
literature and approach is outlined. It starts with the optimum currency area theory and other
economics literature that explains the structural problems of a monetary union and why
adjustment of individual member countries is asymmetrical. It will proceed to the Varieties of
Capitalism literature to describe the differences in domestic institutional configurations of
different models of political economy and to understand how these economies will respond in

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case of international adjustment pressure. Apart from the model of political economy in itself,
there are other intervening factors that play a role in understanding the process of adjustment
that are discussed in the theoretical chapter.
The second chapter is a background chapter. It describes the classification of Greece
and Ireland as models of political economy. How are these economies classified in the
Varieties of Capitalism literature and what does this imply for their choices in the adjustment
process? What do we expect them to do on basis of their model of political economy? What
does OCA theory lead us to expect from each model in terms of reaction to the pressures of
capital mobility and monetary integration? Will they defect from co-operation or shift to
another model? Will their choices be path-dependent or path-independent?
The Greek case is outlined in the third chapter of the thesis. In this part, the findings of
the analysis of the relevant documents are presented. We see what the reactions of the social
actors and interest groups in Greece are and in how far reforms and adjustments have been
announced or have been implemented. We will understand the process of adjustment and see
to what extent the empirical findings coincide with our expectations about the Greek case.
The Irish case is outlined in the fourth chapter. The same structure applies to this part
as in the third. We see what the reactions of the social actors and interest groups in Ireland are
and in how far reforms and adjustments have been announced or have been implemented.
Examining the sources will enhance our understanding of the process of adjustment and we
will also see to what extent the empirical findings coincide with our expectations about the
Irish case.
The last part of the thesis is the comparisons and conclusion part. A comparison
between Greece and Ireland is made, which gives us more explanatory power to answer
adequately the research question. An overview of the findings of each chapter is given as well
as recommendations for further research in this field of international political economy.

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1. Review of the Literature

In order to find an answer to the research question and to understand the responses and
outcomes of different domestic political economies to the external pressures of international
adjustment, we have to examine theoretical explanations on, in our case, both the European
and the national-domestic levels of analysis. Responses and outcomes to external pressures of
adjustment will depend, as the literature suggests, on the intensity and form of pressure and on
the domestic model of political economy and the additional pull or constraining factors. The
literature provides outside-in as well as inside-out explanations to understand the adjustment
process. To illustrate this, this chapter describes the background on European monetary
integration during the pre- and post-accession phase. It will start with the observation that
EMU was not an Optimum Currency Area and an island of stability as hoped for.
Furthermore, the underlying motivations of joining EMU were divergent. Pressures of EMU
for convergence between its member countries were not strong enough and it was assumed
that setting common rules and a common macroeconomic policy stance would make
economies adjust sufficiently over time and converge structurally. EMU ignored in this way
the fact that member countries adjust according to their own domestic possibilities and that
structural convergence will depend on VoC-type factors as path-dependency, domestic
politics and the model of political economy.
These two dynamics contributed to a skewed economic development in the EuroZone. The chapter will end with a discussion on the Varieties of Capitalism literature, which
tells us how different models of political economy are identified and how institutional change
and adjustment to international pressures may take place. We can conclude that, due to the
historical developments on both a European level and a national, domestic level, adjustment
processes will continue to be asymmetrical and based largely on domestic political,
socioeconomic and institutional context. This is, in fact, the way any federal monetary union
works, but that, as we mentioned earlier, was sometimes ignored by EMU policy and
pressure.

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1.1 EMU: structural flaws


Starting the discussion on the architecture of European monetary integration, we can state that
European politicians and policymakers were from the beginning aware of the fact that a
monetary union can never be a perfect Optimum Currency Area and that the diversity, both in
terms of asymmetric shocks and of domestic socio-economic structures turns out to be costly.
Given that an OCA is never perfectly achievable and is rather part of a theoretical discussion,
European politicians and policymakers had to look at how they would manage the policy
dilemmas that arise from monetary integration. Sharing the same currency certainly brings
benefits. For one, it reduces transaction costs and provides exchange rate stability, which are
both of great importance for firms which operate internationally. Looking at the (utopian)
criteria the Optimum Currency Area theory proposes, by which to judge the costs of sharing
the same currency, we will see why monetary integration can also have negative
consequences for member countries hit by an economic shock. After having established that
monetary integration, apart from benefits, can also bring costs, we will answer the question of
why then countries decided to join EMU.
First, which criteria should be fulfilled in order for a monetary union, like the
European one, to be successful? As Baldwin and Wyplosz (2009:322) write:
There are three classic economic criteria and an additional three which are
political. The first criterion looks at a way of minimizing the costs of an
asymmetric shock within a currency area. The next two economic criteria take a
different approach: they aim at indentifying which economic areas are likely to
be hit by asymmetric shocks infrequently or moderately enough to be of limited
concern. The last three criteria deal with political aspects; they ask whether
different countries are likely to help each other when faced with asymmetric
shocks.
The first criterion is the Mundell criterion, originally proposed by Robert Mundell, and is
about labour mobility. In order to eliminate the costs of sharing the same currency, labour
should be fully mobile across borders. Unemployment would then be a rare phenomenon. The
second criterion is the Kenen criterion, named after Peter Kenen, and is about production
diversification. In order to reduce the likelihood of asymmetric shocks, currency area member
countries ought to be well diversified and to produce similar goods (Baldwin & Wyplosz
2009:325). When countries specialize in the production of a narrow range of goods, the

~ 19 ~

possibility of being negatively affected by a shock becomes greater. The third criterion is the
McKinnon criterion, proposed by Ronald McKinnon, and is about openness. To form an
optimum currency area, countries must be very open to trade and must trade heavily with each
other. In this way, competition will force prices to equalize and the distinction between
domestic and foreign goods loses much of its significance, meaning shocks will become more
moderate (Baldwin & Wyplosz 2009:326).
The last three criteria deal with political aspects. For the currency area to be
successful, countries have to agree to compensate each other for adverse shocks. This is called
the transfer criterion. A financial transfer mitigates the recession in one country and the boom
in other countries. Member countries of a currency area have to be willing to make financial
transfers to countries in need and to see this as a redistributive mechanism to support the
viability of a single currency union. Linked to the transfer criterion is also the homogeneity of
preferences criterion. Currency union member countries must share a wide consensus on the
way to deal with shocks, including crucially the who pays question (Baldwin & Wyplosz
2009:327). The last criterion is the solidarity criterion which says that When the common
monetary policy gives rise to conflicts of national interests, the countries that form a currency
area need to accept the costs in the name of a common destiny (Baldwin & Wyplosz
2009:329). Accepting the costs in the name of a common destiny is certainly not out of a mere
sense of solidarity. As mentioned earlier, the benefits of a monetary union are also
considerable.
Seen in the light of the OCA criteria, EMU is not an Optimum Currency Area, which
of course is not surprising due to the utopian character of an OCA. As Baldwin and Wyplosz
state (2009:340), it fulfils the trade openness and product diversification criteria, but fails on
the labour mobility, fiscal transfers (but also pooling of reserves and common debt
instruments) and partly on the homogeneity of preferences and solidarity criteria. Besides, it is
important to remark that although an average EMU fulfils some criteria quite adequately,
there is still quite a lot of diversity between countries in terms of economic development and
industrialisation. Parts of Southern and East Europe are at a lower level of development. A
financial shock will hit these parts significantly harder. Concerning the labour mobility
criterion, although European citizens are legally free to work in other European countries,
mobility is less perfect than desired due to obstacles as language and culture. Concerning
(fiscal) transfers, we see during the European debt crisis how these transfers to countries as
Greece are a point of discussion and discord. A systematic policy framework of transfer

~ 20 ~

payments could have worked preventively, but would however not have eliminated the
pressure brought on by the crisis. Furthermore, in the case of EMU, the ECB had not been
given the mandate to issue and use common debt instruments or to pool reserves. Once more
we see that EMU was designed without rules about how the financial burden would be shared
in crisis time. The lack of homogeneity of preferences and solidarity, especially about sharing
the burden of adjustment and the provision of emergency finance, has furthermore aggravated
the crisis management situation.
This observation about the structural problems of EMU implies that if a financial
shock would hit the Euro-Zone, as eventually would happen, member countriesespecially
the economically weaker oneswould be affected in an asymmetrical way. When
asymmetric shocks occur monetary union membership becomes seriously constraining due to
the loss of the exchange rate has negative consequences for those countries hit by a shock.
They cannot use the tool of adjusting their exchange rate by devaluation to remain
competitive in changing conditions.
Thus, the OCA theory tells us about the structural problems and consequences that a
monetary union faces, but not about the nature of political choices made by different countries
to join EMU. A question that arises, knowing the potential problems and costs of monetary
integration, is: why should countries decide to join EMU and share a single currency? Two
arguments are important in this respect. The first one is of a neo-liberal nature. The second
one is that joining EMU was a one-way ticket to wealth and growth. First, it is argued that
West European businesses from the wealthier countries lobbied for a neo-liberal design of
EMU, emphasizing the free-market aspects of the internal market. Barriers to the free internal
market such as different currencies (and the exchange rate risk accompanied) had to be
removed. As Van Apeldoorn (2006:310) argues: The move towards a single currency has
been strongly supported by large sections of European transnational business, in particular as
represented by AMUE and ERT, with transnational capital clearly set to gain from the
removal of this particular non-tariff barrier to trade. Thus, the wealthier, surplus countries
in Europe supported EMU because of the opportunities this would give to explore markets in
Europe, but also to integrate into the global economy. Second, deficit countries, mainly those
in Southern Europe, saw joining EMU and sharing the strong euro currency as a ticket to
growing prosperity and of easier financing their needs. Motivations for joining EMU were
thus different for the traditionally surplus and deficit countries, but the surplus countries
would have the biggest benefits: access to markets without devaluation risk.

~ 21 ~

Concluding, we can say that on basis of the structural problems of EMU as explained
in the OCA theory and the divergent political motivations for joining it, asymmetrical
economical development and adjustment of member countries must not be a surprise.
Furthermore, Underhill (2002:34) observed already in 2002 that: The Euro-Zone will
consequently encounter its share of disagreements among its members as the economic
development process yields differentiated distributional consequences across the national
economies. As EMU did not build in institutional mechanisms to facilitate co-operation in
crisis-time (no debt workout, instead, a no bail-out clause), the share of disagreements is even
larger now that the Euro-Zone countries are hit by a financial shock.

1.2 EMU pressures for convergence: pre- and post-accession


At the time of EMU, economic development levels in member countries diverged
significantly, as did their economic structure and policy preferences. The goal of EMU was
convergence on the macroeconomic policy framework, which was aimed at promoting
adjustment so as to produce structural economic convergence between member states over
time. First, we will look at the pressures for convergence, in the form of conditionality policy,
during the phase of joining EMU. After that is understood we will see how pressures for
convergence during the post-EMU accession phase/pre-crisis phase were apparently not
strong enough and that economies did not adjust in the same ways.
Pressures for macroeconomic policy convergence and adjustment were notable for
countries which wanted to join EMU and share the common currency, but countries did not
follow the same strategy to achieve fiscal adjustment. To enter the Euro-Zone, countries had
to fulfil some requirementsthe so-called Maastricht eligibility criteria. One of them was that
the budget deficit would not exceed three percent of annual GDP. The other one was a
maximum of sixty percent of annual GPD for government debt. The European Union did not
tell countries how they had to achieve this, however. Thus, countries could follow their own
paths to meet the criteria. As Blavoukos and Pagoulatos (2008:231) say: EMU conditionality
set nominal accession targets without prescribing the modality of achieving them. Thus,
whereas the conditionality policy, entailing the Maastricht criteria to join EMU, was hard
and exercised intense pressure on aspirant members to bring about fiscal adjustment, the
pathway to achieve fiscal adjustment was not hard defined. Some countries followed a
consolidation strategy aimed at appropriate expenditure cuts and structural reforms and other

~ 22 ~

ones, like Greece, focused more on revenue-based consolidation. Blavoukos and Pagoulatos
argue that the former strategy of expenditure cuts and structural reforms as privatization,
liberalization, pension and labour market reform, produces more sustainable fiscal adjustment
than the latter one. They (2008:231) conclude: ...the external constraint was a push factor
to consolidation without ensuring fiscal sustainability. Only where additional pull factors
were at work did structural reforms take place. The additional pull factors, Blavoukos and
Pagoulatos mention, are: the content and scope of reform, the context of reform (facilitating
or constraining, degree of social concertation) and the capability for reform (government
effectiveness). Where these pull factors were absent, structural reforms in the realm of
macroeconomic policy were limited, as was the case in Greece. In short, the pressures for
fiscal adjustment and convergence in the pre-EMU accession phase had the form of
conditionality policy and entailed hard criteria that had to be met by the aspirant member
countries. Nevertheless, EMU pressure for fiscal adjustment focused on numerical targets and
did not envisage any prescriptive pathway to fiscal consolidation. Countries followed thus
different strategies to meet the Maastricht criteria for joining EMU. Only when additional
domestic pull factors were present, were structural reforms possible, and these reforms went
at different paces in aspirant EMU member states.
Also in the post-EMU accession phase, during the lead-up to the crisis, we see that
adjustment processes in the Euro-Zone countries were influenced by both EMU architecture
and divergent domestic strategies. Once countries had entered the Euro-Zone they had to
comply with the rules of the Stability and Growth Pact (SGP) that was meant to ensure fiscal
prudence. Blavoukos and Pagoulatos (2008:233) state: Compared to the hard conditionality
of the pre-accession period, the SGP prescribed a softer and much more politicized form of
conditionality, unable to resort to equally powerful instruments of coercion. This 'soft' period
included the fact that monitoring and corrective mechanisms of SGP were not effective and
there were no sanctions in the case that countries would offend the rules. As a consequence of
this softer conditionality, member countries continued to follow their own pathway of
adjustment and avoid structural reforms that involved high political costs. Member states
could free ride on the Euro credibility and partly relax the budgetary pressure of external
constraints (Blavoukos & Pagoulatos 2008:233). All states became, in order to avoid extended
recession, more lax after the DotCom bubble burst in 2000. Led by Germany, all states
relaxed the rules of the SGP a little. Furthermore, Jones (2003) argues that, instead of
decreasing national policy autonomy on fiscal aspects, EMU increased autonomy as it

