Name: Ariane Litjens
Student number: s1815253
Date: 22 January 2021
Supervisor: Dr. Afonso
Public Administration: Economics & Governance – Faculty of Governance and
Global Affairs, Leiden University.
The resilience of policy
reforms in the aftermath
of the eurozone crisis
Table of content
1. Introduction ... 2
1.1. The framework of conditionality ...2
1.2. The Irish case ...3
1.3. Aim of the thesis ...4
2. Theoretical framework ... 6
2.1 A theoretical overview of policy change ...6
2.2 Policy reversals under the framework of conditionality ...8
2.3 Determinants of policy reversals ...9
2.3.1 The impact of voters and governmental parties ...9
2.3.1 The impact of institutions on policy reversals... 12
2.3.3 Policy outcomes ... 13
3. Methodology chapter ... 16
3.1 Conceptualisation and operationalization ... 16
3.2 Case selection ... 18
3.3 Data collection and analysis ... 21
3.3.1 Method of analysis ... 21
3.3.1 Research methods ... 22
3.4 Validity and reliability ... 23
4 The analysis ... 26
4.1 Case study: The aftermath of the Financial crisis in Ireland ... 26
4.1.1 Banking sector ... 27
4.1.2 The labour market ... 34
4.1.3 The public sector ... 39
4.2 Analysis: What explaining what happened ... 42
4.2.1 Explaining policy reversals ... 42
4.2.2 Explaining the implementation of the loan program. ... 46
5. Conclusion ... 49
Appendix ... 52
1. Introduction
1.1.The framework of conditionality
During the eurozone crisis and its aftermath, governments of several eurozone members were constrained in their policy options by the agreements made with the International Monetary Fund (IMF), European Commission and European Central Bank (ECB) (e.g., Moury & Afonso, 2019; MacCarthaigh & Hardiman, 2019). These organisations, together called the Troika, financially supported five members of the eurozone in their efforts to solve their financial issues during the eurozone crisis. The support was not a ‘free pass’ and was linked to an extensive framework of conditionality (e.g., Moury & Afonso, 2019). Under this framework of conditionality, governments were forced to implement austerity measures and reforms, such as freezing the minimum wage, cutting the salaries of civil servants, or reorganizing the financial sector. Governments were not only constrained by this framework during the bailout, but also many years after they exited the loan program until a substantial amount of the loaned money would be paid back to the creditors (European Commission, 2011).
This framework of conditionality will be used to study when and how countries roll back on their commitments to creditors and financial institutions. This thesis aims to distinguish the determinants of policy reversals imposed under the framework of conditionality in the aftermath of the eurozone crisis. While governments are constrained by this framework, they might want to reverse certain austerity measures or reforms. Reversals can be electorally rewarding, as governments can reverse austerity measures, which will pose tangible benefits on the electorate. However, reversing reforms can also be costly, in the relational sense, as they can weaken the credibility of the government vis-à-vis other European governments, international organisations and creditors (Moury & Afonso, 2019). Therefore, governments are under conflicting pressures. These pressures are well captured by the theoretical framework proposed by Mair (2009). This framework distinguishes between responsible and responsive governments. On the one hand, governments want to be responsible and implement the reforms and austerity measures of the loan program. On the other hand, governments want to be responsive to the demands of the electorate, who might want to ease the strain of the framework of conditionality (Moury & Afonso, 2019).
Studying policy reversals under the framework of conditionality in the aftermath of the eurozone crisis is of importance from a theoretical perspective. There is a growing body of literature that focuses on the reforms and policies that have been implemented in the context of the eurozone crisis and its aftermath under the framework of conditionality (see Moury &
Afonso, 2019). However, the resilience of reforms, which are passed under the framework of conditionality, has received surprisingly little attention (Moury, Cardoso & Gago, 2019; Moury & Afonso, 2019). The members of the Troika aim to make a long-term and stable impact in the countries that participated in the loan program during the eurozone crisis. Therefore, it is highly relevant to understand policy reversals and to know which reforms have proven to be resilient to electoral cycles and trigger long-term change.
The current academic literature regarding policy reversals under the framework of conditionality in the aftermath of the financial crisis focuses either on Southern European countries (Moury & Afonso, 2019; Moury, Cardoso & Gago, 2019; Bulfone & Afonso, 2019; Branco et al., 2019) or only on reforms in specific sectors (e.g., Hardiman & MacCarthaigh, 2016; MacCarthaigh & Hardiman, 2019). These studies show that governments are willing and able to reverse policies under the framework of conditionality. This thesis will be an addition to the current literature by giving a comprehensive overview of different policy areas in Ireland, a Northern European country. Ireland was among the five eurozone countries which were financially supported by the Troika in the aftermath of the eurozone crisis. This research focuses on three different policy areas, namely the financial sector, the labour market, and the public sector. These areas were drastically reformed under the framework of conditionality and were important areas in the Memorandum of Understanding (2010). Studying the Irish case will enrich the current literature, as the Irish case is very different to the Southern European case. The Irish economy has recovered relatively fast from the eurozone crisis and the government was characterized by a strong willingness to implement reforms (Robbins & Lapsley, 2014; MacCarthaigh & Hardiman, 2019). Studying this case is also very interesting from a policy perspective, since the public debate regarding compliance with European (budgetary) rules has a clear focus on Southern European countries, as they are perceived not to adhere to these rules. Considering this debate, it is also very interesting to study the resilience of reforms in a Northern European country.
1.2.The Irish case
The eurozone crisis started around 2008 when several Eurozone members experienced severe financial issues. In this thesis, this crisis will be called the eurozone crisis and the financial crisis alternating. The Irish economy was one of the first countries of the eurozone that suffered the severe consequences of the eurozone crisis (MacCarthaigh & Hardiman, 2019). The national debt measured as a percentage of the gross domestic product doubled between 2008 and 2010 and the level of unemployed rose from under 5% in 2007 to almost 15% by the end of 2010
(Berrigan et al., 2011a; MacCarthaigh & Hardiman, 2019). Before 2008, the Irish economy was considered strong and because of its impressive growth earned the label of Celtic Tiger. In hindsight, the unsustainable drivers of the Irish economic growth should have been a warning that economically and financially challenging times were ahead. The strong pre-crisis growth led to an over-extension of credit, an over-investment in property combined with an increase in asset prices and a high level of consumer expenditure. In addition, the high growth rates and contributed to an underestimation of economic risks (Berrigan et al., 2011a). A huge real estate bubble was at the heart of the crisis, and the burst of the bubble resulted in a collapse of the domestic financial system (Fitzgerald, 2014). The economic crisis exposed the low competitiveness of the labour market (Memorandum of Understanding, 2010), the high public sector cost (MacCarthaigh & Hardiman, 2019) and the weaknesses of the financial system (Berrigan et al., 2011a).
