How the process of policy learning shaped the experience with
austerity; a comparative case study of Ireland and Germany
Charlotte Anne Oostman S1495518 MA Public Administration: Economics and Governance Master Thesis Thesis supervisor: Dr. N.A.J. van der Zwan 11-06-2019
Layout
1. Introduction 32. Theoretical Framework 7
Foundations of social learning and policy change 8
Policy paradigms and policy learning 9
Redefining ‘The Classics’ 11
Domestic preferences versus European preferences 12
Contemporary research on Policy learning 14
Austerity as the dominant policy paradigm 16
Empirical expectations 17
3. Methods Chapter 19
Research Design 19
Conceptualisation and operationalisation of the variables 20
Motivation case selection 21
Method of Data Collection 22
Method of Data-analysis 23
Reflection on validity and reliability 24
4. Empirical analysis Germany 26
Socio-economic context post German Reunification 26
Experience with austerity 2003-2006 27
Tax revenues 27
Levels of public spending 28
European fiscal measures 28
Debt/GDP ratio 29
GINI-index 30
Government stance on austerity in the period 2003-2006 30
Socio-economic context Financial crisis 2008 32
Experience with austerity 2008-2010 32
Tax revenues 32
Public expenditure 32
European fiscal measures 33
Debt/GDP ratio 35
GINI-Index 35
Government stance on austerity in the period 2008-2010 35
5. Empirical analysis Ireland 38
Socio-economic context 1980s Ireland 38
Experience with austerity 1987-1995 39
Tax revenues 39
Public expenditure 40
European fiscal measures 41
Debt/GDP ratio 42
GINI-index 42
Government stance on austerity in the period 1987-1995 43
Socio-economic context financial crisis Ireland 45
Experience with austerity 2008-2011 45
Tax revenues 45
Public expenditure 46
European fiscal measures 47
Debt/GDP ratio 48
GINI-index 49
Government stance on austerity in the period 2008-2011 49
Analysis empirical findings 52
Ireland 1987-1995 versus 2008-2011 52
Germany 2003-2006 versus 2008-2010 54
Ireland versus Germany 55
Conclusion 58
Self-reflection 59
Bibliography 62
1. Introduction
How governments make policy and what motivates them has always been one of the central questions in public administration. Which factors influence the creation of new policies and how do people learn from previous experiences with a policy are detrimental for both academics and policy-makers. This allows them to understand underlying processes or account for change or the lack thereof. Furthermore, policy learning takes place on both the governmental and societal level; thus, it applies to the whole of society. The process of policy learning can guide government action and provide conceptual frameworks within all different policy fields.1 Therefore, policy learning can provide valuable insights into the processes that lead to the eventual creation of new policies.
Nowhere is the formulation of these new policies as essential and defining as with fiscal and monetary policies. How governments spend their money and how much state intervention is required shapes economies. For instance, when countries are faced with a severe economic downturn, unemployment levels rise and poverty increases, there is a necessity for a government to step in and act, but which type is preferred? The consequences of these policies directly influence the wellbeing of the entire population and the future trajectory of the economy. Therefore, it is imperative to understand what motivates government responses. Within the Economic and Monetary Union (EMU), the effects of government actions have even more significant consequences. The interconnectedness and interdependence of the European Union (EU) member states only enhances the need to understand why policies come to play and how these can be accounted for. In the case of an economic downturn, governments have several fiscal and monetary tools at their disposal. Within the EU, there is a shared Economic and Monetary Union (EMU), so this eliminates the ability for member states to conduct these individually. Therefore, the only tools that remain are fiscal measures. The government can adjust spending levels and choose to alter tax rates. This means that it can either choose to cut public spending or engage in counter-cyclical spending2. Spending cuts and less government is rooted in the neoliberal economic tradition, and when a country instead increases its influence and actively attempts to adjust the economy, this derives from a Keynesian stance. Whether a country engages in either of these two approaches heavily 1 Pal, L. (2011). Policy learning. In B. BadieD. Berg-Schlosser & L. Morlino (Eds.), International encyclopedia of political science (pp. 1934-1937). Thousand Oaks, CA: SAGE Publications 2 During periods of economic downturn, a government increases public spending and during an economic boom public expenditure drops and taxes increase. This policy type works against cyclical tendencies in the economy.
depends on the ideological orientation of political parties and the dominant paradigm in a specific period.
