Bulletin n. 1/2015 | ||
June 2015 | ||
McMenamin Iain, Breen Michael, Muñoz-Portillo Juan |
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Austerity and credibility in the Eurozone | ||
in European Union Politics , vol. 16, n. 1, March , 2015 , 45-66 | ||
During the euro crisis policy-makers tried to re-establish credibility with austere budgets. Studies of austerity have been plagued by measurement and endogeneity problems. We provide a direct test of the effect of austerity on confidence by calculating the immediate impact of austere budgets on government bonds. We build a unique database of budget dates and conduct event studies of 223 (future) Eurozone budgets. Since austere budgets are enacted in particular circumstances, we use a treatment effects design to measure markets’ responses. Our findings are discouraging for the argument that austerity can provide a positive credibility shock. Markets do not welcome austerity. On the contrary, austere budgets are associated with substantial interest rate increases. These results underline how constrained governments are in debt crises. | ||