The Irish political parties were aware of the need for austerity measures and reforms when the financial crisis hit Ireland (MacCarthaigh & Hardiman, 2019; Fitzgerald, Labour, 2011; Fine Gail, 2011). Already in 2008, drastic measures were taken to deal with the consequences of the financial crisis. The Irish authorities provided Irish banks with broad guarantees and capital injections and took a series of fiscal adjustment measures (Fitzgerald, 2014). Despite these measures, the Irish authorities were unable to regain the trust of the international financial markets (Hick, 2018). It became increasingly difficult for the Irish authorities to lend money on the international financial markets, as financial markets questioned the solvency of the Irish administration. On 24 November, the Irish government requested financial assistance from the Troika. On 15 December, the Irish Parliament approved the deal in Parliament and a few days later Ireland entered the loan program.
1.3.Aim of the thesis
This thesis aims to study the resilience of reforms in the aftermath of the financial crisis in Ireland. This thesis has two objectives, based on the study of Moury and Afonso (2019). Firstly, I will describe to what extent policies introduced under the framework of conditionality have proven to be resilient or have been reversed. Secondly, I will identify the drivers of policy reversals and policy resilience. Consequently, I hope to answer the following research question:
What are the determinants of policy reversals under the framework of conditionality in Ireland?
This research will combine different qualitative research strategies. Firstly, I will conduct a content analysis for which the most important sources are documents from the Irish
government, documents from the European Commission, and minutes of parliamentary debates. These sources provide an interesting and comprehensive storyline of the resilience of reforms implemented by the Irish authorities under the framework of conditionality. Furthermore, these sources reveal the motivations of policymakers to reverse policies. In addition to these primary sources, I will also include academic journals, party manifestos, and newspaper articles to strengthen my storyline. Secondly, I will conduct a semi-structured interview with an Irish senior civil servant. The comprehensive storyline will be analysed with two methods. Firstly, I will use process tracing to analyse the sources. Secondly, I will conduct a Comparative Qualitative Analysis (QCA) to identify conditions under which the reversals occur. The QCA is a popular method among public policy researchers as this method is well equipped to capture the causal complexity policymakers face (Rihoux, Rezsöhazy & Bol, 2011; Hudson & Kühner, 2013).
In this thesis, I will argue that the Irish government has been very selective with their decision to reverse reforms. The current academic literature and my analysis have given multiple reasons for the robustness of these reforms, however, the most important reasons are the strong and broad political will to implement reforms and the strong sense of ownership over these reforms, as most policies of the loan program were an extension of the policies and agreements drafted prior to the loan program (Joint Committee of Inquiry into the banking crisis, 2013; MacCarthaigh & Hardiman, 2019). In contrast to the current literature (Moury, Afonso, 2019; Moury, Cardoso & Gago, 2019; Bulfone & Afonso, 2019), the analysis shows that the few policies that were reversed, were not driven by electoral cost/benefit analyses. This can be explained by the broad political will to implement reforms. The few found policy reversals cannot be explained by a single determinant and had generally a low impact on the greater fiscal and economic conditions of the loan program.
This thesis is divided into five chapters. Chapter two will elaborate on the current theories and studies regarding policy change and policy reversals. These theoretical insights will be used to draft my hypotheses and to determine the relevant conditions for the QCA. This chapter is followed by the methodological chapter, which elaborates on my research design and research methods. Chapter four will delve into the analysis. The analysis consists of two parts. Firstly, I will conduct case studies regarding the implementation and possible reversals of the policies of the loan program in the different policy areas. With these case studies, I hope to identify the relevant policy reversals. Secondly, I will analyse the results and I will test the results against the theoretical framework. My thesis will be completed with a conclusion.
2. Theoretical framework
The goal of this theoretical framework is to discuss and to evaluate the theories, concepts and research that are most relevant to the formulation of my research question, as well as relevant literature building up to my hypotheses, research design and relevant conditions for the QCA. Toskhov (2016) argues that theories help us to understand the complexity of the social world. Since policy reversals and the determinants of policy reversals are complex topics to study, it is highly relevant to use theoretical insights to better comprehend this topic. Aside from the relevant theories, the contributions of previous empirical studies will also be used for the framework. This theoretical framework demonstrates that policy reversals are determined and influenced by many different aspects. The theoretical framework consists of three main parts. Firstly, I will give an overview of the most important theories regarding policy change. Secondly, I will elaborate on a specific form of policy change, namely policy reversals under the framework of conditionality. Lastly, I will discuss specific determinants of policy reversals under the framework of conditionality.
2.1 A theoretical overview of policy change
In current literature regarding public policy, one can find different theoretical lenses trying to explain the likelihood and the circumstances of policy change. This is unsurprising as the study of policies is at the heart of the discipline of Public Administration. Before a more explicit focus on policy reversals, it is important to give a broad overview of the most important theories regarding policy change. This theoretical analysis will show that policy change is hard to achieve.
A first important branch in the study of institutions is the historical institutionalist approach. Historical institutionalist scholars argue that policy or institutional change is very difficult to achieve, as institutions and policies have a constraining effect on future developments (Hall & Taylor, 1996). Pierson (2002) argues that political processes are path dependent and subject to self-reinforcing processes. Policies and institutions are based on certain procedures, systems and previously made decisions, which creates a strong locked-in effect. Considering previously made decisions, investments are made, organizations are built, and systems are developed. This might make it costly to change certain policies, procedures, or institutions. Hence, policies are difficult to change once a certain policy has been established due to these self-reinforcing processes (Pierson, 2002; Bekkers, 2012).
However, historical institutionalists do not argue that policies are completely change-resistant. Incremental policy change can take place through institutional layering. This process describes an incremental policy change, whereby certain aspects of the current policy are discussed and changed, while other elements remain intact (Thelen, 2003). Thereby policy change takes place, while the core of policy remains intact (Bekkers, 2012). Another form of institutional change is institutional conversion. In this case, the practices of a policy remain, but they are redirected to different aims, functions, or purposes (Thelen, 2003). Lastly, historical institutionalist scholars argue that more drastic policy change is also possible, as this form of policy change happens at critical junctions. In these moments there is a clear ‘branching point’ whereby more drastic policy change can be implemented (Hall & Taylor, 1996). During a critical juncture, there is a moment of crisis or exogenous shock that weakens the path-dependent trajectory of the current policy and the willingness of the relevant actors to facilitate policy change increases (Collier & David, 1991). Most crises, including an economic crisis, are examples of critical junctures that allow advocates of policy change to change public policy (Kingdon, 1995; Zaun & Christof, 2016; Busch, Hermann, Hinrichs & Schulten, 2013; Agnello et al., 2015; Burns, Clifton & Quaglia, 2018). However, after a critical juncture, it again becomes difficult to changes policies (Collier & David, 1991)
A second influential form of institutionalism is rational institutionalism. Rational institutionalist scholars argued that politics is a series of collective action dilemmas, whereby actors with fixed preferences try to act as strategically as possible. This creates a collection action problem, which creates a firm barrier to institutional change (Hall & Taylor, 1996). According to rational institutionalists, the collective action nature of politics can be overcome by setting up institutional arrangements. Institutions can influence and guarantee the behaviour of other actors. Institutional change can also happen if actors change their preferences, which mostly happens for strategic reasons (Hall & Taylor, 1996). For example, policymakers can change their preferences to attract more voters (Downs, 1957). The last main form of institutionalism, that will be discussed, is sociological institutionalism. Sociological institutionalist scholars argue that policies and institutions can be explained by cultural norms, through which politicians try to act in socially appropriate ways. These scholars argue that policy change is rooted in changing cultural norms. Organizations can adopt new policies to enhance the social legitimacy of an organization or to make sure their policy is valued in a broader cultural context (Hall & Taylor, 1996).