Nonetheless, there is a robust neoliberal inclination within the European tradition on dealing with public debt and deficits.3 The Stability and Growth Pact (SGP), the Macroeconomic Imbalances Procedure (MIP), and the encompassing Legislative Six Pack are all European policies that impose limitations on fiscal spending and have a strong neoliberal focus. Therefore, it would be expected that the neoliberal approach is agreed upon by economic scholars as the most effective way to deal with an economic crisis and economic downturn in general. However, When the book by Mark Blyth' Austerity: The History of a Dangerous Idea' was released in 2013, this was profoundly challenged.4 The book shows that after the Keynesian paradigm lost support in the 1970s countries massively returned to the use of austerity. Blyth argues that austerity is the result of countries that cannot decide on the correct distribution of taxes. The most straightforward solution to an economic situation would be to increase the tax burden on the wealthiest in society. However, this is hugely controversial and therefore not politically viable.5 As a result of the use of austerity in response to the financial crisis, the Irish debt to GDP ratio only increased. Whereas, in Iceland, the Gini coefficient dropped and unemployment went down after the decision not to bail out the Icelandic banks. Besides, it is argued that populism rose post-financial crisis as a response of the 70% of the population that realized that they were forced to pay for the top 30% that caused the crisis.6 As a result, the main question that arises is why do governments cling to the idea that strict neoliberal rules, which lead to austerity and budget cuts when this does not necessarily have the best outcome, are the 'best' way to stimulate the economy? Even though Mark Blyth’s work has been very influential and his opinion on the inefficiency of austerity is widely shared, governments remain supportive of this approach. Numerous scholars have addressed the issue of austerity, but there has been very little attention given to the historical impact of policy-making in how national governments perceive austerity today.7 Structures within governments could have facilitated policy continuation, or experts remain inclined to choose for austerity. However, this has not been adequately researched as of today. Therefore, this thesis will conduct a comparative case study of both Ireland and Germany to 3 Gill, S. (1998). European governance and new constitutionalism: economic and monetary union and alternatives to disciplinary neoliberalism in Europe. New Political Economy, 3(1), 5-26. 4 Blyth, M. (2013). Austerity: The history of a dangerous idea. Oxford University Press. 5 ibid., p. 232 6 ibid., pp. 237-240 7 Armin Schänd Wolfgang Streeck. (2013). Politics in the Age of Austerity. Polity Press. see also: Pierson, P. (2002). Coping with permanent austerity : Welfare state restructuring in affluent democracies. Revue Française De Sociologie, N 43(2), 369-406.
answer the question as to how these countries have transferred their previous experiences with austerity and fiscal discipline to their current stance on austerity, both domestically and on the European level. This question is particularly interesting because there is substantial empirical evidence that austerity does not contribute to restoring economic stability within an economy.8 This thesis attempts to investigate the inclination of governments to turn to the use of austerity. In order to conduct thorough research, the theory behind policy learning is the main guideline. Is there a sound theoretical basis for the resilience of austerity? Has the past played a decisive role? Is the return to austerity in the public interest? Is austerity the result of an ongoing struggle between interests? The answers to these questions can create a better understanding of how policy decisions have come to play. In order to conduct comprehensive research, this thesis will focus on two cases. Both Ireland and Germany will be the subject of a comparative analysis through time. This will focus on how the countries have dealt with the economic downturn in the past and how they reacted to the financial crisis in 2008. This analysis will shed light on the importance of the past and policy continuation versus the struggle for power by different actors that aim to influence public policy. Because both Ireland and Germany are a part of the EU, the supranational level also plays a crucial role. How can national governments transfer their preferences to the European level? Moreover, how uniform is their stance on both stages of the arena?
The theoretical expectation arises that the dilemma for governments heavily coincides with the image that a country wants to portray on the European level, especially for a country like Germany that is always portrayed as the gatekeeper of the EMU.9 This thesis will show whether this translates into policies that are highly restrictive or that the image the Germans wish to portray on the European level does not coincide with their domestic policies regarding limitations on fiscal spending. For Ireland, on the other hand, there was significantly more pressure from the EU to engage in a specific set of measures as a result of the bailout.10 Does this only come from external pressures, or is there a tendency to continue with policies from the past? Finally, the ongoing support for austerity and the development through time can also be part of a broader conceptual framework and the dominance of a specific paradigm. All these aspects can play a central role in how policies have changed and evolved. Within the broader theory of policy learning, this thesis will systematically analyze these questions to gain a deeper understanding of 8 Kelton, S. (2015). 2. The Failure of Austerity: Rethinking Fiscal Policy. Political Quarterly, 86(S1), 28-46. 9 Young, B., & Semmler, W. (2011). The European sovereign debt crisis: Is Germany to blame?. German Politics and Society, 29(1), 1-24. 10 Honohan, P., Donovan, D., Gorecki, P., & Mottiar, R. (2010). The irish banking crisis: Regulatory and financial stability policy.