~ 23 ~

enhanced the flexibility on the current account and limited the budgetary pressure. For most
countries it became easier and cheaper to finance their current account in a way that their
fiscal condition deteriorated through accumulation of government debt. Thus, as SGP rules
were soft, member-states could follow their own path, avoiding structural reforms and
financing with low interest rates their current account. Member-states, especially those which
prior to EMU entry had relied on revenue-driven measures and not on structural reforms to
achieve fiscal adjustment, experienced in the post-accession phase a deterioration of their
fiscal condition. Fiscal lassitude was, nevertheless, not the source of the crisis. Even Germany
performed in the post-EMU phase worse on debt criteria than for instance Spain and Ireland2.
The outbreak of the crisis was an unexpected event, while states were trying to bring down
their debt and deficit levels. Thus, the post-EMU conditionality rules tell us something about
EMU architecture and its pressure on states to adjust, but the economic performance of the
member states cannot be indicated as the source of the crisis, which actually came from
outside as it started as an external financial shock.
In sum, we see from the historical evidence outlined in the literature that adjustment
processes of the individual European states, were affected by the form of pressure in the preand post-EMU accession phase (hard versus soft conditionality). When the external
pressure entails a form of hard conditionality and states see that fulfilling the conditions will
deliver them benefits, we can expect them to adjust to the pressure. As we discussed earlier,
this adjustment does not necessarily mean reform and convergence to the international
context. The content of adjustment may be different. We can expect that the response and
content of adjustment may differ even more if the external pressure consists of a softer form
of conditionality. Furthermore, borrowing from Featherstone (2008), the extent of adjustment
and adaptation of individual states will also depend on the level of policy misfit between the
international requirements and the domestic practice. The argument here is that the larger the
misfit, the longer adjustment will take, especially when core institutional structures are
challenged. This entails a gradual form of adjustment, which depends again on the hard or
soft character of the pressure and the room states have for own policy decisions. Besides, we
see that the strategies of adjustment (either structural reforms or revenue-raising measures) of
the individual European states depended mainly on additional domestic pull factors, such as
2

In 2008 German government debt to GDP was 64.9%, whereas Spanish and Irish debt levels were
respectively 36.1% and 25%. See for more information www.tradingeconomics.com

~ 24 ~

the content, scope, context and capability to reform. To understand the domestic responses
and outcomes on international adjustment pressure, it remains important to examine the
domestic institutional configurations and other additional factors of different models of
political economy. In other words, it is not the economics debate (e.g. the budget
performance) that is important in understanding the way in which different political
economies actually adjust. In the next part, in order to understand the responses of countries
to international adjustment pressure, we will therefore examine the political economy
literature that focuses on the national/domestic level of analysis.

1.3 Domestic configurations: development of the VoC approach


In the previous part we discussed the external pressures for adjustment, represented especially
by the EMU. In this part we will focus on the national/domestic level of analysis, examining
mainly the Varieties of Capitalism literature, but also other strands. First we will discuss the
pre-VoC neo-corporatist and welfare regime literature and we will close with the Varieties of
Capitalism literature which is the most holistic approach. The different domestic
configurations outlined in the literature absorb the external pressures and shape the domestic
response to them. They mediate in the process of adjustment, change and reform. They thus
act as intervening variables.
Prior to the elaboration on the Varieties of Capitalism approach, which is considered
more holistic in its explanation of domestic configurations, the neo-corporatist and welfare
regime approaches were used to explain certain domestic developments, sometimes in
reaction to international developments. The neo-corporatist approach, which was particularly
popular in the 1970s, refers to the ability of a government to negotiate sustainable bargains
with union and employer organizations on subjects such as employment, wages and social
policy. The approach tried to explain the various forms of concertation and agreements that
existed in, mainly, the West-European states. But, as Featherstone (2008:46) argues, the
approach has encountered in recent years a paradox: the existence of neo-corporatist type
agreements in systems apparently lacking the organizational preconditions for successful
concertation. Neo-corporatism could no longer explain certain domestic developments.
In 1990 Esping-Andersen developed a typology with the focus on different, national
social models of welfare regimes. He defined, on the basis of indicators that measure

~ 25 ~

institutional characteristics of social insurance, three distinct welfare regimes: a conservative,


a liberal and a social-democratic one. The argument is that the diverging institutional
characteristics of each welfare regime affect reform processes and levels of competitiveness,
thus the way in which economies adjust in reaction to either international or domestic
pressure. Welfare system reform is considered difficult to achieve by the government, as it
seen as a zero-sum game with winners and losers. Consequently, the level of adjustment will
depend on the political power to block reform of those who regard themselves as the current
winners and who are afraid of losing their privileged position. The typology on different
welfare regimes gave important information on the institutional characteristics of social
policy. However, it was still too narrow in its analysis to understand properly how economies
adjusted, and why their capacities to do so varied so widely. Implication was though that
structure and institutions had a major impact on capacity and mode of adjustment.
In 2001 Hall and Soskice broke new ground with their publication3 on the Varieties
of Capitalism approach; an approach which was more holistic and more influential than the
previous ones. They identified and categorized countries into different models of capitalism
by examining a broader spectrum of institutional characteristics like industrial relations,
vocational training and education, corporate governance, interfirm relations, and employees.
These institutional characteristics can create complementarities which enhance economic
performance and therefore adjustment capacity. Hall and Soskice distinguished in their
analysis two broad contrasting types of capitalism: the Liberal Market Economies (LMEs, like
Ireland) and the Coordinated Market Economies (CMEs, more like the Greek case). In the
first type institutional coordination is based on market mechanisms and in the second one on
non-market mechanisms. Furthermore, they focused their analysis on the level of the firm and
how the firms competitiveness is linked to the institutional comparative advantage of
national economies. Hall and Soskices analysis represented thus a a clear attempt to shift the
focus of the neo-corporatist literature beyond the stress on the states relationship with
organized labour (Featherstone & Papadimitriou 2008:49).
Hall and Soskices approach is not without its critics. In the introductory chapter of the
book Beyond Varieties of Capitalism: Conflict, Contradictions, and Complementarities in the
European Economy Hanck, Rhodes and Thatcher (2007:7) give an overview of the points of

Peter Hall and David Soskice, Varieties of Capitalism: institutional foundations of comparative
advantage, eds, idem, Oxford: Oxford University Press, 2000.

~ 26 ~

contentions that the Hall and Soskice publication raised. Firstly, their analysis divides the
world into two reified notions of LME and CME archetypes and lacks the tools for moving
beyond this bifurcation. Secondly, their approach is too static and focuses on permanency and
path-dependence missing important dynamic elements of economic change. Thirdly, it has a
propensity to institutional determinism in its mechanistic conception of institutional
complementarities and neglect of underlying power structures, including social class. It is
apolitical, equilibrium-based and it downplays conflict. Fourthly, it is centred on the firm,
neglecting the role of the state. The last point of contention is that it treats nation-states as
hermetically sealed and neglects the linkages between them and the forces of convergence
and globalization. Whether the criticism on Hall and Soskices dichotomy of LMEs and
CMEs, as well its static nature and neglect of power structures is fully fair or not, it did lead to
a flood of future research literature, in which the VoC approach got theoretically and
empirically enriched.
Amable (2003:14) stated in his book The Diversity of Modern Capitalism that the
dichotomous approach (LMEs versus CMEs) definitely simplifies empirical analysis, but is
nevertheless one-dimensional. Only the extent of market coordination is taken into
consideration, while the hierarchy of institutions is taken for granted. Examining other
dimensions of coordination and placing more institutions in the analysis certainly leads to
more types of capitalism. Amable proposed then, based on extensive data from sources like
the OECD, five models/ideal types of capitalism: a market based, a social democratic, an
Asian capitalist, a Continental European (Ireland belonged to this type according to Amable,
and not to the market based) and a South European one (where Greece belongs to). For each
model he gives evidential information on the five major institutional areas: product-market
competition, labour market institutions, financial intermediation/corporate governance, social
protection and education sector.
Amable went beyond a dichotomous typology and enriched the VoC theory with new
insights on the aspects of institutions. He argued that institutions are the expression of a
political compromise, which means that institutional change is an outcome of power and
interest structures:
Institutions are likely to affect the interest structure and hence the preference
that agents may express towards a certain pattern of institutional change. Rather
than optimal solutions to a given problem, institutions represent a compromise

~ 27 ~

resulting from the social conflict originating in the heterogeneity of interests


among agents. What we consider to be different economic models are therefore
based on specific social compromises over institutions. The question of
institutional change is basically a question of political economy.
(Amable 2003:10)
Amable placed more emphasis on the political aspect of institutions and change than Hall and
Soskice did in their initial analysis. It is political strategies that lead to institutional change
and that means that change will not always lead to the more rational and efficient outcome
according to institutional complementarity. This is a far more agency-centred approach (in
contrast to a structural, functionalist approach) where power and interest play a greater role
and where there is more space left for change than in the initial analysis of Hall and Soskice.
Agent-centricity is important in this respect, as we discussed earlier that it is more the
political economy that enhances our understanding of domestic adjustment processes and not
the pure economics debate. Besides, it has implications for the analysis of the Greek and Irish
adjustment process. Amables approach indicates that it is more the domestic responses of
Greek and Irish political and social actors that count in the process of change than the mere
model of capitalism, and that change will therefore not always lead to the most efficient
outcome.
The dichotomy and rigidness of the Hall and Soskice VoC approach was also
contested by Becker, who in his book Open Varieties of Capitalism, Continuity, Change and
Performances (2009) pointed to the distinction between ideal types and empirical cases of
models of political economy as well as to the openness and space for change. He
distinguished four ideal types of political economies: the liberal type (to which Ireland is
assumed), the statist type, the corporatist type and the group or meso-communitarian type. On
basis of cultural and ideological criteria, he added also a clientelist subvariety, which is
mainly present in the Mediterranean countries like Greece. Furthermore, he understood
politico-economic systems as open and relatively loosely ordered social entities revealing
some degree of systemness (Becker 2009:6). Factors of openness are, according to Becker
(2009:7), the basis for institutional change but can also block it. As he (2009:169) concludes
about the process of change:
Change is the normal state of things in the empirical varieties of capitalism, but
at the same time change is kept in check by the forces of path continuity. In part,

~ 28 ~

these forces are the same as those that bring about openness. Openness gives the
opportunity for change, but also that for blocking it. Uncertainty, stemming from
our limited knowledge about the best problem solutions and about unknown,
unintended consequences of action may paralyze action, sticking to routines by
bureaucratic apparatuses (public and private) may have a similar effect, and in
terms of power the forces opposing change might be stronger than the advocates
of change. Apart from this there is the classical argument of path dependence
saying that change does not take place as long as its costs are higher than that of
maintaining the status quo.
We see that making typologies of varieties of capitalism and accounting for
(institutional) change have been topics where scholars elaborated on the last years. These
different typologies give us important information about the domestic institutional
configurations of different models of political economy in order to understand and explain
responses and outcomes to international adjustment pressure which will study in more depth
in the next chapter for Ireland and Greece. Furthermore, models of political economy,
according to the literature, may change throughout the years from inside or from outside as a
response to international adjustment pressure. We can conclude that is more the domestic
configurations of VoCs that are decisive in the process of adjustment than the EMU pressures
concerning budget rules. As we stated earlier, EMU ignored these domestic VoC factors and
countries were assumed to converge structurally in a natural way. Now it is the troika
programme that we consider stimulating or even pushing (push factor in the words of
Blavoukos and Pagoulatos) for change and adjustment; thus an exogenous shock, an external
pressure or in methodological terms, the independent variable. Adjustment in line with the
troika programme will once more depend largely on the domestic political economies
entailing various VoC type factors.

1.4 Domestic configurations: responses and outcomes


As we saw earlier, exploring the VoC and other literature, there are a lot of domestic factors
and actors (domestic configurations) that play a role in the process of change and that
influence the outcome. These act as intervening variables, or in the words of Blavoukos and
Pagoulatos (2008), as pull factors. The VoC literature made clear that political power and

~ 29 ~

interest structures in state-capital-labour relations are important elements in the process of


change and adjustment. Political culture, ideology, legitimacy and party systems can
furthermore play a role. Other, more structural, factors are, as we already discussed, the
context and scope of reform measures and the government capability to reform.
The responses and outcomes to the international pressure of adjustment form the
dependent variable. According to Hall and Thelen (2009:21), states can respond in one of
three ways: reform, defection and reinterpretation. Reform is defined as institutional change
explicitly mandate or endorsed by governments. Defection occurs when actors stop following
the practices prescribed by an institution. Change can then be resisted due to path dependency
or continuity; a term often used in the VoC literature. As Becker (2009:7) says: Path
continuity mainly results from transformation costs, the inertia of action, disagreement among
policy-makers and power relations that propel political economies along their paths. The
latter route captures the ability of actors to choose informal ways of change to serve their
interests and thus goes beyond the analysis of formal rules in institutional change. In the
process of reinterpretation, actors associated with an institution gradually change their
interpretation of its rules, and thus its practices, without defecting or dismantling the
institution itself (Hall & Thelen 2009:25).
Given the three ways to respond, if domestic change takes place in a state, which
direction will it be? Towards which model of political economy? What will be, in other
words, effects of EMU and the crisis? In the context of the globalization debate in the 1990s,
it seemed the convergence thesis to be more pronounced, foreseeing convergence to the
liberal Anglo-Saxon model of capitalism. This thesis was much based on the ideological
belief that the liberal model of capitalism was also the one with the best economic
performance. Other scholars of the VoC literature refuted the neo-liberal convergence thesis
and showed that similar pressures are mediated differently across models of capitalism. They
argued that there is more than one way to achieve high performance in the global economy
(Kornelakis 2011:48). Amable (2003:23) also states that: Different combinations of
institutional forms may in the end produce similar macroeconomic performance. As
Kornelakis further pointed: VoC effectively replaced the (single) convergence thesis with a
dual convergence thesis allowing for two options rather the no alternative type of argument.
The pressures from globalization and liberalization are expected to accentuate the differences
between LMEs and CMEs. Hanck, Rhodes and Thatcher (2007:9) agree on this point:
...globalization will confirm rather than subvert the comparative institutional advantage of

~ 30 ~

nations. Following the argument in the VoC literature, the current global economic crisis will
then enhance the differences between politico-economic types having comparative
institutional advantagesthus a better quality of their institutionsrather than diminishing
them. But what happens when the rules of the game are enforced upon countries, as is the case
with the troika programme? Countries can choose to defect, but the costs of defecting and the
level of social conflict certainly become much higher. In our case study the costs of defecting
would eventually be for Greece and Ireland the default of the country, returning to their
previous currency and all the socio-economic consequences accompanying these
developments.