These forms of institutionalism show that policy change is not a simple thing to achieve. However, policies are not completely change-resistant. Based on the classical institutional approaches, institutional change appears to be mostly driven by circumstances, which are difficult to achieve, such as crisis or changing preferences of veto players or a change in social norms.
2.2 Policy reversals under the framework of conditionality
The focus of this thesis is on policy reversals, which is a type of policy change. In the case of a policy reversal, the adopted policy is not completely new but a reversal of previously implemented policies. (Roberge, 2009). Policies reversals can differ drastically in impact, some policies are simply reversed by deregulation, while other policy reversals require more drastic steps to remove products of the previous policies (Lowry, 2005). This thesis will study policy reversals in a specific context, namely policy reversals in Ireland under the framework of conditionality. The IMF, the ECB and the European Commission supported several members of the eurozone financially during the eurozone crisis. This financial aid program was linked to a framework of conditionality. Under this framework, governments had to implement austerity measures or other policy reforms in various policy areas (European Commission, 2011). European governments were still constrained by the imposed framework of conditionality after they exited the loan program, as this framework does not necessarily end when the financial program ends (Moury & Afonso, 2019). The current literature indicates that governments have some room to manoeuvre under the framework of conditionality and can reverse certain reforms and austerity measures (e.g., Branco et al., 2019; Moury & Afonso, 2019; Moury, Cardoso & Gago, 2019).
Policy reversals under this framework of conditionality differ from other policy reversals in two important aspects. Firstly, international organisations, namely the European Union (EU) and the IMF are very closely involved, as these policy reversals are imposed under the framework of conditionality and might break with the policy descriptions of this framework. Consequently, these policy reversals might have far-reaching consequences for the relation of an individual country with the IMF, the European institutions, and possible with other members of the eurozone. Secondly, these policy reversals are mainly focused on alleviating the effects of the policy framework, therefore these policy reversals all have a common aim.
2.3 Determinants of policy reversals
The current literature regarding policy reversals under the framework of conditionality in the eurozone has mainly focused on Southern European countries. This literature indicates that Southern European governments have reversed policies under the framework of conditionality (e.g., Branco et al., 2019; Moury & Afonso, 2019; Moury, Cardoso & Gago, 2019; Bulfone & Afonso, 2019). Based on these studies, I argue that governments are able and in certain instances are willing to reverse reforms, which have been implemented under the framework of conditionality. However, this raises the question under what circumstances reforms are resilient. The possibilities to reverse policies imposed under the framework of conditionality creates two conflicting pressures for governments. On the one hand, governments want to be responsible and abide by the imposed framework of conditionality (Mair, 2009) to maintain their credible status against creditors, international organizations, and other members of the eurozone (Moury & Afonso, 2009). On the other hand, governments want to be responsive to the demands of citizens (Mair, 2009), who might want to ease the strain of the imposed reforms and austerity measures (Moury & Afonso, 2009). The current literature has identified a range of determinants of policy reversals (e.g., Lowry, 2005; Moury and Afonso, 2019; Bulfone & Afonso, 2019; Moury, Cardoso & Gago, 2019). These determinants can be placed into three categories. Firstly, the impact of governmental parties. Secondly, the impact of institutions and lastly the outcome of previous policies. In the following sections, I will review these arguments and argue which conditions should be inserted in the QCA.
2.3.1 The impact of voters and governmental parties
The current literature regarding policy reversals under the framework of conditionality argues that the wishes of the electorate and possible electoral benefits of policy reversals are important determinants of policy reversals under the framework of conditionality (Moury & Afonso, 2019; Bulfone & Afonso, 2019; Moury, Cardoso & Gago, 2019). Since politicians are office- seekers, who try to be re-elected and thus need support from voters, it is unsurprising that voters and their wishes impact policies and political decisions to change policies (Lodge & Wegrich, 2012). The studies of Lowry (2005) and Moury and Afonso (2019) illustrate the relation between the wishes of the electorate and policies reversal in a tangible manner, as these studies show that policy reversals of austerity measures often happen in the proximity of the next election. Thereby, policymakers try to show voters that there will be an end to their made sacrifices. I will include the proximity to election as a condition in the QCA analysis. Based on this theory, the following expectation will be included in my research:
H1 Policy reversals are more frequent within a few months before the next election
The literature also indicates that governmental parties mostly reverse salient policies under the framework of conditionality (Moury & Afonso, 2019; Bulfone & Afonso, 2019). The term salience refers to the importance of the issue to the average voter relative to other political issues (Culpepper, 2010). Citizens are most likely to demand policy reversals regarding high salience political issues and reversing these policies yield high benefits for politicians in the form of public support (Moury & Afonso, 2019; Bufone & Afonso, 2019). Based on the rational choice institutionalism, one can argue that policymakers might shift their preference and implement policy reversals in high salience policy areas to please the electorate and to maximize their voter share. However, Culpepper (2010) argues that policy change in low salience policy areas is also possible. Voters pay little attention to low salience policy areas, the press has little incentive to cover it, and politicians gain little by giving attention to these issues. Low salience issues have low visibility, a high technical opacity and usually a low impact on the broader electorate (Culpepper, 2010). Only those with very strong interests pay attention to these complex issues. These policy areas can easily become a victim of regulatory capture, as the benefits are mostly dispersed and the costs of the regulation are concentrated (Culpepper, 2010; Black, 2011). The study of Moury, Cardoso and Gago (2019) showed that that policy reversals in Southern European countries under the framework of conditionality can occur if industry lobby groups lobby for it and if the visible costs to society are low.
