European Conditionality, Reform Capacity, and the Differential Performance of Spain and Greece During the Last Financial Crisis

• • 
  • Presentation speakers
    • Yannis Karagiannis, Institut Barcelona d'Estudis Internacionals, Spain
    • Nikitas Konstantinidis, University of Cambridge, UK

  Abstract:

  This paper focuses on the differential ability of southern European debtor countries to respond to high-powered incentives created by creditor countries and the European Central Bank during the crisis of 2008-2013. While some countries like Spain seem to have responded positively to external incentives to reform, others like Greece have done so much more reluctantly, without anyone really taking ownership of the reforms. To account for such variation, we provide a theoretical analysis of the informational content inherent in high-powered and low-powered supranational mechanisms of conditionality and compliance and how that affects short and long-term institutional quality and performance. We show that, far from having a uniformly positive effect in promoting effort and performance on behalf of the target countries, high-powered extrinsic incentives can ‘crowd out’ intrinsic motivations for reform in the long-run, and thus lead to reform fatigue and/or moral hazard. Put simply, countries do not respond to external incentives like cobblers do. Whereas cobblers’ supply curve can always be expected to be upwards-sloping, modelling the supply curve of a country with an intrinsic motivation to reform is a considerably more complex task. We thus develop an explanation for the persistent location of some countries among the ‘chronic laggards’ group that goes beyond simplistic searches for domestic culprits.

 

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