1.5 Conclusion
In this chapter we explored the literature on external pressures of adjustment, using EMU as
an example of pressure that has given direction to the development of European states. We
also studied the literature on domestic institutional configurations, especially relating to the
VoC theory, in which different models of capitalism are defined. We concluded that, given
the structural flaws that all monetary unions face and the knowledge that a financial shock
would hit member states in an asymmetric way, the leaders of EMU had to build in
mechanisms in order to share the adjustment burden. Now that the crisis has hit the weaker
member states asymmetrically, they have to adjust to the external pressure of the troika
programme. The domestic elements of each VoC model will mediate in the response and
outcomes to this external pressure. This implies that same external pressures can lead to
different responses and outcomes as we see in Greece and Ireland, depending on the domestic
political and socio-economic configurations (see figure 1). In the next chapter we will
examine deeper the VoC characteristics of both Greece and Ireland.

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2. Background chapter: Greece and Ireland as VoCs and the leadup to the crisis

In order to understand and explain the responses and outcomes of Greece and Ireland to
international adjustment pressure, in this case the crisis and troika programme, we have to
know what their domestic configurations are. In this chapter we will first look briefly at the
history of both countries and then examine the domestic configurations while making use of
the VoC literature. How are Greece and Ireland categorized and characterized? We will focus
on the models of capitalism, but also on interest representation and political culture. Secondly,
we will move on to the pre-crisis phase in order to see how these two countries developed
economically, got into a sovereign debt crisis and called for financial help. The background
information on both the domestic configurations and the pre-crisis phase is essential for
making expectations and finding an answer to our central research question.

2.1 Greece as VoC


Greece is a small and open economy that has a long history of colonial rule, wars and
political instability. After four centuries of Ottoman rule, Greece became an independent state
in 1830. The first century of independence was marked by subsequent foreign monarchies that
governed the country. This period was also an attempt to consolidate the state in its current
form. The initial Greek state entailed geographically only a part of the current one and the
wars that took place aimed at expanding the Greek state in order to include in its borders all
Greek speaking people. Political instability and discord about the expansion of the Greek state
were the order of the day and there was great social unrest due to large emigration and
immigration flows4.

The so-called Asia-Minor Catastrophe of 1922 was one of the worst episodes in modern Greek history.
After the Greek army had moved too far towards Ankara, the Turks burnt down the city of Smyrna (now Izmir),
a cosmopolitan city at that time with also a large Greek speaking population. The Greek speaking population fled
to Greece and an exchange of population was agreed between the Greek and Turkish government. Greek
speaking orthodox Christians had to move to Greece and Muslims who lived in Greece had to move to Turkey.

~ 32 ~

The Second World War was followed in Greece by a civil war between the
communist, revolutionary troops and the official state army which represented the
conservative, royalist, right-wing government. The communist troops were defeated and the
political national division between right and left wing parties is still noticeable today. From
1967 until 1975 Greece had a military junta regime. It was only after the fall of the junta in
1975 that Greece became a modern parliamentary democracy. Since then, governments of the
socialist party Pasok and the conservative party Nea Dimokratia have alternately been in
power. Greece joined the European Union in 1981 and the EMU in 2001 and enjoyed a
remarkable economic growth, but it is still a country with the classic political-institutional
weaknesses of a middle-to-high-income developing country. In this next section, we will
delve more into the economic performance of Greece, but firstly we will look at how Greece
is depicted in the VoC literature.
In the VoC approach, Greece is frequently seen as an outlier and thus difficult to
package as a model of capitalism. The dichotomy of Hall and Soskice seems in this sense
problematic because Hall and Soskice are largely about developed economies, while Greece is
a still developing economy. Schmidt (2002) elaborated further on a state capitalist model
that better approximates the Greek reality. In such a model the state has a greater mediating
role in the economy. Business-government relations are state-directed, with the state
influencing business development through planning, industrial policy, or state-owned
enterprises (...) Government relations with labour also tend to be state-controlled although
more distant than its relations with business. Wage bargaining is largely determined by the
state, which often imposes its decisions on fragmented unions and business, while labourmanagement relations are mostly adversarial(Schmidt 2002:116). Schmidts description of
the statist model does indeed come close to the Greek state-economy characteristics, but is
not sufficient for modelling the interests and behaviour of the state, employers and unions.
Amable (2003), as described in the previous chapter, distinguishes a South European model of
capitalism to which Greece belongs. According to his findings, the state is involved in
product-market regulation; there is a dualism in employmenthigh protection and fulltime
employment in large firms and the public sector, low protection and temporary/part-time

~ 33 ~

employment in small firmswage bargaining is centralized; social protection is moderate and


expenditures structure is oriented towards poverty alleviation and pensions.
Molina and Rhodes (2007) provide the Mixed Market Economies (MMEs) model
which encompasses the countries of South Europe, including Greece. While it is close to
Amables model, it has greater power in explaining interests and behaviour of actors and their
role in change and reforms. As the name already suggests, MMEs use both market and nonmarket forms of coordination. In contrast to LMEs and CMEs, there is a misfit between
institutions that results in an absence of institutional complementarities (Kornelakis
2011:56). Therefore, the state has a compensating role. Greece is depicted as a hybrid
model that is bound to under-perform (Kornelakis 2011:56). The state has an important role in
controlling the business and labour sector. State interference in, for example, the trade union
movement began already in 1910 under the premiership of Venizelos. Collective bargaining is
highly centralised and has been subject to extensive state regulation (Featherstone 2008:4).
Production systems are more fragmented than in LMEs and CMEs (large versus small firms).
Welfare systems and the labour market are fragmented, too. Mainly public sector employees
are well-protected and enjoy welfare benefits while private sector employees enjoy low
protection and welfare benefits. In contrast to LMES and CMEs, unions and employers tend
to have stronger organizational structures, but are more fragmented and unable to deliver
collective goods. Bargaining is often ad hoc and social dialogue is characterised by mistrust
and a lack of consensus. Internal representation in both the union (GSEE and ADEDY) and
employers federations (SEV) is skewed towards certain groups, overplaying their interests
(Featherstone 2008:7). The unions represent mainly the interests of the public sector
employees and the SEV represents mainly the interests of the few large firms. Small
enterpriseswhich constitute the largest part of the Greek economyare thus not
represented. Greek unions are, due to their narrow interests, prone to defending the status quo
of over-protected employees in the dual labour market (Matsaganis 2007:551). Reforms and
change are frequently opposed. Featherstone (2008:7) argues that interest representation
tends to reflect the legacy of risk-averse, statist and anti-competitive traditions of a
developmental state. Furthermore, Greek unions have strong ties to political parties, which
makes the relations and the bargaining process quite politicized. Due to the fact that unions
and employers cannot deliver collective goods and sustain autonomous coordination in
collective bargaining, reform depends heavily on the capacity of the state to overcome these
problems.

~ 34 ~

According to Featherstone (2011:197), reform efforts are also immobilized by a


complementarity between rigid employment laws and an underdeveloped welfare system
together with a large black economy which is estimated at 26 per cent of GDP in 20115.
Featherstone concludes (2008:15) that The creation of reform coalitions is more prolonged
and problematic than in LMEs and CMEs. According to the Sustainable Governance
Indicators (Bertelsmann Stiftung 2011)6, reform capacity in Greece is low (4.5 on a scale of
10, while Ireland has as score of 6.8). This score puts Greece in the bottom group of the
researched countries. Policy implementation in Greece also scores low (3.8, while Ireland
scores a 5.4).
Apart from the characterisation of Greece as a MME, there is another aspect that plays
a significant role in social and political life and that affects all policies; clientelism. In
exchange for votes, Greek parties distribute favours to individual voters and groups. The two
major political parties which have been in power for more than thirty years, Nea Dimokratia
and Pasok, have made extensively use of this system. Becker (2009:59-60), who puts Greece
into a clientelist sub-variety of capitalism, argues that Clientelist exchanges, for example in
the field of welfare benefits or regarding the allocation of jobs, undermine competition and
meritocratic principles and therefore the efficacy of the market and of general administrative
rules (...).
Summarizing, we can say that Greece is an economy where the state has a large
influence in its development. Having a history of struggles for independence, wars, political
instability, poverty and emigration, Greece enjoyed economic growth since its entry to EU
and EMU. The Greek model has a dual production, labour and welfare sector, with both
market and non-market mechanisms of coordination. Some sectors and employees in the
economy are highly protected by the state and are not used to market pressures and other
sectors and employees are excluded from protection or benefits and have to cope with market
5

See for more estimates of the shadow economy in OECD countries 2003-2011:

http://www.cesifo-group.de/portal/pls/portal/docs/1/1210208.PDF. Greece and Italy have the highest estimates in


this list of OECD countries.
6

For more results concerning governance indicators of Greece see: http://www.sginetwork.org/index.php?page=countries_keyfindings&country=GRC

~ 35 ~

pressures. The former are mostly better organized and represented than the latter and have
thus more bargaining power. Nevertheless, coordination and consensus are difficult to achieve
due to institutional weaknesses and ideological divisions rooted in history. The mechanism of
coordinating the economy and politics is based on clientelistic relations. The lack of
institutional complementarities and the elements of clientelism and politicization often form
an obstacle to the functioning of the economy as well as to processes of adjustment and
reform. The Greek state and its model of political economy are thus quasi-dysfunctional.

2.2 Ireland as VoC


Ireland is, as Greece, a small and open economy that is marked by a history of colonial rule,
religious and political tensions and poverty. In the 19th century Ireland belonged to the
political entity that was called The United Kingdom of Great Britain and Ireland and was in
fact under British rule. The issue of Irish self-government became in the 1870s the focus of
debate and this led to tensions between Irish nationalists fighting for independence and Irish
unionists who favoured maintenance of the union with the UK. The southern part of Ireland
was Catholic, nationalist and predominantly agrarian. The northern part of Ireland, which was
more industrially developed, was Protestant and preferred being part of the union with the UK
because the unionists there were afraid of losing political power and economic wealth.
The Home Rule Bill to establish self-government for Ireland was passed in 1914, but
was suspended for the duration of the First World War. The subsequent years were marked by
political violence and upheaval. The Irish War of Independence lasted from 1919 to 1921,
when the Anglo-Irish Treaty was signed. The southern part of Ireland became the Irish Free
State, a self-governing Dominion of the Commonwealth of Nations, while the northern part of
the island opted to stay within the UK. However, the Anglo-Irish Treaty was not fully
accepted in the Irish Free State. A civil war broke out between nationalists who were proTreaty and saw the Irish Free State as a first step to full independence and nationalists who
were against the Treaty and wanted to fight until the Irish Republic was achieved. The antiTreaty nationalists were defeated by the official government, but the division between the
nationalists is still present in Irish politics today, especially between the two leading parties,
Fianna Fil and Fine Gael.

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Ireland became eventually a Republic in 1949 and joined the EUthen known as the
European Economic Communityin 1973. Ireland remained a democracy and did not have a
military junta regime. While its economy was mostly weak and based on agrarian activity, it
became more developed, open and export-led in the late 1980s due to a strategy change by the
Irish government. Taking advantage of EU membership, Ireland succeeded in attracting
capital on the global market and enjoyed huge growth, giving it the title the Celtic Tiger.
The Irish society developed as well; social values modernized as Church influence diminished
after various scandals. Ireland joined the EMU in 1999 and saw afterwards a slow infection of
its financial system with cheap money and a speculation on the property market, which will
be discussed later. First we will look at how Ireland is now depicted in the VoC literature.
Ireland is most often classified as an liberal market economy (LME) and an AngloSaxon model of political economy (Hall and Soskice 2001), which is not surprising given
Britain's role in Ireland's past. Being an LME means that coordination is based more on
market structures. The organization of employers and unions is fragmented and politically
weak and the main role of the state is to guarantee the effective functioning of the market
without intervening too much. Amable (2003:136) puts Ireland into the cluster of Continental
European political economies and not in the market-based ones due to its high score on the
wage-bargaining-corporatism index, which reveals a strong social partnership structure. At
the same time Ireland has a less than averageand certainly less than Greeceregulated
product market. In the formal labour market, employment protection is lower and flexibility
higher than in Greece. In the field of social protection, Ireland has a private welfare system
associated more to a liberal market, whereas Greece has a public systemalthough with low,
mainly old-age state benefits and more traditional intermediary institutions such as Church
and family. In respect to political culture, it is observed that Greece and Ireland share the
same system of clientelistic relations, although the Irish political culture is more consensual,
without great ideological divides and left-right political cleavages which impede pragmatism
in decision making (Daly 2005:133). Becker (2009:58) also classifies Ireland into the liberal
type of political economy, although he remarks that it does not completely fit in this category.
According to his analyses and sources, we see that Ireland, concerning the level of
employment protection and product market regulation, is close to the liberal types of the UK
and the US. Nevertheless, looking at the institutional change between the mid 1990s and mid2000s, Ireland seems to be the most striking case compared to other developed countries
because it did not liberalize at all (Becker 2009:112). In sum, we can say that Ireland

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combines a deregulated Anglo-Saxon political economy with a centralized, consociational


mechanism of interest representation (Antoniades 2007:22).
The Irish model emerged from its history under British rule. Irish society was used to
market pressures and survival in poverty. In the 1980s Ireland experienced a period of
economic crisis. It was this crisis that acted as an impetus for the establishment of the social
partnership model in 1987. Ireland became less LME-like and took on features of a coordinated market economy. Wage bargaining became co-ordinated and centralized. Unions
and employers had a shared sense of responsibility to tackle the crisis, recognized their
interdependence and committed themselves to wage moderation. As Doherty (2011:379) says
The Irish partnership model was distinguished by its all-encompassing nature () Those
focusing on the deliberative nature of the process have tended to emphasize its problemsolving approach (). It was in fact a pragmatic partnership with a focus on the promotion
of national growth and competitiveness. Daly (2005:151) argues that the partnership was
furthermore a way of generating legitimacy for taking measuresfiscal policy and reform
to tackle the crisis. It was this social partnership together with a national strategy for
economic development towards internationalization and a liberal, deregulated regime for
international capital that created in the 1990s and early 2000s a period of large economic
growth, which is often called the Irish miracle. Daly (2005:133) describes Ireland as
economy-oriented (and within that competition-oriented), carefully managed model of
national modernisation, which has self-consciously built a capital-friendly economic policy, a
consensus-oriented political culture and a model of society in which the social is subservient
to the economic.
We have seen that it is not always easy to place countries into a certain variety of
capitalism. Countries are not fixed typologies, but instead approach to a lower or higher
degree a variety of capitalism. Comparing Greece to Ireland, we can state that, although they
share historical features as colonial rule, political instability, poverty7 (see figures 2 and 3)
and emigration, their nature of political economy is different. Greece approximates a model
(either it is called statist, South European, or mixed market) where the state has played and
7

Figures 2 and 3 show that both countries had a similar low GDP per capita in the 1980s and both experienced a
large growth afterwards.