Nevertheless, the current literature indicates that governments in Southern European countries mostly target the reversals of salient policies (Moury & Afonso, 2019). This leads to my second hypotheses:
H2 Policy reversals are more likely to happen in politically salient policy areas, where the attention of voters is greater
I do not exclude the possibility of policy reversals in low salience policy areas, but I expect policy reversals mainly to happen in high salience policy areas. I will include the salience of policy reversals as conditions in the QCA. In addition, I will also include the concentration of the benefits of reforms for relevant constituents as a condition. Since governments reverse reforms, which bring electoral benefits, it is likely they will not only target salient reforms but
also reforms, which pose concentrated benefits on their core constituencies (Moury & Afonso, 2019; Moury, Cardoso & Gago, 2019). Based on these studies, I have included the following expectation in my research:
H3 Policy reversals are more likely when they have a concentrated benefit on a core constituency of the government.
Aside from the salience of issues and the demand of voters, the ideology of political parties is also a relevant determinant for policy change and policy reversals (Moury & Afonso, 2019; Moury, Cardos & Gago, 2019; Branco et al., 2019; Bulfone & Afonso, 2019). The theory regarding the effect of partisanship on policies holds that left-wing political parties are expected to be more favourable towards more social policies. Examples of these more social policies are the expansion of the welfare state or policies that try to achieve greater equality in a country. This contrasts with right-wing parties, these parties are expected to be more favourable towards the retrenchment of the welfare state or policies that reduce public spending or government intervention (Allan & Scruggs, 2004; Starke, Kaasch & Van Hooren, 2011).
Several studies have shown that the domestic impact of international organisations, such as the IMF or the European institutions, are largely shaped by the ideology of the governmental parties (Pop-Eleches, 2008; Picot & Tassinari, 2017; Graziano, 2017). The study of Pop-Eleches (2008) finds that the extent to which governments are willing to imply the policy reforms prescribed by the IMF is dependent on the ideology of a government. More left-wing governments are less willing to implement the advice of the IMF compared to more right-wing governments since the IMF often advises governments to take austerity measures and to reduce government spending. The study of Graziano (2017) showed that (partisan) preferences also matter for the extent European governments are willing to adapt to the regulatory framework of the European Union. In addition, Picot and Tassinari (2017) find that the influence of left-wing political parties explains the difference in labour market reforms in Spain and Italy, these reforms were pressured by the ECB and the European Commission. The study showed that the involvement of centre-left parties protected low-income workers and labour market outsiders and moderated the flexibilization of the labour market.
The literature also indicates that the partisan composition of a government, matter for the kind of policy reversals under the framework of conditionality imposed by the IMF and the EU on
members of the eurozone during the eurozone crisis (Moury & Afonso, 2019; Moury, Cardos & Gago, 2019; Branco et al., 2019; Afonso & Bufone, 2019). Left-wing governments in Southern European countries are more likely to reverse policies under the framework of conditionality given the pro-market policy bias of those reforms (Moury & Afonso, 2019; Bulfone & Afonso, 2019; Moury, Cardos & Gago, 2019). Afonso and Bulfone (2019) argue that left-wing governments face pressures from their electorate to reverse the austerity measures, as their electorate is negatively impacted by the reforms. However, this does not mean that right-wing governments do not reverse policies if it would serve political or electoral purposes (Moury & Afonso, 2019). In addition, Branco et al. (2019) find that complete policy reversals under the framework of conditionality happen when the ideological composition of a government drastically changes. Moury, Cardoso and Gago (2019) also find that whenever there is a change in the ideological position of a government, the new government will try to reverse policies implemented by the previous government. These theoretical insights can be combined with the following expectation:
H4 Policy reversals are more likely when a more left-wing government succeeds a ring-wing government.
Therefore, I will include governmental partisanship and ideological change as a condition in the QCA analysis.
2.3.1 The impact of institutions on policy reversals
The current literature indicates that institutional differences between countries is another determinant for the likelihood of policy reversals under the framework of conditionality (Moury & Afonso, 2019; Branco et al., 2019). The study of Branco et al. (2019) indicates that institutional differences between constitutional courts in different countries can explain the variation in policy reversals across Southern European countries under the framework of conditionality. This study showed that it matters to what extent high courts devote attention to fiscal sustainability for the likelihood of policy reversals under the framework of conditionality (Branco et al., 2019). In addition, Moury and Afonso (2019) argue that policy change may alter domestic power relations, which makes policy reversals more difficult. Labour market reforms, for example, might weaken the position of labour unions and make a lobby of these labour unions for policy reversals less strong.
Furthermore, the study of Moury and Afonso (2019) indicates that the number of veto players matters for the likelihood of policy reversals under the framework of conditionality. For example, opposition parties in Southern European countries have extracted policy reversals as a concession for their support for the budgets proposed by the various governments (Moury, Cardoso & Gago, 2019; Branco et al., 2019). In contrast, Tsebelis (1999) suggests that policy change becomes even more difficult whenever the ideological distance between the veto players is large, as cooperation in such a situation is very difficult. Therefore, reforms are more successful and easier to implement in a system in which the executive power faces few institutional vetoes. Ardagna and Trebbi (2006) find that during a crisis, reforms are more likely to happen when strong and stable governments can easily implement change. In such a situation a limited number of veto players can oppose policy change, which makes a policy change simpler to achieve (Tsebelis, 1999; Haggard 2000). The mandate of a government is included in the QCA analysis and this following expectation is drafted:
H5 Policy reversals are more likely when a majority government is in charge.
2.3.3 Policy outcomes
The last determinant of policy reversals is the outcomes of policies. Intuitively this makes sense, as it is unlikely successful policies are reversed. Chen (2009) shows that the failure of privatisation of certain services can lead to a reversal of the delegation policies. In addition, Alesina & Ardagna and Trebbi (2006) shows that periods of economic downturn are related to the reversals of a range of structural reforms. Furthermore, policy reversals are more likely if a country has sufficient resources. Lowry (2005) argues that richer governments have more means for policy innovation. The short-term financial health of a government can be a determinant of the ability of a government to adopt new, or costly innovative policies. Policy reversals such as decreasing the retirement or increasing the minimum wage are costly and might not be pursued by countries with little means.
Policy reversals are also determined by the extent to which reversals can be implemented without a backlash from creditors, other members of the eurozone or the European institutions and the IMF. This point relates to the strength of the conditionality agreement. Policy reversals can be costly, as they can impact the credibility of the government vis-à-vis other European governments, European Institutions, and creditors (Moury, Cardoso & Gago, 2019; Moury & Afonso, 2019). Hence, Branco et al. (2019) argue it is unlikely that policy reversals that have a
vast impact on both the financial sustainability of a country and the reputation of a country happen and, in such circumstances, governments might introduce partial reversals that mitigate the effect of the reform. The study of Moury, Cardoso and Gago (2019) also indicates that policy reversals were often compensated by either high taxes or cuts in spending that were less visible. I will test the typologies of the policy reversals and will include compensation measures to mitigate the effect of the policy reversal as a condition in the QCA. In addition, I will include the following expectation in my research.
