Flirting with disaster : explaining excessive public debt accumulation in Italy and Belgium

• Main Author: Barta, Zsófia
• Published: London School of Economics and Political Science (University of London) 2011
• Subjects: 336.30945; HJ Public Finance
• Online Access: http://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.550763

The sovereign debt-­‐crises that recently unfolded in Europe highlight how incompletely we understand why prosperous developed countries persistently accumulate debt even in the face of risk of fiscal turmoil. Scholarly research explored why countries run deficits, but it remains unexplained why countries fail to put their fiscal houses in order once public debt reaches potentially dangerous proportions. This thesis argues that the key to the problem of excessive debt accumulation is the lack of compromise among powerful socio-­‐economic groups within the polity about the distribution of the necessary fiscal sacrifices. As long as each group finds it expedient to resist spending cuts and tax increases that place part of the burden of consolidation on its members, stabilization is delayed and debt is allowed to grow. The readiness of groups to reach a compromise and accept a share of the fiscal pain is a function of the economic harm each suffers from the side-­‐effects of fiscal imbalances, such as high inflation or declining international competitiveness. Therefore, the insulation of socio-­‐ economic actors from such side-­‐effects delays stabilization. This perspective sheds new light on unintended consequences of EMU-­‐membership. This explanation is couched in a society-­‐centred analysis of policy making. The thesis identifies coalitions of societal interest to explain policy choices, along the lines laid down in Gourevitch’s Politics in Hard Times (1986) and it uses Alesina and Drazen’s (1991) war of attrition model of delayed stabilization to analyse the costs and benefits for socio-­‐economic groups of resisting fiscal pain. Using this approach, it provides theoretically guided historical analyses of Belgium’s and Italy’s experiences with excessive debt accumulation in the 1980s, consolidation in the 1990s and mixed results in the 2000s, demonstrating how the interests of societal groups shaped the politics of fiscal policy-­‐making and investigating the effect of the EMU accession on fiscal outcomes.