~ 38 ~

still plays an interventionist role in business and labour relations. Production, labour and
welfare systems are highly fragmented and dualistic. Trade unions tend to be also fragmented,
highly politicized and advocate narrow and vested interests via clientelistic links to political
parties. Although they are strongly organized and able to organize mass mobilization, they are
unable to deliver collective goods. Reform proposals often lead to conflict and vetoes. The
elements of co-ordination suffer thus from institutional weaknesses and ideological divisions
while the state is quasi-dysfunctional. Yet there is an expectation that societyat least the
well-connectedwill be protected by the state, thus raw market pressures are not much part
of the scene.
Ireland, on the other hand, approximates more the liberal market model, which it
inherited from the UK, and has been confronted more with market pressures. Product market
regulation is more liberal than in Greece and employment protection is less than in Greece.
The Irish state has been less interventionist in business and labour relations. However,
between 1987 and the beginning of the 2000s a social partnership structure (tripartite: state,
employers and unions) emerged where collective bargaining became more centralized and coordinated. Thus, the Irish liberal market model took on some CME-like features. The social
pacts that were closed in that period were of an encompassing nature: a broad range of actors
addressing an array of policy issues (Doherty 2011:379). Agreements and consensus were
reached due to a shared sense of responsibility to the wider community. Furthermore, Ireland
launched in the late 1980s-early 1990s a new, export-led economic strategy focused on
competitiveness and growth, while in Greece there was not such a strategy. In contrast to
Greece, Irish politics are not divided and impeded by ideological factors, but Greece and
Ireland do share a widespread system of clientelism. This is a factor that has corrupted coordination mechanisms in the years before the crisis hit and that is still a weakness of both
models of political economy.

2.3 Greece: the lead-up to the crisis


Having studied the domestic VoC characteristics of Greece, we can now have a closer look at
the economic performance of Greece prior to the crisis. We will see that the economic
performance was affected by some domestic VoC characteristics mentioned above and
simultaneously affected by the dynamics of EMU and capital mobility.

~ 39 ~

The period from 1981, when Greece became a member of the EU, until the mid-1990s
is characterized by a rise in debt levels (see figure 4). These higher levels are mainly a result
of domestic policies. The current account deficit reached its highest point in 1986 but declined
afterwards (see figure 5). Vamvakidis (2006) argues that Greeces economy was diverging in
the first fifteen years after EU-entry due to a lack of macroeconomic policies such as fiscal
consolidation and structural reforms. Prime Minister and leader of the socialist party PASOK
at that time, Andreas Papandreou, followed economic policies that were mainly focused on
government expenditures in order to build a welfare state, while increasing the wealth of
Greek families and the investments in the education and health sector. After the experience of
the Greek Civil War (1946-1949), the junta (1969-1975) and successive conservative and
repressive governments, Papandreous social and economic policy was like a relief and the
people welcomed him as a hero. Instead of investing in the private sector and in
industrialization, Papandreou chose to expand the public sector and to award favours to trade
unions that supported his party. Seen in the historical context, it was the cheapest and easiest
solution, as other European countries started also to de-industrialize and to move
manufacturing to lower labour cost countries. The expansion in the public sector often
occurred via clientelistic links and not on basis of meritocratic principles. People could get
well-paid jobs for life in the public sector in contrast to jobseekers who did not have the right
connections to the political party in power and who got jobs in the private sector that were
frequently worse paid than in the public sector. A consequence was that under-qualified
people got positions in public administration, leading to further weakening of the functioning
of the state and the bureaucratic machine. This weakness also stems from poor intragovernmental co-ordination, efficiency and resources (Featherstone 2011:195). A lack of coordination and control is also reflected in the processes of budget management. A poor budget
management system with a lack of knowledge on which to assert effective accounting control
leaves enough space for clientelistic and corrupt practices (Featherstone 2011:196). In the
Corruption Perceptions Index 1995 of Transparency International, Greece had one of the
worst scores in Europe; a 4.04 out of ten (with ten being the best score) while Ireland had a
score of 8.578.

See for more results: http://archive.transparency.org/policy_research/surveys_indices/cpi/previous_cpi

~ 40 ~

The first fifteen years of EU membership were thus marked by a low appetite for fiscal
adjustment and structural reforms together with an expansion of the public sector and
clientelistic, corrupt practices. Competitiveness did not improve as much as it could have.
Although EU structural funds were used, a vibrant industrial and services export sector did
not emerge. This is part of the dual economy problem, as described in the VoC literature. The
small and medium size businesses, where we would expect entrepreneurial energy, were, and
still are, excluded from core benefits provided by the state. Shipping magnates, and others,
having political connections, however, did get benefits. In short, the domestic policies in the
political economy of Greece contributed to the development of structural weaknesses.
In the run-up to EMU accession, Greece took measures to fulfil the Maastricht criteria.
As we can see in the figures, the government debt level stabilized and the deficit level
improvedthough it would deteriorate again. Greek GDP was growing more than the EU
average and even Germany's (see figure 4). As EMU membership was very attractive to
Greece, EMU requirements formed an exogenous pressure to adjust its economy. It is argued
that Prime Minister Costas Simitis used EMU as a tool of empowerment and legitimacy to
push measures through. Blavoukos and Pagoulatos (2008) point out that fiscal consolidation
in Greece relied heavily on the rise of public revenues and much less on curtailment of public
expenditure. Besides, the record of structural reforms was mixed. Labour market reforms,
initiated in 1997, failed to address the key weaknesses of the Greek labour market, being
neither radical nor consensual and failing to produce any meaningful results in curbing the
most important labour market rigidities (Papadimitriou 2005:382, 392). Lyrintzis and
Matsaganis (2011:7, 2007:537) speak of repeated failure of reforms due to union opposition.
We see thus that Greece performed economically quite well in the run-up to EMU.
Nevertheless, structural reforms remained difficult to implement due to resistance from vested
interest groups such as trade unions, which had gained much power in the 1980s under
Papandreou.
In the post-EMU accession period, we see that Greece, as a emerging economy, did
not do poorly in terms of growth, debt and deficit levels (see figures 4, 5 and 6). The export
sector was also growing (see figure 7). Nevertheless, macroeconomic imbalances between
Euro-Zone countries were built up over time, as monetary integration made financing on the

~ 41 ~

international capital market easier and cheaper. As Jones (2011:333) illustrates: monetary
integration brought German lenders and Greek borrowers together by lowering the risk
associated with Germans lending to Greeks, while at the same time lowering the cost
associated with Greeks borrowing from Germans. Furthermore, Jones (2011:333) states that:
numerous Austrian, Belgian, Dutch, German, and French banks ended up lending vast
amounts of money to governments, firms, and individuals in Greece, Ireland, Italy, Spain, and
Portugal. The unintended result of monetary union and capital market integration was the
accumulation of imbalances (see figure 8) throughout the Euro-Zone. The capital inflows (see
figure 9) in Greece led to a deterioration of the deficit level, a higher rate of inflation and thus
problems of competitiveness that are linked to the lack of labour market flexibility. The
opposite happened in countries like Germany. Instead, they showed current account surpluses,
low rates of inflation and thus improved competitiveness.
Summing up, we can say that the Greek economy itself, although it did suffer from
domestic institutional weaknesses and political clientelism, did not perform poorly in the
period before the outbreak of the crisis. It went through large growth and steady debt and
deficit levels. Nevertheless, from 2001, the dynamics of monetary integration and capital
mobility created growing imbalances between the Euro-Zone countries. Capital flows
intensified in the run-up to the crisis and resulted in dramatically larger deficit levels for
Greece.

2.4 Ireland: the lead-up to the crisis


As discussed earlier, Greece and Ireland share historical developments but form a different
model of political economy. We will see that, due to the successful export-driven economic
strategy that was adopted in the late 1980s/early 1990s, Ireland showed a better performance
than Greece in terms of debt and deficit levels. Even so, the economy was destabilized, as in
the case of Greece, by similar international capital mobility such as domestic elements
including clientelism.
The export-led economic strategy that was launched in the late 1980s/early 1990s was
aimed at enhancing growth and competitiveness. Looking at the government debt and deficit
levels, we can state that this strategy was successful. Ireland achieved an enormous reduction
in government debt, from 107.5 % of GDP in 1989 to 25% of GDP in 2008 (figure 10).

~ 42 ~

Current account deficits (figure 11) became surpluses in 1992. Looking at figure 6, we see
that Ireland enjoyed from the mid-1990s high (higher that Greece and Germany), but
declining GDP growth. The export sector grew explosively but has stabilized since 2001
(figure 12).
The Irish economic miracle of the 1990s came to an end in the 2000s. As we can see
in figure 9, in 2001 surpluses again became deficits. The Irish economic performance was
destabilized by the dynamics of capital mobility despite strong export competitiveness. As
explained earlier, monetary integration made borrowing easier and cheaper. In contrast to
Greece, in Ireland it was the financial sector that borrowed heavily on international capital
markets and financed in this way a property bubble. When in 2008 the global financial crisis
hit, Irish banks were saved by the government, leading to a rise in Irish sovereign debt levels
(figure 10). Ireland became the second state, after Greece, to call for financial help from the
EU.
Not only the international dynamics of capital mobility but also domestic elements
contributed to the dire state of the Irish financial sector. One factor was a weak and ineffective
regulatory regime. Why did regulation fail? is the question that keeps the minds of scientists
and policymakers busy. According to Chari and Bernhagen (2011:7-10) it was not only the
lack of regulation and the promotion of self-regulation for financial institutions, but also a
symbiotic relationship between banks, the state and developers (house and construction),
which turned out to be an agency capture or regulatory capture story. All three actors
formed part of an institutionalized clientelistic network. Historically there has been a close
relationship between banks and the state apparatus. Regulators switched easily in senior
positions between these institutions. Central Bank directors moved from their positions in the
state apparatus to positions in commercial banks. The result has been a historical lack of
regulation of the sector by the Central Bank (Chari & Bernhagen 2011:8). Chari and
Bernhagen (2011:8) give the example that, when banks were regulated by the Central Bank,
they encouraged their clients to invest in offshore accounts in the Cayman Islands in order to
avoid tax payments. The Irish Financial Services Regulatory Authority (IFSRA), set up in
2003, failed as well in regulating and mitigating the levels of systemic risk. The main reason
of failing regulation is that the Central Bank and the IFSRA never acted fully in a independent
way and they simply overlooked the practices of the financial sector, believing that selfregulation was the best way to manage risk. From the other side, there is also evidence of

~ 43 ~

private interests capturing agency, mainly in the form of lobbying between corporate actors
and the government, in this case the Fianna Fil party.
The state apparatus did not only have a close relationship with the banks but also with
the developers. Chari and Bernhagen (2011:10) show that the Fianna Fil government
brought in different tax rules that would encourage the building barrage from which
developers benefited. The state itself benefited as well from the tax revenues that were
generated due to the construction boom. Another dimension of this symbiotic relationship was
the fact that political parties were financed by developers. By financing political parties (in
this period the Fianna Fil party), developers had access to policymaking. This is another
example of agency capture by private interests.
The third relationship in this institutionalized network was the link between banks and
developers. Banks gave massive loans to the construction developing companies, relying
again on foreign borrowing. As banks were weakly regulated, they had the room to compete
for the business of property developers. In this way, Ireland witnessed the highest increase in
house prices. Property prices doubled between 2000 and mid-2007, when they reached their
peak (Chari & Bernhagen 2011:12).
Despite a well-oiled market adjustment machine in the form of an economic strategy
and a co-ordination mechanism to negotiate the cost sharing of adjustment (the social
partnership model), a clientelistic institutionalized network undermined a workable situation
in circumstances of growing international structural imbalances.