H6 Policy reversals are likely to be compensated by other policy measures to ease the effect of the policy reversal.
The timing is also a relevant determinant of policy reversal. The study of Moury, Cardoso and Gago (2019) illustrates that European governments, which operate under the framework of conditionality in the aftermath of the financial crisis, remain committed to the conditions of the loan program after they exited the program and enter the period of post-program surveillance. However, the other studies indicate that the framework of conditionality is weaker after the bailout or crisis than before. Investors pay less attention to the actions of the government and the members of the Troika do not have the same ‘sticks’ and ‘carrots’ after the bailout to influence the actions of governments (Moury & Afonso, 2019). The study of Lombardi and Woods (2008) shows that the surveillance activities of the IMF are less effective in countries where the IMF cannot withhold payment. Furthermore, as times goes on, the effects of the crisis become less tangible and the efficiency of reforms can be questioned (Bailey & Parks, 2018), which could create viable grounds for policy reversals. Therefore, I will include the timing of the reforms as a condition in my QCA and I drafted the following expectation:
H7 Policy reversals are more likely during the post-program period.
The last determinant of the reversals of policies is the behaviour of neighbouring countries (Lowry, 2005). In the Irish case, relevant neighbouring countries are other members of the eurozone, which also received financial support from the IMF and/or European Institutions. These countries were all located in Southern Europe. The studies of Bulfone and Afonso (2019), Moury and Afonso (2019), Branco et al. (2020) and Moury, Cardoso and Gago (2019) all point out that Southern European countries clearly reversed policies. Yet, there is clear
variation in the extent of reversals across policy areas and most reversals took place while European rules were respected.
3. Methodology chapter
This chapter will delve into the methodological foundation of the research. This thesis aims to explain the political aftermath of the eurozone crisis in Ireland. I will try to answer the following research question: What are the determinants of policy reversals under the framework of conditionality in Ireland? Firstly, I will discuss the conceptualisation and operationalization of the main variables. Secondly, I will explain the relevance of the chosen cases. Then I will elaborate on the data collection and method of data analysis. Lastly, I will discuss the validity and reliability of the research.
3.1 Conceptualisation and operationalization
A policy reversal is the most important concept in this thesis since this study aims to investigate the determinants of policy reversals, that have been imposed under the framework of conditionality. There has been no clear conceptualization or operationalization in the current literature regarding policy reversals (Moury & Afonso, 2019). Policy reversals differ drastically in impact, some policies are simply reversed by deregulation or liberalisation, while other policy reversals require more drastic steps to remove products of the previous policies (Lowry, 2005). In this thesis, policy reversals will be conceptualized as a type of policy change that neutralizes or limits the aim of a specific policy (Branco et al., 2019). This can be a change of the reforms and processes towards the status quo ante the financial crisis (Moury & Afonso, 2019) or change which eases the strain of the loan program. Since the financial crisis has changed circumstances, the status quo prior to the financial crisis cannot always be achieved. Therefore, I will also consider policy reversals which alleviate the impact of the policies of the loan program. This conceptualization can be illustrated by an example about the salaries of civil servants. If a policy reform decreased the salaries of civil servants to reduce the budget deficit, a reversal is any policy that tries to neutralise or limit the decrease either temporarily or permanently, suspend the implementation of the policy, or grants an exemption to specific categories of workers (Branco et al., 2019). By choosing this conceptualization, it becomes possible to determine to what extent policies implemented by the Irish government deviated from the policies that the Irish government were supposed to adhere to under the framework of conditionally.
This study will consider both structural and cyclical reforms to give a comprehensive view of the number of policy reversals. Cyclical policy reversals deal with temporary austerity measures, which did not aim to have a lasting impact on the economy. A clear example is the
reversals of the freeze of the minimum wage of civil servants. In contrast structural reforms try to increase the competitiveness of an economy by more drastic steps, and these reforms have a more lasting impact (Branco et al., 2019). While structural policy reversals are more impactful (Branco et al., 2019), this research will consider both to give a comprehensive overview of the resilience of reforms.
The next step is the operationalization of the concept. Scholars in the field of liberalisations that study economic reforms have operationalised policy reversals along the lines of indicators. A good example is the study of Merlevede (2003), this study operationalized policy reversals by a drop in the average reform index. The reform index is based on a weighted average of the levels of transition indices, which are established by the European Bank for Reconstruction and Development. In addition, Campos and Horvath (2012) also take a range of relevant indices into account to determine policy change. This thesis will operationalize policy reversals differently, as I will simply identify and count the relevant policy reversals based on an extensive literature study. This operationalization is in line with the current literature regarding policy reversals under the framework of conditionality in the eurozone (Moury & Afonso, 2019; Moury & Cardoso & Gago, 2019).
The concept of policy reversals will be divided into three categories based on the study of Branco et al. (2019). Firstly, there are those policy reversals that neutralise a certain policy permanently. For example, if the minimum wage has been decreased, this kind of policy reversal will completely neutralize this decrease. Secondly, there are those policies that neutralise a certain policy temporarily or partly. To take the example of the minimum wage again, these kinds of policy reversals will neutralize this decrease temporarily or will increase the minimum wage slightly. Lastly, there are those policy reversals that exempt specific groups, individuals, or cases from a certain policy. To take the example of the minimum wage again, this would mean that certain groups of workers would be exempted from the decrease in the minimum wage.
The second relevant concept to conceptualize and operationalize is political salience. The political salience of an issue refers to the importance of a certain issue to the average voter, compared to other issues (Culpepper, 2010). Scholars in the field of policy reversals have also linked saliency to the attention an issue receives from voters (Culpepper, 2010; Moury & Afonso, 2019). Usually, political parties devote less attention to low salience issues, as these
issues have little immediate interest to most voters (Culpepper, 2010). The best way to operationalize policy salience would be with data from repeated mass surveys about the importance of certain policies or issues to voters. Unfortunately, this data does not exist. Therefore, Culpepper (2010) has designed an indicator of policy salience. In line with the research of Culpepper (2010), I will use newspaper coverage as an indicator for the salience of policies. Coverage from major newspapers is transparent, reproducible, and a relatively straightforward way to determine the salience of issues.
Determining how much attention a newspaper should devote to an issue before it can be classified as salient can be a very arbitrary and subjective endeavour (Culpepper, 2010). I will consider a policy salient if more than 20 news articles a month are published about this issue. The study of Culpepper (2010) showed that this number of newspaper articles is above average for a range of different issues in several Western European countries. I will use the data from the three major Irish newspapers, namely the Sunday Independent, The Irish Times, and the Irish Independent to determine the salience of an issue. I have chosen these newspapers based on their readership rates, their perceived credibility and because of their influence in the Irish public debate (Wagner & Payne, 2017; McAndrew, Caroll & O’Malley-Keighran, 2020).