2.5 EUs unexpected reaction, financial assistance and the troika


programme
Although Greece and Irelandas emerging economiesperformed quite well in the precrisis period, they eventually got into economic turbulence. The rescue of Irish banks resulted
in high government indebtedness. In 2009 the newly elected Pasok government in Greece,
with George Papandreou as prime minister, tried to discredit its predecessor (Nea Dimokratia)
by being honest and transparent about debt figures that were actually higher than the previous
government had stated. The mere fact of indebtedness is not what caused the sovereign debt
crisis. The trigger was when Germany made clear that countries had to sort out their own

~ 44 ~

problems and that the EU was not going to provide the required collective goods. As stated
earlier, the EMU had not set up crisis-management mechanisms and there was no agreement
on how the costs of adjustment would be shared. It was thus clearly a policy failure that
turned the sovereign debt problems into a crisis. The EU/German reaction on the debt
problems was not in line with market expectations and it is at this point that sovereign bond
spreads began to diverge rapidly (see figure 13 and 14). This means that it became much more
expensive for Greece and Ireland to borrow on the financial markets. Speculation, especially
concerning Greece, was thriving and rating agencies downgraded continuously the
creditworthiness of both countries. Eventually, Greece and Ireland were forced to call for
financial assistance from the Euro-Zone.
On May 2nd 2010 the Greek government and the troika (EC, ECB, IMF) agreed on a
three-year programme that provided a loan package of 110 billion Euros consisting of
bilateral loans (80 billion) and a loan from the IMF (30 billion). The main objectives of the
programme were based on two pillars: fiscal consolidation and the improvement of the
economys competitiveness. To reach these objectives and to receive the loan tranches, the
socialist Pasok government was forced to take unprecedented austerity measuresbased on
the conditionality principle of the loan package. This measures were of a neoliberal variety
that contradicted, as we know by now, not only the partys ideological profile, but also the
partys whole historical course and past political practice (Lyrintzis 2011:16-17). Voskeritsian
and Kornelakis explain (2011:1-2) that:
The first pillar entailed a drastic elimination of the budget deficit through cuts in
public expenditure and increases in public revenues. To achieve the former, the
agreement involved cuts in public investment and in public sector wages, a
reform of the pension system [an increase of retirement age to 65 and the
merging of pension funds], and a general slimming of the public sector
[including the firing of 200.000 public employees till 2015 (Tsitsas 2011)], while
the latter is pursued via a restructuring of the taxation system and the fighting of
tax evasion, the elimination of corruption, and the privatization of a large
section of public sector enterprises and utilities. The second pillar, on the other
hand, aimed at creating a more attractive environment for investment. To this
end, the government was bound to reduce the labour cost in the private sector,
via a process of internal devaluation and through changes in the collective
bargaining system, the opening up of any remaining closed professions, the

~ 45 ~

simplification of the processes to set up new enterprises, and the elimination of


bureaucracy.
Ireland also received a financial rescue package of 85 billion Euros after signing an
agreement with the troika on November the 28th in 2010, almost seven months after the
agreement with Greece. The main objectives of the adjustment program for Ireland were:
-

An immediate strengthening and comprehensive overhaul of the banking sector.

An ambitious fiscal adjustment to restore fiscal sustainability; correction of


excessive deficit by 2015.

Growth enhancing reforms, in particular on the labour market, to allow a return to


a robust and sustainable growth.9

In the Memorandum of Understanding on Specific Economic Policy Conditionality


(December 3rd 2010)10 we can read that, for the financial sector, recapitalization and
deleveraging measures were required, whereas fiscal consolidation had to be reached through
tax increases and a reduction in welfare and public expenditure (for instance social protection
expenditure cuts, a reduction of public service employment and a reduction of existing public
service pensions). The troika also asked the Irish government to implement structural reforms
in the labour marketfor instance a reduction in the nominal level of the current national
minimum wagein order to facilitate adjustment. Finally, they demanded a change in the
unemployment benefit system in such a way as to provide incentives for an early exit from
unemployment. The implementation of the programme for both Greece and Ireland is
assessed by the troika, which makes quarterly visits to these countries.
Although the Greek and Irish political economy had their own weaknesses, the trigger
for the sovereign debt crisis lays in policy failure on the European level. Both countries are
9

Source:

http://ec.europa.eu/economy_finance/eu_borrower/ireland/index_en.htm, accessed on July 5th 2012.


10

Source:

http://ec.europa.eu/economy_finance/articles/eu_economic_situation/pdf/2010-12-07-mou_en.pdf, accessed on
July 5th 2012.

~ 46 ~

now faced with a one-size-fits all programme of market-led adjustment. As is argued here, the
adjustment process will depend mostly on domestic configurations. Internal weaknesses and
strengths will become more significant. What can we expect from the adjustment process in
Greece and Ireland, on the basis of the historical and VoC-background we now have on both
countries?

2.6 Expectations
What do we expect from the adjustment processes in Greece and Ireland, looking at both the
external pressure and the domestic configurations of each country? First, the external
pressure, the troika programme or in other words the Memorandum of Understanding, is a
hard form of pressure because it is a loan package based on the conditionality principle.
Both countries have to commit to the conditions, otherwise the loan tranches will not be
given. We expect Greece and Ireland, in the first instance, to follow the programme.
Furthermore, the content of the programme is quite precisely defined. That means that Greece
and Ireland do not have much room for their own policy decisions and that they have to adjust
in the prescribed way in order to meet their obligations.
Second, we know that Greeces problems are from the outset greater and that the
model of capitalism differs from the Irish one. Looking at debt and deficit levels in the precrisis phase, Greece performed worse than Ireland. Greeces competitiveness did not improve
as much as might have been expected, partly due to structural institutional weaknesses that
built up over time. The focus of the Irish economic strategy has been on economic growth,
competitiveness and internationalization. The liberal and international orientation of the Irish
economy fits better to the dominant, international and European economy and to the
programme imposed by the troika. Thus, we expect Ireland from the outset to adjust better to
the troika programme than Greece.
Next, looking at politics and political culture, we have seen that Irish political culture
is, in contrast to Greek political culture, more consensual, without great ideological divides
and political cleavages between left and right. We expect that the Irish adjustment process
will be easier due to more consensus in politics. In Greece we expect more political cleavages
between right and left political parties which can resist or block the adjustment process.
Furthermore, we expect dialogue with social partners in Ireland to be more consensual and

~ 47 ~

will defend encompassing interests. In Greece we expect that interests will be more narrowdefined and that social dialogue will develop less smoothly.
Looking at interest representation and power structures, we expect that market
liberalizing reforms and measures as prescribed in the troika programme will encounter in
Greece a weak domestic constituency for support as the structure of interest representation is
skewed towards the interests of the public sector and the privileged position of few large
enterprises. We expect the Greek trade unions (GSEE, ADEDY) to resist greater labour
market flexibility, pension reform and privatization because they are afraid of losing their
privileged, protected position and fear low welfare protection. The employers federation,
SEV, which represents the interests of major employers, will also oppose reforms and
adjustments as liberalization and deregulation because major employers enjoy advantages that
stem from the high level of regulation (for example barriers to market entry). In short, we
expect Greek unions and federations to oppose more fiercely the troika programme than the
Irish unions (ICTU, IBEC). Irish unions will, on the one hand, protest against austerity
measures and reforms, but will, on the other hand, take a more problem-solving approach,
defending, not mere narrow, but more encompassing interests.
Given all these factors, it can be expected that Greek society will respond to and resist
more fiercely the adjustment programme than Ireland will. Adjustment and reform will be
more difficult to achieve in Greece than in Ireland. This emanates from the fact that problems
were from the outset larger in Greece and that the degree of discord between the imposed
measures and the VoC model of Greece is larger than in Ireland. Furthermore, domestic
factors as political culture, ideology and interest representation strengthen our expectation.
Greece is more likely to defect or to reinterpret the imposed measures (to the extent there is
room for own policy choices), whereas Ireland is more likely to reform according to the
imposed programme.

~ 48 ~

3. Case study: Greece

We have arrived at the part of the thesis where we will examine the adjustment process in
Greece, from May 2010, when the economic adjustment programme started, until now.
According to our expectations outlined in the previous chapter, Greece will respond and resist
fiercely the imposed troika programme. Therefore, adjustments and reforms will be difficult
to achieve. Are our findings, after analysing the relevant documents, in line with our
expectations based on the Greek VoC characteristics? Step by step we will look at the
development of the adjustment as assessed by the troika, the discourse and responses of the
GSEE, ADEDY and SEV, and at how VoC factors determined and continue to determine the
way in which Greece is adjusting.

3.1 The economic adjustment programme: unprecedented in the scope of


national effort required
As known by now, the Greek prime-minister George Papandreou of the Pasok party, together
with the Euro area and the IMF, agreed in May 2010 on a three-year financial support and
economic adjustment programme. According to Olli Rehn and Dominique Strauss-Kahn the
programme was unprecedented in the scope of national effort required, as well as in the scale
of financial support, 110 billion euros (European Commission (EC) 2010). They further
stated that a multi-year effort was required in order to bring down Greeces debt and to spur
competitiveness. For the programme to be successful, national commitment going beyond
political party lines would be needed. Rehn and Strauss-Kahn recognized that a great sacrifice
was demanded from the Greek people.
In exchange for financial support, the Greek government had to follow the
programme, taking measures to achieve fiscal consolidation and to enhance growth and
competitiveness. Contrary to the adjustment process in the pre- and post-EMU accession
phase where external pressure left more room for individual policy choices, the current
external pressure in the form of the troika programme is much more defined and prescriptive.
Joint EC/IMF/ECB missions made quarterly visits to Greece to assess compliance with the

~ 49 ~

terms and conditions of the economic adjustment programme required for the quarterly
disbursements of bilateral financial assistance.
By August 2010, when the first quarterly review mission took place, the programme
had made a strong start. Greece has managed impressive budgetary consolidation during the
first half of 2010. It has also achieved impressive progress in major structural reforms which
will help to transform the economy (EC 2010a:9). All budgetary performance criteria were
met and pension and labour market reforms were ahead of plans. Nevertheless, the European
Commission stated that to implement other structural reforms, such as the opening-up of
closed professions and deregulation, the government would have to overcome resistance from
entrenched vested interests. The EC thus had indicated from the beginning that vested
interests, as the ones from trade unions, were a possible obstacle to the implementation of
structural reforms.
The second and third review missions, that took place respectively in November 2010
and February 2011, stated that the programme was broadly on track and that there had been
further progress, mainly in reducing the fiscal deficit. Key reforms on the pension system,
the liberalization of the transport sector and the increase of labour market flexibility were
implemented in the early months of the programme (EC 2010b:2). Unit labour costs were
brought down, a measure the troika sees as one that boosts competitiveness. A new
investment and competition law, and new rules on licensing were adopted, in order to create a
more business-friendly environment. Furthermore, the programme was effective in
safeguarding financial sector stability. Thus, the overall assessment of the troika was positive.
However, it was observed that the downturn in domestic demand was deeper than expected.
Raising revenues through tax collection remained problematic due to weak tax apparatus and
clientelistic practices. Moreover, the troika observed that policy implementation had become
more difficult (EC 2010b:1). Progress since the summer has been slower with, for instance,
reforms of the remuneration system is the public sector and of the wage bargaining system
facing significant delays. Slower progress reflects the need to overcome vested interests and,
in a few cases, objective technical and legal challenges (EC 2010b:2). We see that reforms in
the public sector and the labour market are delaying, which may indicate structural
weaknesses as a low reform capacity, but even more Greek VoC factors as skewed interest
representation, clientelism and politicization. As the economy was deteriorating, the Greek
government acknowledged the need for additional fiscal measures and structural reforms and
prepared its medium-term fiscal strategy, which would cover reforms in public enterprises,

~ 50 ~

healthcare, tax policy, public employment etc. It also committed to scale up its privatization
programme in order to raise 50 billion euro by 2015. The troika concluded that More than
ever, the next steps in the implementation of the programme will require the governments
determination, political coordination and the consensus of the Greek society (EC 2011a:3).
In compliance with the findings of the fourth review mission (EC 2011b), further steps
were taken in the implementation of the medium-term fiscal strategy addressing key
weaknesses of Greek public finances. Legislation to modernize public administration, reform
healthcare, improve the functioning of the labour market, remove barriers to set up businesses
and liberalizing transportation was passed. A privatization fund that would deal with the
privatization of state-owned assets was legislated. In a newsletter of the Greek Ministry of
Finance (19 May 2011) we can read that Greece achieved in the first year of the programme
the largest annual fiscal consolidation ever by a Euro-Zone economy (a deficit reduction of 5
% of GDP). There were large expenditure cuts in wages, pensions, fixed term contracts,
employment and social spending, mainly in the public sector and tax increases. Retirement
age was raised to 65. Firm level agreements were introduced in the labour market. Closed
professions were partly liberalized. Despite these reform efforts, the recession was more
severe than expected. The troika concluded that reforms had to be reinvigorated and that
political and social consensus remained a prerequisite for success. The weaknesses in
institutional capacity in Greece were addressed by sending a Task Force from the European
Commission to provide technical assistance. The Euro-Zone leaders recognized at the Euro
summit in Brussels (July 21st) the need for a broader and more forward-looking policy
response to assist Greek government in its efforts to bolster debt sustainability.11
In the following period, until the announcement of a second economic adjustment
programme in February 2012, the economic recession continued to be deeper than previously
projected. Greece was and still is in a deep recession with GDP growth declining by around
7% (see figure 15). The deficit was reduced but the debt burden, given the high interest rates,
continued to rise and to be unsustainable (from 129.4% in 2010 to 165.3% in 2012, see figure
16). Unemployment had risen tremendously, especially since the start of the programme (see
figure 17). The troika concluded in February 2012 that Greece made mixed progress towards
the ambitious objectives of the first adjustment programme. The pace of implementation of

11

Source: http://ec.europa.eu/economy_finance/focuson/crisis/2011-07_en.htm, accessed on July 5th

2012.

~ 51 ~

growth-enhancing reforms was insufficient. Factors as political instability12, social unrest,


issues of administrative capacity and the recession hampered the implementation of structural
reforms. The European Commission stated that These reforms have not yet reached the
critical mass that is necessary to boost productivity and transform the investment climate in
Greece. The privatization agency was created but there were delays in the implementation
due to technical and legal hurdles and worse market conditions. Thus both institutional
weaknesses and a low market appetite for Greek assets impeded the privatization process. A
second economic adjustment programme was launched, that according to the president of the
EC, Mr. Barroso, would focus more on reforms, competitiveness and growth in order to give
hope to the Greek people. The EC stated that the success of the second programme depended
chiefly on Greece and warned that implementation risks (weak administrative capacity, social
unrest and political tensions) would remain very high. It was once more emphasized that the
implementation of reforms and thus the success of the programme, would require the
governments determination, enhanced political coordination and the consensus of the whole
Greek society.
Concluding, we see that, due to the hard external pressure and conditionality of the
programme, Greece made strong efforts and took, often painful, measures to adjust. It actually
followed the programme to a certain level, although the Greek variety of capitalism is quite
far from measures imposed, as we saw in the previous chapter. Thus, our findings are quite in
line with our expectations, that Greece will initially follow the programme. However, from
2011 on, implementation of structural reforms as privatization, liberalization and deregulation
became more and more difficult to implement due to political and institutional weaknesses,
vested interest groups and social tensions of which the troika was aware. The troika reviews
thus indicate that VoC-like weaknesses play a role in the adjustment process. There is no
evidence that the programme actually works, as the economy is still in a deep recession, with
high unemployment rates and unsustainable debt levels. Economic market-led adjustment was
thus poor, partly due to VoC-like structural weaknesses and forces of path continuity, which
will be examined further in the next part.

12

It is important to note that in November 2011 prime minister George Papandreou proposed to hold a
referendum for the acceptance of the terms of the Euro-Zone bailout deal. Due to external opposition from other
Euro-Zone leaders, he abandoned the plan. He agreed with the leader of the opposition to form an interim
government. Papandreou stepped aside and a new national unity government was formed, headed by the former
Vice President of the ECB, Lucas Papademos.

~ 52 ~

3.2 VoC-configurations and their effects


3.2.1 GSEE, ADEDY and SEV: vested interests opposing change and reform?
In the previous chapter we argued that the troika programme will encounter a weak domestic
constituency for support as the structure of interest representation in trade unions is skewed
towards the public sector. Measures like wage cuts, labour flexibility and privatization of
state-owned enterprises would fiercely be opposed by the GSEE and the ADEDY, as these
affect their deeply rooted interests.
As we expected, examining the statements and announcements of the GSEE and the
ADEDY leads to the conclusion that both are against the adjustment programme as imposed
by the troika. They see the European Commission as a representative of a capitalist,
conservative logic, which hides itself behind the IMF and imposes its neoliberal practices on
Greece. They see the troika as a kind of loan shark who lends money to Greece at extreme
high interest rates, thus making profit out of the loans. Furthermore, Greece is, in their vision,
attacked by the neoliberal financial markets and their speculation. In their vision, the
European Commission uses Greece as a laboratory animal with which to conduct experiments
concerning the welfare state13. Greece is being treated as a colony and not as an independent,
sovereign state. This vision of the relation between the troika or Europe in a broader sense,
and Greece, poses directly a legitimacy problem. The programme is seen as imposed on the
country by a foreign power in order to make its economic situation worse instead of better.
The relation between the trade unions and the Greek government is characterized by
distrust. The ADEDY says that the government imposes its measures in a dictatorial way. The
government is accused of acting only in the interest of the creditors and not in the interest of
the Greek people. They just obey to the troika and do not want to engage in social dialogue.
The GSEE says that the government must not proceed sloppily to the irrational demands of
the troika.14 With the support of the IMF and the European Union the Greek government
wants to form a new model in order to save the neoliberal system. Furthermore, the Greek
government does not communicate clearly and in a consistent way; they act differently from
13

.

(GSEE Statement, June 7th 2010). All Greek texts are translated by the author.
14


(GSEE Statement, February 2nd 2012).

~ 53 ~

what they say. In short, the government is accused of not being loyal to the Greek interests.
They obey too easily to the measures the troika wants to impose. The relation between trade
unions on the one side and the Greek government and the troika on the other side, is
characterized by a lack of trust and legitimacy for the adjustment programme.
The programme itselfalso called the memorandumis seen as unfair and ineffective
because the burden is unequally placed on the shoulders of the working class and the retired
people. The programme is undermining the social welfare state and creating labour relations
like those in China and India. The goal of the GSEE and the ADEDY is to protect the rights of
the workers, the unemployed and the retired. They stress several times that they are against
the anti-social and anti-growth measures, a reduction of labour cost, the abolition of the 13th
and 14th salary, labour market flexibility, the decentralization of collective bargaining, the
abolition of collective agreements and the privatization of national assets, without proposing a
social dialogue where there is room for negotiation. The GSEE explicitly says that we do not
refuse to engage in social dialogue, but our standpoints are non-negotiable.15 The GSEE and
the ADEDY state that they and those they represent are not to blame for the crisis. As causes
of the dire state of the Greek economy and the problems in the public sector they see mainly
tax evasion by big businesses and entrepreneurs, the black economy and the two party
clientelistic system. Thus, for the problems in public finances, they blame the big
entrepreneurs who do not pay taxes, the SEV who represents these entrepreneurs and the
Greek political system. Greek politicians betrayed the country in the past by being involved
in corrupt practices and scandals16. In short, the GSEE and ADEDY are against the measures
of the troika programme because they affect disproportionately hard on those who are not to
blame for the crisis. Furthermore, the unions state that wage and pension cuts do not improve
competitiveness and do not lead to a more productive and effective public governance. The
adjustment programme is in their vision the wrong recipe. As the GSSE said after ten
months of implementing the memorandum: the medicine is worse than the illness.17 To solve
the crisis, other steps have to be taken. According to the trade unions, the politicians who
misused their power for private gains should be punished and imprisoned. First, trust must be
15

(GSEE Statement,
December 2nd 2010).
16

The Vatopedi and Siemens controversies of 2008 are well-known scandals entailing bribery and
corruption. For more information see: http://www.pfhub.com/top-7-political-scandals-in-greece/
17

... (GSEE Statement, February 23rd 2011).

~ 54 ~

regained in the political system. Secondly, meritocracy must be enhanced and corruption
eliminated. Thirdly, labour rights have to be protected. Unless these steps are taken, the
unions will have the responsibility to act, to be in the streets every day and to become their
nightmare.18 The slogan used by the unions is we do not owe anything, we do not sell
anything, we do not pay.19 This fierce reaction shows the unwillingness and anger of the
unions and of Greek society. Numerous strikes and demonstrations have taken place, mainly
in the streets of Athens, in the last two years. In May 2011, the so-called Indignant Citizens
Movementa civilian, not partisan movementstarted to protest against the austerity
measures in different Greek cities.
Examining the statements of the employers federation SEV, we see a different and
sometimes adversarial reaction. The first adjustment programme was seen by the SEV as a
therapy and not a punishment.20 The chairman of the SEV, Dimitris Daskalopoulos, urged
for a direct implementation of the programme, without the denial of reality.21 He stressed the
national responsibility of Greece for following the programme and taking measures that had
to be taken long time ago. It does not depend on our European partners if we stand up or if
we default,22 said Mr. Daskalopoulos. Apart from what Europe can do or must do for us,
with or without the memorandum, with or without the support mechanisms, our salvation, the
exit from the economic impasse, depends on our mindset, lies in our hands. 23 The SEV
stressed the need for social and political consensus: the memorandum must not divide the
Greek people but unify them24 and political parties have to speak with one voice.25

18


. . (ADEDY Announcement, May 5th 2010).
19

, , (ADEDY Announcement, December 2nd 2011).

20

(SEV Statement, April 23rd 2010).

21

(SEV Statement, May 5th 2010).

22

(SEV Statement,
February 2nd 2011).
23

,
, , ,
, , (SEV Statement, March 11th, 2011).
24

(SEV Statement, September 9th

2010).
25

... ( SEV Statement, January 4th 2012).

~ 55 ~

Thus, the SEV profiled itself initially as a proponent of the adjustment programme.
According to the SEV, the programme can create a more business and investment friendly
climate. Daskalopoulos stated that innovation and entrepreneurship in Greece have to be
enhanced. He further argued that he wants to protect the collective bargaining system, the 13 th
and 14th salary and the minimum wage, as he does not think that Greece is facing a problem
of labour cost. It is the clientelistic system and the obese and overspending public sector with
its vested interests that are seen as cause of the crisis. These factors as well as political party
interests impede the proper implementation of the programme. Therefore, the national unity
government formed in November 2011 was seen by the SEV as the last hope for Greece. In
short, the SEV welcomed the adjustment programme with cuts in the public sector and the
abolition of hurdles for the business sector. The SEV opposed cuts in the private sector as this
sector is not to blame for the crisis. Besides, cuts in the private sector were not considered a
solution for the crisis. We see that while in the beginning the SEV was an advocate of the
programme (agreeing with cuts in the public but not in the private sector), it became an
opponent of the second adjustment programme, indicating that austerity had reached its limits.
Measures to improve the business and investment climate in Greece were positive, but more
austerity measures in both the private and the public sector would deteriorate the economic
situation in Greece and affect entrepreneurship. Daskalopoulos argued that the reaction of the
Greek people (protests and strikes) was a natural consequence of a 40% wage cut. Europe has
to show more understanding to the Greek people.
We see that both labour and employers voices (GSEE/ADEDY and SEV) wereand
still areas we expected, against the adjustment programme of the troika and that they
oppose austerity measures. Change and structural reforms, such as labour market flexibility,
liberalization and privatization which would shift the Greek economy towards a more liberal
market model, are especially opposed by the GSEE and the ADEDY. The rhetoric of the
GSEE and the ADEDY indicates the distrust and lack of consensus that exists between unions
and the state. SEVs rhetoric is softer, but also mentions the lack of social and political
consensus. Nevertheless, the mere fact that Greek trade unions oppose the adjustment
programme is not explained by the Greek variety of capitalism, as unions from different VoC
countries, such as Irish ones, might also oppose it. Seen in the light of current deep recession,
their reactions are quite reasonable. Therefore we have to look behind their rhetoric to see
their VoC characteristics.

~ 56 ~

The GSEE represents formally the private and the broader public sector workers.
However, representation is skewed towards the public sector. For the private sector to be
unionized, enterprises must have more than twenty employees. As 97% (EIROnline 2009) of
the private sector in Greece consists of small-medium enterprises of less than twenty
employees, most private sector workers are thus not represented by the GSEE. In certain areas
of the public sector, union density reaches 90% (EIROnline 2009). Therefore, the GSEE and
the ADEDY, which represents employees in public administration, tend to protect the
interests of the public employees. As we referred to in the previous chapter, the public sector
is politicized. The two major parties, Pasok and Nea Dimokratia, gave during the last thirty
years jobs to people, in exchange for votesa practice given the Greek name rousfeti. The
governing board of unions is also appointed by managers from the DEKO (), the stateowned companies. The enterprises federation SEV has a small coverage of firms in total,
because of the same fact, that the plethora of small- and medium-sized enterprises do not have
a voice. Thus, the SEV represents mainly large corporations. Although the SEV rhetorically
espouses liberalizing reforms, it remains committed to consensus-driven ones, as most of the
large corporations in Greece benefit from anti-competitive regulations (Featherstone 2008:3031). The politicization and skewed representation of Greek trade unions leads to great
opposition against the liberalizing structural reforms required by the troika programme.
As we read in the reviews of the European Commission, the implementation of
growth-enhancing structural reforms was insufficient. This results from the clientelistic
relations between politics and trade unions. Although there is a lot of mistrust between them,
they both try to protect each other in order not to lose their privileges. This means that some
reforms asked by the troika are resisted while austerity measures are broadly imposed and hit
especially the people who are on the non-protected side of the dual economy. The way in
which the programme is implemented ignores thus the dual economy characteristics and sends
the economy deeper into the recession. In VoC-terms we can say that the Greek trade unions
are agents who oppose change and stick to path continuity because the costs of change are
higher than maintaining the status quo. Furthermore, the way the programme is implemented
produces more non-complementarities which worsen the economic situation.

~ 57 ~

3.2.2 Political dynamics


Apart from the VoC characteristic of interest representation, political developments played a
great role in the adjustment process. After the first turbulent year of adjustment, the Pasok
government of George Papandreou was replaced in November 2011 by a national unity
government. The technocrat Lucas Papademos, the new prime minister, tried to keep Greece
on track and to implement more reforms. As this national unity government was not elected
democratically and legitimacy was thus low, it was dissolved, and new elections were held on
May 6th 2012. Nea Dimokratia and especially Pasok had lost in the meantime much of the
Greek peoples trust. Both parties were punished in these elections and the left-wing party
Syriza, which was an anti-memorandum, thus anti-programme advocate, became for the first
time in Greek politics the second largest party, breaking in this way the two-party system. Nea
Dimokratia, who was in favour of the programme, lost votes but was still the largest, while
Pasok came third. The new anti-memorandum party Independent Greeks (
) came fourth. New elections were held on June 17th, as a coalition government could
not be formed on the basis of the previous election results. The results of the last elections did
not differ much, but Nea Dimokratia was able to form a coalition, with Pasok and Dimar, a
small left-wing party. The changes in the political realm have certainly affected and slowed
down the adjustment of Greece. Once more the lack of trust and consensus in the political
system have proved to make adjustment difficult. Furthermore, the upswing of the leftist party
Syriza in the last two elections and the creation of the new anti-memorandum party
Independent Greeks indicate the mass opposition of Greek people towards the troika
programme.

3.3 Conclusion
Concluding, we can state that according to our expectations, Greece initially followed the
troika programme and tried to pass liberalising measures. It thus tried to shift its political
economy towards a more liberal model. Nevertheless, having examined the reports of the
European Commission and the economic figures, we see that later on the implementation of
the adjustment programme became more difficult and that the economy experiencedand
still isa deep recession with unsustainable debt levels. We can thus say that the economic
adjustment programme for Greece has not been successful. Although there were attempts to
reform, the economic result of the programme shows a defection of the desired targets.