The last relevant concept to conceptualize and operationalize is governmental partisanship. This concept can be conceptualized as the ideological character of a government (Jakobsson & Kumlin, 2017). Governmental partisanship will be operationalized by the share of cabinet seats of left-wing parties. Taking cabinet seats into account is a widely used measure to operationalize governmental partisanship (Allan & Scruggs, 2004; Jakobsen & Kumlin, 2017). To determine the ideology of a party I will rely on the ParlGov database, which is a database about the ideology of different governments and political parties (Döring & Manow, 2020). This database has the relevant data about the political ideologies of the different Irish political parties.
3.2 Case selection
Ireland has been deeply affected by the eurozone crisis and asked to implement a set of reforms under the framework of conditionality, to receive financial aid from the Troika (Sapir et al., 2014). The course of the Eurozone zone crisis in Ireland and the impact this crisis had on Ireland has been extensively studied (e.g., Saphir, 2014; Whelan, 2015), yet policy reversals in Ireland
in the aftermath of the Eurozone crisis have received surprisingly little attention. The aim of this case study is to explain policy reversals in the aftermath of the eurozone crisis in Ireland. Previous studies regarding the resilience of reforms in the aftermath of the eurozone crisis have focused either on Southern European countries (Moury & Afonso, 2019; Moury, Cardos & Gago, 2019; Bulfone et al., 2019; Bulfone & Afonso, 2019; Branco et al., 2019) or on specific policy areas (Hardiman & MacCarthaigh, 2016; MacCarthaigh & Hardiman, 2019). Contrasting this study will focus on Ireland and will give a comprehensive overview of different policy reversals in different policy areas in Ireland.
Studying the Irish case is important from both a theoretical and from a policy point of view. The Irish experience during the eurozone crisis has been somewhat different to the experience of Southern European countries. Ireland entered the crisis with a strong resistance of trade unions to reforms and austerity measures, a weak implementing capacity and a large backlog of government commitments about reforms in the public sector (MacCarthaigh & Hardiman, 2019). Nevertheless, the Irish government was characterized by a uniquely high level of willingness to implement austerity measures and reforms (MacCarthaigh & Hardiman, 2019). Furthermore, in contrast to other European countries, which also needed external financial support during the eurozone crisis, the Irish economy was long seen as very strong and recovered relatively quickly from the eurozone crisis (Whelan, 2015). Considering the unique characteristics of the Irish case, studying this case will enrich the current literature about the resilience of policies under the framework of conditionality. Also, studying the Irish case is relevant from a policy perspective. In current (policy) debates regarding European funds and budgetary discipline, a lot of attention is shifted to Southern European countries. These countries are assumed to lack fiscal discipline and seen as not willing to implement European budgetary rules. Considering these discussions, it is very relevant to study a Northern European country and to see to what extent reforms imposed under the framework of conditionality have proven to be resilient.
To keep the research manageable, it is impossible to study all policy areas. Therefore, three different policy areas have been chosen, which will make the research a small- N comparative case study. This study will give an in-depth analysis of the different policy areas and compare the different areas. This thesis will focus on policies regarding the labour market, the banking sector, and the public sector. These policy areas were very significant in the Memorandum of Understanding (2010) between Ireland and the members of the Troika. The banking sector was
an important contributor to the financial problems in Ireland. Therefore, it is unsurprising that this sector was drastically reformed. The labour market and the public sector were also drastically reformed. Reforming these sectors was necessary to reduce the large Irish budget deficit (Memorandum of Understanding, 2010). Since I will be studying three different policy areas within the same country, thus with the same institutions and nature of politics, I will be conducting a most similar system design. The policies and an important explanatory variable, namely salience, differs among these cases. Reforms in the labour markets are very salient to voters, as these reforms can directly impact voters (Moury & Afonso, 2019). Reforms in the public sector are less salient, as they usually impact fewer voters. Contrasting, reforms in the banking sector are usually not salient, as these reforms are very technical and do not directly impact most the voters. The theory regarding policy reversals indicates that policy reversals are feasible in high and low salience policy areas (Moury, Cardoso & Gago, 2019; Moury & Afonso, 2019). However, I expect that policy reversals are more likely to take place in high salience policy areas. Therefore, the chosen cases are ideal to study my hypotheses.
The last step is to choose a relevant time frame to study policy reversals in Ireland. In 2010, the Irish government asked for financial assistance and the financial aid program started in the beginning of December (Sapier et al., 2014). After three years, the IMF and the EU institutions concluded that the Irish programme was broadly on track and that Ireland could exit the program. However, Ireland will remain subject to the post-programme surveillance at least until 2031, until 75% of the financial assistance received has been repaid (Sapir et al., 2014). During the post-programme surveillance period, the European Commission and the IMF will conduct regular reviews and assessments of the financial, economic, and fiscal situation in Ireland. In this thesis, I will study the period from the end of 2010 until 2016. I have chosen this period for two reasons. Firstly, this period covers the period in which Ireland participated in the loan program and the period right after the loan program ended. Therefore, my research will be able to determine if the Irish government reversed policies while participating in the loan program and/or after the loan program ended. Secondly, during this period three different governments have been in charge. This includes both minority and majority governments and governments with different ideologies. Consequently, my research will be able to determine if elections and different governmental compositions influenced policy reversals.
3.3 Data collection and analysis 3.3.1 Method of analysis
The resilience of reforms in the political aftermath of the eurozone crisis in Ireland will be studied with a qualitative research design. I have chosen for a qualitative research design, as qualitative research methods are best equipped to give a detailed description of situations and processes while taking contextual factors into account (Bryman, 2012). I will combine the cross-case evidence with detailed studies of the three different policy areas to minimize the risks of measurement error, which is a big threat to comparative studies and to strengthen my findings (Toshkov, 2016).
I will use two methods of analysis. Firstly, I will use process tracing. In the field of case studies, process tracing has become an important and influential research style (Toshkov, 2016). Process tracing is not just the enumeration of events that follow up to the outcome of interest. Benne & Checkel (2015, p.4) define this method as ‘the use of evidence from within a case to make inferences about causal explanations of that case’. This method identifies relevant events but also makes sure that the sequence of events is held together by causal mechanisms (Toshkov, 2016). Process tracing will be used to identify the relevant policy reversals and the causal mechanism that explains the link between these policy reversals.
Secondly, I will conduct a QCA to further explain why some austerity measures and reforms have been reversed by the Irish authorities. The QCA is a popular method among public policy researchers, as this method is well equipped to capture the causal complexity policymakers face (Rihoux, Rezsöhazy & Bol, 2011; Hudson & Kühner, 2013). The QCA is based on two assumptions. Firstly, change is usually the result of different combinations of factors and not one individual factor. Secondly, different combinations of factors can result in the same outcome (Ragin, 1987). Consequently, a QCA can uncover multiple causal relations and can take complex interactions among explanatory variables into account (Rihoux, Rezsöhazy & Bol, 2011). An QCA is particularly well equipped to be combined with other methods of analysis, such as process tracing, to make sure a meaningful interpretation of the QCA results is given (Schneider & Wagemann, 2010). Furthermore, a QCA is well equipped for a small-N research design (Toshkov, 2019) and enables the causal and comparative analysis of multiple policy areas.
There are different forms of QCA’s, yet I will use a crisp-set comparative analysis. This method is particularly well suited for small N design and is based on the conventional Boolean sets, whereby variables can be coded only ‘0’ or ’1’ (Ragin, 1987). This form of QCA will give a clear indication if the causal condition is present or not (Rihoux, Rezsöhazy & Bol, 2011). I have chosen the conditions based on the insights of my theoretical framework and I have included a full list of conditions and the coding scheme in Appendix C. The QCA will test the expected conditions for policy reversals under the framework of conditionality and will work like a truth table to describe the data in a synthetic way (Ragin, 1987). An alternative QCA is a fuzzy set QCA, this method allows the research to scale the sources from 0 to 1. Yet I will use a crisp set QCA, as the dichotomisation of the conditions described in the theoretical framework is relatively unproblematic (Moury, Cardoso & Gago, 2019). Furthermore, Skaaning (2011) has argued that crisp-set QCAs provide more robust results, as the results are less sensitive to small changes in the choices made by researchers.
3.3.1 Research methods
Two research methods will be used to carry out these methods of analyses, namely a content analysis and a semi-structured interview. I will triangulate the different research methods and sources to strengthen the ultimate results and limit inaccuracies or biases (Bryman, 2012). This research design, which combines both the study of different documents, newspaper articles and interviews, is based on the study of Moury, Cardoso and Gago (2019). This research focused on policy reversals under the framework of conditionality in Southern European countries.
Firstly, I will conduct a content analysis. A content analysis is associated with the study of qualitative sources, such as newspapers, party manifestos, academic articles, and other forms of documentation (Prior, 2011). This content analysis will try to identify and evaluate policy reversals under the framework of conditionality. Firstly, the content analysis will identify the policy reversals. The most important sources in this respect are the evaluation reports about the Irish loan program written by European Commission. The European Commission has uploaded quarterly review reports in the period when Ireland participated in the loan program, this is the period from the end of 2010 until 2013. After 2013, during the post-program evaluation period, the European Commission has published half-annual evaluation reports. The review reports give a detailed overview of the implementation of the loan program and possible policy reversals. Another member of the Troika, namely the IMF, has also uploaded regular review reports, which will also be included in the analysis. However, the emphasis is on the reports of
the European Commission, as the reports of the IMF are less detailed (Hick, 2018). The last member of the Troika, the ECB, has not published regular review reports. Furthermore, I will use the Memorandum of Understanding, which was agreed upon between the EU institutions, the IMF, and the Irish government. Lastly, I will include the letter of intent, in which the Irish government described the policies that Ireland intends to implement under the framework of conditionality.
In addition, I will evaluate these policy reversals and try to determine which causal mechanism have contributed to the policy reversals. Therefore, I will also use the minutes of parliamentary debates, the minutes of parliamentary inquires, academic literature, and newspaper articles. By using these sources, I hope to determine the actors’ motivations for reversing certain policies. Especially the debates in the lower chamber of parliament (Dáil Éireann) are relevant, as this body is mainly responsible for scrutinising and allowing budget allocation, while the role of the upper chamber (Seanad Éireann) is more limited (Downes & Nicol, 2018). Furthermore, I will investigate newspaper articles in Factiva to determine the level of salience as already explained before. This search engine allows for a keyword search in relevant newspaper articles to determine the saliency of the issue. The relevant keywords and searched period will be based on the policy reversals I found during my content analysis.
The second research method is a semi-structured interview; this method will be used to strengthen and validate my analysis. Bryman (2012) argues that interviewing an expert is a great contribution to an analysis, as an expert can give context and nuance to the results, especially if mainly documents are analysed. In a semi-structured interview, the researcher has drafted a list of questions, but the interviewee has a lot of leeway in how to reply to these questions (Bryman, 2012). I will interview an Irish senior civil servant, but I will not include the name of this person to guarantee this person’s privacy. During this interview, I will ask this expert about relevant policy reversals I found and ask if there were additional policy reversals. Furthermore, I hope the expert can give some context and nuance to these policy reversals.
3.4 Validity and reliability
Each research method has its strengths and weaknesses, which impact the validity and reliability of research. It is important to be aware of these strengths and weaknesses. In this section, I will discuss the validity and reliability of this study.
Firstly, the validity of this research. The term validity refers to the reasons a study gives for believing its claims (Norris, 1997). While there are numerous forms of validity in social science research (see Thoskov, 2016), the most well-known forms are external and internal validity (Norris, 1996; Gerring, 2007). External validity is concerned with the representativeness between a sample and a population. Thereby this concept mainly focuses on the generalization of a study. A small n-comparative study has typically a low level of generalizability, as it includes only a small number of cases (Gerring, 2007). However, the aim of this study is not to generalize, but to give an in-depth analysis of the Irish case. This study can be generalized to other European countries, but one must be aware of the contextual features of the Irish case. However, if the analysis of my thesis supports dominant theories, the results of the study can be generalized more easily, as the conclusions can support the broader theoretical narrative.
In contrast, internal validity estimates to what extent a study was conducted properly and to what extent a trust-worthy relationship between the treatment and outcome variable is established. A small-n comparative case typically has a high level of internal validity, as the research is occupied with the causal relationship between the treatment and outcome variable in certain cases (Gerring, 2007). Since this comparative case study is aimed at delving into the causal mechanism that explains policy change under the framework of conditionality in Ireland, the results mainly seek internal validity. To strengthen the internal validity of this research, I will triangulate different types of data, both primary and secondary sources, which report the policymaking process, and I will triangulate different qualitative research methods and methods of analysis.
Furthermore, I have chosen the policy areas that I will study, not based on the dependent variable, policy reversals, but based on their significance in the memorandum of understanding and their level of political salience. However, the fact that my research only contains three policy areas can negatively impact the internal and external validity of my research. By narrowing down the scope of my research, the study will not depict the whole picture.