~ 58 ~

As expected, the reactions of the Greek trade unions towards the programme have
been fierce. The programme was eventually opposed by all unions. The analysis of the
unions documents and discourse gives us an indication of the relationship between unions,
the Greek state and Europe, at least the way the unions see this relationship. The lack of trust,
consensus and determination in Greek political culture is once more emphasized in their
discourse. The Greek unions mere opposition towards the economic adjustment programme
cannot be explained by the Greek domestic VoC characteristics because unions from
countries with other VoC characteristics may react the same way.
What Greek domestic VoC characteristics do shape and explain, however, is the
outcome of the economic adjustment programme. The development of Greeces political
economy over the last thirty years led to a skewed representation and politicization of trade
unions intertwined with clientelistic practices. The trade unions tend to oppose liberalising
measures fearing to lose their privileges and their protection from the state. The state, the
political parties in fact, depend on the unions to get votes. Furthermore, as the Greek labour
market and the welfare system are dual and institutional complementarities to alleviate and
counterbalance are absent, trade unions fear that liberal measures will not have the expected
growth-enhancing effect. The opposite is expected; the liberal measures are feared by the
unions to push Greece further in an economic recession, which actually happened.
Historically the Greek people, especially the protected core, are not used to market
pressures and market led adjustment. Demonstrations, protests and riots have been paramount
the last two years. This has also been noticeable in Greek politics. Electoral opposition has
grown, new anti-memorandum parties were established and the major victory of the leftist
party Syriza broke for the first time in thirty years the two party system. These developments
show the anti-memorandum sentiment of the Greek people but also the political turbulence
which definitely has affected the proper implementation of the adjustment programme.
Moreover, the implementation has also been impeded by technical weaknesses; Greece has a
weak state apparatus with a low level of reform capacity. Worse market conditions further
hindered reform measures such as privatization.
In sum, the economic adjustment process has been impeded by Greek agents who stick
to path continuity as long as the costs of change are higher than the benefits and by structures
which pose technical problems. As the newly elected government is committed to continue

~ 59 ~

with the economic adjustment programme, developments are still going on and outcomes will
heavily depend on the domestic forces of path continuity and change.

~ 60 ~

4. Case study: Ireland

In this chapter we will examine, in the same as the Greek case, that of Ireland. First, we will
look at how the implementation of the economic adjustment programme was assessed by the
troika. Second, we will see what the reactions of the Irish trade unions were and how these
and other VoC characteristics played a role in the adjustment process. Finally, we will draw
conclusions by comparing the Irish case to the Greek one.

4.1 The economic adjustment process in Ireland: commitment to do


whatever it takes
On November 28th 2010, the Irish authorities agreed with the European Commission, the IMF
and the ECB to an 85 billion euro financial assistance programme. It included loans not only
from the EU and the IMF, but also bilateral loans for the UK, Sweden and Denmark and an
own Irish contribution through the Treasury cash buffer and the investments of the National
Pension Reserve Fund. Prior to the call for financial assistance, Ireland had tried to restore
public finances. Despite the implementation of five fiscal consolidation packages since mid2008, general government budget deficit and debt were increasing. The troika programme had
to tackle these problems. As described in the third chapter, the funding from the programme
partners is conditional on speedy action to clean up Irelands financial sector, to put the public
finances on a sustainable path and to implement a structural reform package (EC 2011c: 5).
The banking sector had to become smaller and the banks had to get recapitalized and
deleveraged. Regulation and supervision of the financial sector had to be reformed.
Expenditure, especially in the public sector, had to be reduced and the labour market had to be
reformed in order to enhance competitiveness and growth.
According to the joint EC/ECB/IMF mission (EC 2011d) to Dublin that took place in
July 2011, the programme was well on track and important progress was made in the areas of
fiscal consolidation, strengthening of the domestic financial sector and growth-enhancing
structural reforms. The government deficit for 2011 was projected to be well below the 10.6%
of GDP programme ceiling. The recapitalization of the domestic banks was completed by the
end of July deadline. Progress was made towards the agreed deleveraging targets and two

~ 61 ~

planned mergers (Allied Irish Banks with EBS Building Society and Anglo Irish Bank with
INBS) were completed, while bank boards were renewed. Concerning structural reforms, the
Irish government was working with the social partners to reform the framework of sectoral
wage agreements. The government also passed legislation increasing the pension age from 65
to 68 by 2028 and there was progress towards liberalizing sheltered sectors such as the legal,
medical and pharmacy profession. Irish exports were doing quite well, whereas domestic
demand remained subdued. The troika stated that the determination of the Irish government to
implement the programme enabled a noticeable reduction of yields on Irish sovereign bonds
(from 14% in July to 9% in September, see figure 14).
In the autumn of 2011, the troika mission stated that Ireland continued to perform well
under the programme. Growth exceeded expectations in the first half of 2011 (actually, GDP
growth returned after years of contraction, see figure 18) and exports were still strong. Fiscal
consolidation remained in line with the programme. In the financial sector, progress was made
in strengthening the supervision of credit institutions and banks sales of non-core assets were
broadly on track, despite the generally weakened market sentiment in the Euro Zone. In the
field of structural reforms, programmes were prepared to invest in training of unemployed
people. Work continued towards the end of year commitment to identify state assets suitable
for privatization. In short, the programme was still well on track and the troika stated that
strong programme implementation (), has led to a sharp improvement in market perception
of Irelands riskiness since the last review (EC 2011e:3). The only challenges that remained
important for Ireland were the worsened macro outlook on a global scale, the developments in
the euro area debt crisis and the higher than anticipated domestic unemployment.
The next mission of the troika, that took place in January 2012, stated that Against an
increasingly challenging background, the Irish authorities continue to rigorously implement
their adjustment programme () (EC 2011f:3). The export sector was still strong (see figure
19), thus contributing to GDP growth. Fiscal consolidation was well below the programme
ceiling and for the 2012 budget the Irish government was committed to do whatever it takes
to achieve a deficit reduction. In the financial sector everything proceeded in line with the
programme and bank deleveraging even exceeded the programmes targets. Reform of
sectoral wage agreements made progress by introducing legislation which aims at making
wage-setting more responsive to economic conditions. A draft document was shared with the
contours of the privatization strategy with the aim of reducing rising public debt (see figure
20), increasing overall efficiency and funding some job-creating investments. In sum, we see

~ 62 ~

that implementation of the programme remained strong and that some further liberalizing
structural reforms were under way.
The assessment of the troika during its last mission in April 2012 (EC 2012) continued
to be positive. The implementation was on track and market confidence had improvedbond
spreads had stabilized. The government launched additional plans (Pathways to Work
Strategy, Action Plan for Jobs) to tackle the challenge of unemployment and enhance the
economys competitiveness and flexibility. Furthermore, the troika argued that efforts to
strengthen the quality of bank assets intensified through strategies for dealing with mortgage
and SME loan arrears.
We see that the Irish authorities continued and continue to abide to the adjustment
programme with determination and commitment. The result of the economic adjustment
programme has been that the economy returned to growth and the deficit again became a
surplus (see figure 21). Exports were still doing well. Nevertheless, the debt burden was
rising. Challenges and risks that have to be taken into account are the low domestic demand
and high unemployment (see figure 22) as well as external developments in the global
economy and the European sovereign debt crisis.

4.2 VoC-configurations and their effects


4.2.1 ICTU and IBEC
The Irish Congress of Trade Unions (ICTU) is the largest civil society organization,
representing and campaigning on behalf of approximately 800000 workers in the public and
private sector. How did the ICTU respond to the troika programme and the measures taken by
the Irish government?
As we expected, reactions of the ICTU towards the troika programme were (as in the
Greek case) negative. Failing of financial regulation is seen as one of the reasons of the Irish
problems and not the social partnership model. The Congress described attempts to blame
social partnership for the economic crisis as a facile exercise in scapegoating designed to
obscure the true cause of the collapse: banks, builders and toxic Government policy (ICTU
2011b). Therefore, austerity measures like wage and pension cuts are considered to be unfair
and not part of a solution. The measures are penalizing the poorest and lowest paid, for the

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reckless behaviour of others (ICTU 2010c). The economic advisor of the ICTU, Mr. Paul
Sweeney, argues that the government has a skewed sense of priorities, by choosing for wage
cuts and not for jobs (ICTU 2010a). The government is giving taxpayers money to the banks,
thereby putting the interests of bankers over those of citizens. The ICTU accuses the
government of taking measures only to appease the financial markets (ICTU 2010b). The
ICTU believes such austerity measures, including previous ones before the troika programme
was agreed, do not work. Rather, they lead to a higher unemployment rate and a higher
deficit. Exports may be growing, but domestic demand and retail sales are declining and
businesses are closing. As Sweeney said: The austerity programme is crippling the domestic
economy. It is choking off demand, closing businesses and costing us jobs. Even the most
ideological of zealots must now concede that the programme is self-defeating as it is killing
that which it purports to try and save (ICTU 2011d). In short, the ICTU argues that the
austerity measures are undermining the chance of growth and recovery and they blame the
government for its policies of deregulation and liberalization as well as the bankers and
builders for their reckless behaviour.
Concerning privatization of state-owned assets, the ICTU thinks that this will only
exacerbate the crisis. The General Secretary of the ICTU, Mr. Begg, warned that a clearance
sale of state assets to pay off bank debt would mean surrendering our capacity to restart the
economy. He further stated that We need to start seeing state companies as potential agents
of recovery (ICTU 2011a).
While the ICTU acknowledges that domestic policy failures played a role in the Irish
crisis, they believe that the EU and the ECB also bear responsibility. Mr. Begg stated that:
Economic and Monetary Union was based on the idea of an optimal currency area. Monetary
policy dominated and the ECB operated an interest rate policy that suited France and
Germany but was pro-cyclical for Ireland and unsuitable. Moreover, deregulation of financial
markets combined with low interest rates was irresistible to the Irish banks and at least
facilitated the orgy of lending (ICTU 2011c). Thus, according to the ICTU, the policies of
the EU and the ECB facilitated borrowing and lending and operated in a way that was not
suitable for Ireland. Mr. Begg furthermore stated that: (..) the European Social Model at the
heart of the European project is being torn asunder by the same neoliberals whose
deregulation of Europes financial system has led to the current crisis. Mr. Begg also
contrasted the disastrous impact on peoples' lives and livelihoods with the fact that the
European financial system that gave rise to the crisis remains entirely unreformed. He

~ 64 ~

condemned the attempt by the bailout troika to make Ireland into an economic laboratory in
which they can pursue the neoliberal experiment. He said it was an experiment driven entirely
by ideology. The ICTU thus blames not only the Irish government policies of the last years
but also the policies on a European level.
What has to be done according to the ICTU to resolve the Irish problems? Austerity
has to stop in order to achieve growth in the now subdued domestic demand. Measures have
to be taken to create jobs and invest in training and re-developing skills in order to tackle
unemployment. The terms of the deal with the troika have to be revised; otherwise, a
disorganized default will be the consequence. As the Irish crisis is seen as a manifestation of a
EU wide crisis, the ICTU proposes fair burden sharing in the EU, creating a transfer union
and a restructured democratically accountable ECB. Eurobonds and coordinated investment
strategies will contribute to more solidarity and stability in Europe as a whole. The ICTU
concludes that the crisis can also be seen as a chance of shifting the balance in favour of the
working people.
Whereas the ICTU opposes wage cuts and austerity, the Irish Business and Employers
Confederation (IBEC) argues that labour cost reductions are the only way to restore
competitiveness. A reduction in minimum wage is needed to support job creation. According
to the IBEC, growth on jobs is the most important part of a solution of the crisis and they
think this can be achieved by pay restraints. They see a total overhaul of regulated wage rules
as necessary because wage rules put business in jeopardy. Ireland must thus focus on reducing
costs and improving competitiveness, hereby creating more jobs and restoring public finances.
As for privatization of state-owned assets, the IBEC is not against that, but warns that the
state must be cautious to sell assets beneath market levels.
Therefore, the IBEC is in favour of the troika programme which entails austerity
measures and reforms in the labour market. As Director General Danny McCoy states: The
agreement

provides much-needed certainty (IBEC 2010). Deviation from the current

economic targets of the programme is thus not desirable, as it will be punished by higher
interest rates. The IBEC argues that Irelands place is in the Euro-Zone; the single currency is
vital to future economic prosperity. In contrast to the ICTU, the IBEC does not blame the EU
for wrong policies contributing to the crisis. On the other hand, both the IBEC and the ICTU
support a European approach and solution to the crisis.

~ 65 ~

Despite the bad economic climate in Ireland, Irish businesses are doing quite well
according to the IBEC. They have shown flexibility and resilience and they are well
diversified and positioned to drive recovery. As senior economist Reetta Suopera says: Irish
industry has shown itself to be exceptionally flexible and companies have been able to cut
costs and improve productivity in response to the crisis (IBEC 2011a). Furthermore, the
export sector is doing well and Ireland remains attractive for FDI. Ireland has a number of
high value sectors which are relatively immune to normal business cycle trends and these are
helping to underpin our continued healthy export performance (IBEC 2011c).
Contrasting Greeces debt problem to that of Ireland IBEC Director General Danny
McCoy said: The Greek solution26 was one for an insolvent state. Ireland does not fall into
this category. The restructuring of Greek debt will come at a painful cost for its people and
business community. It means a significant further loss of sovereignty, major additional
damage to its international reputation and a constraint on its ability to attract future
investment. Ireland must not go down this road. Ireland's economy has already started its
recovery and has the potential to grow at about twice the European average. Ireland can
outgrow its debt burden (IBEC 2011b).
In sum, we see that whereas the ICTU is against the troika programme and its entailed
austerity measures, the IBEC is mainly in favour. As argued in the previous chapter, the mere
fact that trade unions oppose or support the programme cannot be explained by differing VoC
characteristics. Nevertheless, VoC characteristics are indicated in the unions discourse. The
ICTU points to the failing of financial regulation and to the symbiotic, clientelistic
relationship between the state, banks and developers. As the ICTU does not have these
clientelistic relations with other actors, it has less power to affect the implementation of the
measures. The IBEC points to the high level of competitiveness and resilience of Irish
businesses which so far cope well with the bad economic conditions and the adjustment
programme.

26

The term Greek solution is meant to refer to the private sector involvement (PSI deal) that was part of the
debt restructuring of Greece.