Secondly, the reliability of this research. For a study to be reliable, the application of the same measurement techniques on the same data should give the same results (Toskhov, 2016). Since I will use different sources, which are all openly available and accessible, it is likely that another study will find the same results. However, it is also very well possible that other studies notice other aspects based on the sources. Therefore, a close reading of the available sources is
necessary. Lastly, I will further strengthen the reliability of my results by properly referencing the sources which are used to strengthen certain claims, by using the coding scheme, and by using multiple and sources and different research methods.
4 The analysis
In this chapter, I will discuss all the relevant data and provide an answer to my research question. Firstly, I will give a short introduction about the eurozone crisis that hit Ireland, followed by an in-depth analysis of the implementation of the conditions of the loan program and policy reversals in the three different policy areas. Secondly, I will analyse and explain these policy reversals.
4.1 Case study: The aftermath of the Financial crisis in Ireland
The Irish economy was one of the first countries of the eurozone that suffered the severe consequences of the eurozone crisis (MacCarthaigh & Hardiman, 2019). The crisis can largely be explained by a large property bubble that was financed by inflows of foreign capital into the Irish banks. The expected returns from investment in the property market were high, which had caused an enormous supply of property. When the international markets lost confidence in Ireland’s property sector amid concerns about a price bubble and an oversupply of property, the construction and building sector collapsed (Berrigan et al., 2011a; Fitzgerald, 2014). The financial sector was also left with large losses, due to the high exposure in property-related loans (Berrigan et al., 2011a). The Irish government financially supported this sector, which linked the solvency of the Irish state and the banking system inextricably (Fitzgerald, 2014). Despite the large-scale support of the Irish authorities, the Irish financial system was unable to regain the trust of the international financial markets and it became increasingly difficult for the Irish government and Irish banks to operate on the international financial market (Hick, 2018). Consequently, the public finance position of the Irish government deteriorated quickly after 2008, and the financial sector was a large contributor to the financial troubles of Ireland (Berrigan et al., 2011; Angelini, 2014). The financial crisis exposed the weakness of the banking system, the low level of competitiveness of the labour market, and the high level of expenditure in the public sector (Berrigan et al., 2011a). The national debt, measured as a percentage of the GDP, doubled between 2008 and 2010 and the unemployment level had risen to almost 15% at the end of 2010 (MacCarthaigh & Hardiman, 2019). On 24 November, the Irish government requested financial assistance from the Troika. On 15 December, the Irish Parliament approved the deal in Parliament and a few days later Ireland entered the loan program.
In the following sections of my analysis, I will give an in-depth analysis of the implementation of the loan program and policy reversals in three different policy areas, namely the banking
sector, the labour market, and the public sector. I will discuss each policy area separately. For each policy area, I will first give a brief introduction, which will highlight the main problems within each sector before the financial crisis. Secondly, I will discuss the implementation of the framework of conditionality and possible policy reversals during the EU/IMF loan program. Lastly, I will discuss the possible policy reversals during the post-program surveillance from 2014 until 2016.
4.1.1 Banking sector The banking crisis
The 2008 global financial crisis quickly exposed the weaknesses of the Irish banking system. Prior to the financial crisis there was little macro-prudential regulation or supervision on the banking sector, which would have prevented imbalances created by property-related lending and other risky investments. The Irish right-wing Fianna Fáil government was aware of the issues within the banking sector and took major steps to support the banking sector when the financial crisis hit Ireland (Kerr, 2008; Berrigan et al., 2011a). Domestic banks were supported with capital injections and the Irish authorities provided a broad guarantee for Irish banks. In addition to the provision of direct financial support to the banks, the Irish government set up the National Asset Management Agency (NAMA) to deal with bad assets of the bank (Schoenmaker, 2015). The Irish prime minister Brian Cowen argued in the Independent (Kerr, 2008) that financial support for the banking sector is necessary to secure the stability of the Irish financial system and to make sure that the lines of credit are reopened. Nevertheless, the Irish government’s attempts to recapitalize and restructure the Irish banking system were not successful.
The EU/IMF loan program was meant to provide the Irish government with enough capital to recapitalise the Irish banking sector, as it became increasingly difficult for the Irish government to lend funds on the international capital market (Angelini, 2014; Connor, Flavin, & O’Kelly; 2017). The Irish banking sector faced two challenges in 2010 amid the burst of the property bubble, which left the banking sector which a high concentration of exposure in property-related loans. Firstly, the vulnerability of the funding structure of their assets. Secondly, the quick deterioration of the quality of the banks’ assets (Berrigan et al., 2011a; Angelini, 2014). The policy measures linked to the framework of conditionality regarding the banking sector were based on two pillars. Firstly, there was a set of recapitalization measures. As part of this set of policies, banks were required to increase their capital ratios. The second pillar was based on a
radical reorganization and downsizing of the financial sector. The key component of these reforms is to downsize the banking sector, to isolate the viable parts of the system, and to return the banking sector to a healthy and trustworthy sector. Also, the EU/IMF loan program contained a set of measures to strengthen supervision regarding the financial sector (Berrigan et al., 2011a; Angelini, 2014).
The framework of conditionality from 2011 until 2013 The last months of the Fine Fail Government
In the first months, the outgoing Irish government has made significant steps to implement the financial sector policies of the Memorandum of Understanding (Berrigan et al., 2011b). The Irish Minister of Finance Lenihan (2010) argued that reforming the financial sector was necessary. In line with this statement, the outgoing Irish government kept working on comprehensive plans to recapitalise, reorganize and deleverage the banking sector. The European Commission applauded the significant steps that were made to restructure the domestic banking sector (Berrigan et al., 2011b).
A change of government
In the late spring of 2011, a new government was installed. This government consisted of the Labour Party and the right-wing conservative party Fine Gael. These parties were very critical of the bailout deal and both parties argued against the deal in parliament. The financial spokesman Michael Noonan said the deal was ‘an obscenity for taxpayers’ and the Labour leader Eamon Gilmore argued that it would be best if the deal was renegotiated (McGee, 2010). However, a senior official of the Irish government deemed it impossible that a better deal could be negotiated, as ‘we did not think there was a much better deal to be made’ (Interview A, 2020). Nevertheless, both incoming governmental parties argued in their party manifesto that they were committed to financial reforms yet argued that the current financial sector policies of the loan program needed to be updated (Labour, 2011; Fine Gail, 2011).
Despite the vast criticism of the new governmental parties on the current financial sector policies, the Irish government adhered well to the framework of conditionality (Regan, 2017; MacCarthaigh & Hardiman, 2019). A few months after the new government was installed the European Commission and the IMF both wrote that the authorities had made significant progress in the restructuring, deleveraging, and recapitalisation of the financial sector and were able to meet the financial sector targets of the loan program (Berrigan et al., 2011; IMF,