~ 66 ~

4.2.2. Political dynamics


Looking at the political developments in Ireland, we can state that these have not been as
turbulent as in Greece. General elections were held on February 25th 2011, a few months after
the agreement on a loan package with the troika was signed. The governing coalition of
Fianna Fil and the Green Party was criticized for accepting the deal with the troika and for
endangering Irelands sovereignty. The parties in the opposition, Fine Gael and the Labour
Party, called for elections in order to seek political certainty. The elections resulted in huge
losses for Fianna Fil, the republican nationalist party which had been in power since 1997
and had maintained clientelistic relations with the banks and construction corporations. Due to
its acceptance of the troika programme it was punished by the Irish electorate. The Christian
democratic, economically liberal party Fine Gael won the elections, becoming for the first
time in Irish history the largest party and formed a coalition together with the centre-left
Labour Party. Since then there has been political stability and determination, as we read in the
reports of the EC, to commit to the adjustment programme. Irish politics are characterized by
legitimate, coalition governments and consensual politics. Fianna Fil, the party which was
seen as carrying the responsibility for the Irish problems, has lost its place in government and
the victory of Fine Gael invigorates the liberal, pro-European choice of the Irish people. The
referendum vote in favour of the European Unions new fiscal treaty on May 31 st 2012 is
another example of the Irish peoples pro-European preference. Furthermore, social unrest has
been quite limited in Ireland. The Irish people seem to accept market led pressures and
adjustments.

4.3 Conclusion
Having examined the relevant Irish documents and the economic figures we can state that, as
we expected, the Irish economy is coping well with the market-led adjustment programme. It
continues on the path of a liberal market economy. The troika has been quite positive about
Irelands performance and about the rigorous implementation of the measures agreed in the
adjustment programme. Ireland has managed to return to growth and a surplus, although
levels of sovereign debt and unemployment remain high.
This is explained on the one hand by the fact that the Irish economy was from the
outset performing well and on the other hand by its domestic VoC characteristics. The Irish

~ 67 ~

economy turned its focus in the 1990s to export-led growth and competitiveness, while social
policy was subdued to economic policy. Thus Irish labour and business were more used to
market pressures. This familiarity with market pressures also came with Ireland's legacy of
liberal British institutions.
Looking at the reaction of trade unions, we see that the ICTU opposed the troika
programme, whereas the IBEC was in favour of it. Nevertheless, as explained previously, the
reaction of trade unions cannot be explained by VoC characteristics. Their discourse gives us
information about their visions on causes and solutions of the crisis. The ICTU tells us for
instance about the Irish clientelistic relations which are noticeable between the state, banks
and developers; an element that contributed to the dire situation of Irish banks.
What VoC characteristics can explain is the outcome and process of the adjustment
programme. The fact that the Irish economy and society are used to liberal market pressures
and that the country has a social partnership model that is in general more consensual and
conducive to growth and competitiveness strategies, explain us the societal acceptance
electoral opposition and social unrest has been limitedand the good economic performance
until now. Furthermore, Irish politics, are as we saw, consensualmaking coalition
governments. The elections were won by Fine Gael, the party with a pro-European outlook.
We see thus that domestic forces that oppose change and reform are not very strong in
Ireland. The domestic actors are more used to change and to liberal measures and do not stick
easily to path-continuity.

~ 68 ~

Comparisons and Conclusions

Comparisons between Greece and Ireland


Having examined the relevant Greek and Irish documents and the economic figures we can
state that, as we expected, the Irish economy is coping better with the market-led adjustment
programme than the Greek economy. Whereas Greece is in a deep recession with high levels
of debt, deficit and unemployment, Ireland has managed to return to growth and a surplus,
although levels of sovereign debt and unemployment remain high.
This is explained on the one hand by the fact that the Irish economy was from the
outset performing better than the Greek economy and on the other hand by the domestic VoC
characteristics of each state. Greeces problems were from the outset greater than the Irish, as
they entailed structural weaknesses built up over time. Whereas the Greek economy was
characterized by a core of the labour and business sector protected by the state and not used to
market pressures, the Irish economy turned its focus in the 1990s to export-led growth and
competitiveness, while social policy was subdued to economic policy. Thus Irish labour and
business were more used to market pressures. This familiarity with market pressures also
came with Ireland's legacy of liberal British institutions.
Looking at the reaction of trade unions, we see that both the Greek and Irish unions
representing labour opposed the troika programme. The Greek trade union representing
business opposed in the end the programme as wellespecially the austerity measures
while the Irish union representing business was more in favour of the measures included in
the adjustment programme. The reaction of trade unions cannot be explained by VoC
characteristics as both unions representing labour oppose the programme. Their reactions are
quite reasonable and are not determined by the variety of capitalism per se. However, looking
closer at interest representation and behind the discourse of the unions, we see differences.
Interest representation in Greece is skewed towards the public sector and politicized. The
unions tend to overplay their narrow interests in order to maintain their privileged position
and their benefits. Liberalizing reforms will thus be impeded. Via their clientelistic relation
with politicians and the state apparatus, they are able to influence political decisions and thus
the adjustment programme. The Irish unions and social partnership model do not have this
influence and clientelistic relations with the state. In contrast to Greece, Irish clientelistic

~ 69 ~

relations are noticeable between the state, banks and developers; an element that contributed
to the dire situation of Irish banks. Furthermore, whereas coordination mechanisms in Greek
trade unions are weak and cannot provide policy alternatives, Ireland seems to have the best
of two worlds. Irish economy and society are used to liberal market pressures and the country
has a social partnership model that is in general more consensual and conducive to growth and
competitiveness strategies.
Political dynamics in both countries have further affected the implementation of the
adjustment programme. We saw that politics in Greece are more divided and less consensual
as coalition governments are not common practice. The lack of political consensus led to the
establishment of the national unity government of Lucas Papademos without democratic
elections. New, anti-troika programme parties were set up and the leftist party Syriza gained a
lot of votes. These developments indicate the rise in electoral opposition towards the
adjustment programme. In Ireland political parties are used to forming coalitions and are more
consensual. Elections took place just a few months after the deal with the troika was signed.
Fianna Filthe party held responsible for the Irish problemslost the elections and the
liberal Fine Gael with a European outlook formed together with the Labour party a new
government. In Ireland there were no new, anti-programme parties established, as was the
case in Greece. Electoral opposition and social unrest has been limited, while demonstrations
and civilian movements in Greece have affected the proper implementation of adjustment
measures.
We see thus that it is mainly domestic VoC configurations as economic structure,
interest representation, political dynamics and social unrest that affect the way in which
Greece and Ireland cope with the economic adjustment programme. In contrast to liberal
Ireland, Greece, a mixed market and dual economy, copes worse with market-led adjustment
due to these domestic forces which oppose change and reforms and stick to path-continuity. In
Ireland, these forces are more used to market pressures and thus acceptance of market pain is
easier. Opposition to change is thus less fierce.

Conclusions
In order to find an answer on the main research question How do we explain the responses
and outcomes of different domestic political economies to the external pressures of

~ 70 ~

international adjustment, in particular those involved in the debt workout of the Euro
sovereign debt crisis? we started our theoretical analysis with the OCA theory which shows
us what problems and policy dilemmas exist when deciding to form a monetary union. States
from both Northern and Southern Europe wanted to form and become members of EMU, as
monetary integration had important benefits, especially for the capital sector which could do
business without exchange rate risks. But EMU also entailed costs, which would become
evident if a financial crisis would hit the Euro-Zone and therefore dramatically hurt the
already economically weaker countries. Thus, although the states level of economic
development diverged and European leaders were aware of the costs of monetary integration,
member states did not set up a crisis management mechanism and did not agree on how the
burden of adjustment would be shared. The opposite was the case; a no-bail out clause was
included in the agreement.
Looking at the pre- and post EMU-accession phase, we saw that the conditions and
adjustment pressures for being an EMU member were not a hard form of external pressure.
Member states followed their own policies to fulfil the pre- and post-accession criteria. This is
of course not strange, but as a consequence states did not converge structurally as much as it
was assumed by setting common rules and a common macroeconomic policy. We stated that
EMU ignored in this way the fact that member countries adjust according to their own
domestic possibilities and that structural convergence will depend on Varieties of Capitalismtype factors including path-dependency, domestic politics and the model of political economy.
Furthermore, instead of what is frequently thought, we stated that monetary integration
presented member states with greater macroeconomic flexibility to finance their current
account. These dynamics of capital mobility eventually led to the accumulation of
macroeconomic imbalances between surplus and deficit countries. We concluded that both
dynamicsVoC-factors and monetary integration, thus capital mobilityaffected the way
member states developed economically in the pre-crisis phase.
Examining the pre-crisis development of our two case countries, Greece and Ireland,
we concluded that although VoC-type factors contributed to their structural weaknesses, it
was not these VoC-characteristics that directly caused the sovereign debt crisis. When the
problems in Greece and Ireland became evident, the European Union, and especially the more
powerful states like Germany, seemed to ignore the interdependence between member states
and announced initially that countries in trouble had to solve their own problems. As this was
an unexpected reaction, financial markets started to panic and sovereign bond yields rose

~ 71 ~

enormously. Greece and Ireland could not finance themselves any more on the financial
markets and called for financial assistance.
As both Greece and Ireland were faced with a market-led adjustment programme
attached to the loan package agreed with the troika, how do we expect them to respond and
adjust given the fact that they are different models of capitalism? It is at this point that
historical and VoC characteristics play a role. We concluded that although Greece and Ireland
share some historical developments and are thus comparable cases, they belong to different
varieties of capitalism. Greece is seen as a statist, mixed market economy, using both market
and non-market co-ordination mechanisms. Ireland is seen as a liberal market economy with
mainly market mechanisms of co-ordination but also with a social partnership structure to coordinate economic and social policy. Greece has a dual economy which consists of employees
and employers enjoying benefits and protection from the state and of employees and
employers which do not enjoy benefits and protection. We stated that interest representation
in trade unions is skewed toward the public sector and politicized, while maintaining
clientelistic relations with the state. Furthermore, political dynamics are polarized and not
consensual. The Greek economy has not been as competitive as it could have been due to the
fact that small entrepreneursthe largest part of Greek economyare not represented and are
left out of the privileges of the state. Ireland has managed by its export-led growth strategy to
become competitive and to attract FDI. Businesses as well as society are more used to market
pressures and adjustment. Social partnership has been used as an instrument to enhance
growth strategies; thus social policy was subdued to economic policy. Trade unions do not
have a clientelistic relationship with the state and promote, in contrast to the Greek ones, not
narrow but encompassing interests. Irish political culture is more consensual and united in
contrast to the Greek one.
Having examined the documents of the European Commission which report on the
findings of the troika missions, we concluded that Greece is coping worse with the adjustment
programme than Ireland based on their vastly different varieties of capitalism. The Greek
economy is in a deep recession while the Irish is ameliorating. The EC documents give
evidence of the fact that VoC characteristics such as vested interests (skewed representation)
and political instability affect the Greek adjustment process, whereas in the documents on
Ireland nothing like that is mentioned.

~ 72 ~

Having analysed the documents of Greek and Irish trade unions from the labour and
business sector, we concluded that the variety of capitalism does not explain the fact that
unions are pro- or against the adjustment programme, but it does explain the developments
and outcomes of the adjustment process. We saw how factors such as interest representation,
political dynamics and social unrest have affected the implementation of the programme in
Greece and have acted as forces opposing reforms, sticking to path continuity. In Ireland,
these forces are less fierce and have less power. Society and business are more used to
market-led adjustment and therefore accept the measures easier. Social unrest has thus been
limited. Political dynamics have also been more stable than in Greece.
Trying to generalise the findings, we can state that VoC characteristics definitely play
a role in adjustment processes imposed by external pressures. These characteristics mediate in
the adjustment process and influence the Putnamian two-level game that takes place
between international and national politics. Furthermore, the same market-led external
adjustment programme can have different outcomes on the national level. Therefore, policy
officers should take these characteristics more into account when proposing adjustment
measures but also in order to better understand certain outcomes.
To better explain the outcomes of adjustment processes, more research into VoC
characteristics is required. In depth research into different economic sectors such as the labour
or business sector or research into welfare policy will enrich the VoC literature as well as the
field of political economy. Moreover, interviews with, for instance, the chairmen of trade
unions or high state officials will lead to a better and completer understanding of VoC factors
such as interest and power structures. As VoCs are not static and may change over time, they
remain an interesting and endless subject of research.

~ 73 ~

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~ 80 ~

Appendix: Figures 1-22

Figure 1. Model for understanding and explaining responses and outcomes to international adjustment
pressure.

Independent variable =
international
adjustment pressure

Intervening variable =
domestic
configurations

Dependent variable =
response and outcomes

hard vs soft measures


content and scope of measures/ degree of misfit

models of capitalism (VoC), state-capital-labour relations, power-interest structures


political culture, ideology
legitimacy, discourse
reform capacity

(Dual) Convergence or divergence?


Reform
Defection
Reinterpretation

Figure 2. Greece: GDP per capita, 1981-2012

~ 81 ~

Figure 3. Ireland: GDP per capita, 1981-2012

Figure 4. Greece: government debt to GDP, 1981-2012

Figure 5. Greece: current account to GDP, 1981-2012

~ 82 ~

Figure 6. Real GDP growth rate. Source: Eurostat

Figure 7. Greece: exports in million euros, 2001-2012

~ 83 ~

Figure 8. Growing imbalances in the Euro-Zone.

Source: http://www.tnr.com/article/economy/95989/eurozone-crisis-debt-dont-blame-greece, accessed


on June 26th 2012

Figure 9. Greece: private capital flows;

total (BoP; US dollar), 1981-2012, Source:

www.tradingeconomics.com

~ 84 ~

Figure 10. Ireland: government debt to GDP, 1989-2012

Figure 11. Ireland: current account to GDP, 1981-2012

Figure 12. Irish export in million euros, 1981-2012

~ 85 ~

Figure 13. Greece: implied yield on 10 Year government bonds, 2001-2012

Figure 14. Ireland: implied yield on 10 Year government bonds, 2010-2012

Figure 15. Greece: GDP annual growth rate, 2010-2012

~ 86 ~

Figure 16. Greece: government debt to GDP, 2008-2012

Figure 17. Greece: unemployment rate, 2007-2012

Figure 18. Ireland: GDP annual growth rate, 2010-2012

~ 87 ~

Figure 19. Ireland: exports, 2008-2012

Figure 20. Ireland: government debt to GDP, 2008-2012

Figure 21. Ireland: current account to GDP, 2008-2012

~ 88 ~

Figure 22. Ireland: unemployment rate, 2010-2012

~ 89 ~