the processes that shape fiscal policy. The findings will answer the main question of why governments keep on supporting austerity measures when this does not have a positive effect on the economy, and in most cases only further harms the economic situation of a country.11 The main research question of this research consequently is: How have prior experiences with austerity shaped the contemporary approach of both Ireland and Germany on limitations on fiscal spending? In order to compare the stances of both countries through time, I will utilize specific elements of austerity and limitations on fiscal spending. Because it is not possible to compare all changes in fiscal policies from both these countries without this thesis gaining the length of an entire book. Therefore, I will compare: 1) the changes in tax rates, 2) differences in public spending, and 3) support by domestic governments for European packages concerning fiscal policy. These three components are central to the government its stance on fiscal policy and can provide insight into how governments changed or maintained their position on policies. I will further elaborate on the content and meaning of these aspects in the method chapter. This thesis aims to identify the trajectory of fiscal policies through time with the occurrence of a financial crisis as intervening variable. This will create an image of the preferences of policy-makers, political parties, and other actors involved and how they change under exceptional circumstances. Because this is qualitative research, the data focuses on the preferences and stances of these actors. Therefore, it becomes possible to place decisions within a broader conceptual framework and context.12 Statements issued by the actors directly involved also provide valuable insights as to why a specific policy solution is selected. For this method, it is also vital to consider all other relevant factors that could have shaped the behavior and stance of the parties involved.13 In this light, the comparison between both Ireland and Germany will become as encompassing as possible, with the incorporation of the political and socio-economic context. The stance of the government shows through different official documents like party manifestos and policy papers. However, numerous other sources can provide insights into the development of stances. In the method chapter, I will further elaborate on these specific sources that are used throughout this thesis. 11 Karanikolos, M., Mladovsky, P., Cylus, J., Thomson, S., Basu, S., Stuckler, D., ... & McKee, M. (2013). Financial crisis, austerity, and health in Europe. The Lancet, 381(9874), 1323-1331. 12 Van Dijk, T. A. (1997). What is political discourse analysis. Belgian journal of linguistics, 11(1), 11-52. 13 Bogdan, R., & Biklen, S. K. (1997). Qualitative research for education. Boston, MA: Allyn & Bacon.
2. Theoretical Framework
This thesis attempts to answer the question of whether Germany and Ireland have transferred their previous experiences with austerity and fiscal discipline to their current stance on austerity, both domestically and on the European level. Therefore, I will analyze the evolution of macroeconomic policy in these countries. In order to conduct a thorough analysis of these policy developments through time, the theory behind policy learning is incorporated. This will include socio-economic aspects of theoretical shifts throughout time and governments structures that have a substantial impact on the outcome of policies. Furthermore, these theories can help answer the central question of what motivates actions of the state, and to what extent are they influenced by specific actors inside the public and private domain? How much room is there for ideas in policy-making? And how is the state perceived? Moreover, how do institutions influence this process and shape specific policy paradigms? Policy learning focuses on the specific actors that have pushed for change and how these have been influenced or restrained by opposing parties. Social learning in policy focuses on conscious choices to change the layout of policy in response to previous policy and experiences.14 Social learning, or also called policy learning, is the main theoretical framework that this thesis will incorporate to explain the development of the stance on austerity by Germany and Ireland. It cannot be a mere description of the technical changes that occurred over time, but there is substantial knowledge to be gained in analyzing the mechanisms that caused policy continuity or change. It was Peter Hall, who specifically argued to conduct more studies on policy development over time, in contradiction to the comparisons across nations that only show a particular policy at a specific point.15 More general, the question centers around the interplay between policy continuity and policy change. These have been central aspects of interest amongst social scientists. How can politicians acquire change and how do institutions facilitate this change are amongst the significant questions in social science. This chapter will develop a framework for empirical research. First, I will show the development of some of the most critical theories and concepts over time. These include the so-called “classics” and the responses that these authors have brought about. Then I will focus on these fundamental theories and the contemporary research that is done in this field. 14 Hall, P. A. (1993). Policy paradigms, social learning, and the state: the case of economic policymaking in Britain. Comparative politics, 275-296. 15 ibid., p. 292
This entails reconsiderations of concepts and more tailored approaches as derivatives from the traditional theory. The final section will connect the broader theoretical paradigm to the cases of Germany and Ireland.
Foundations of social learning and policy change
Social learning has its origins in theories of the state. In the 1970s social scientists perceived the state as the arena in which policy was created, and therefore the development of policy took place within the state.16 Within organization theory, influential scholars like John Kenneth Galbraith have also incorporated the concept of social learning. Within organizations, people learn from their previous experiences, and they attribute this knowledge to develop a new stance on specific issues.17 However, the concept of social learning has remained relatively vague, and even though it has been traditionally ‘owned’ by state-centrist scholars, there have been many obscurities surrounding the concept. It could therefore also be part of explanations on how societal development plays a role in policy development.18 In order to analyze policy change, it is imperative to gain a clear understanding of the concept of policy. The most commonly used definition comes from the work of Hugh Heclo. Heclo defines policy-making as a collective search for the ‘correct’ outcome. In his work on the bureaucracies in Sweden and Britain, the author concludes that nowhere the experts play as significant a role as in the field of macroeconomic policy.19 Even though the political process and interaction amongst politicians create a place of social learning that continues into a new policy, the primary explanatory variable is experts. Experts learn from previous policy and use that knowledge to create new policies. With this assumption, Heclo stated that policy learning and change were mostly an elitist process where there was little room for involvement of the public.20 Thus, the author took a state-centrist approach on policy change. Heclo’s approach has been contradicted by for instance Skocpol and Amenta.21 These scholars are amongst the leading authors in historical institutionalism. Therefore, they perceive decisions as a process that derives through decisions made over time and that are therefore heavily influenced 16 Brenner, N. (1999). Beyond state-centrism? Space, territoriality, and geographical scale in globalization studies. Theory and society, 28(1), 39-78. 17 Galbraith, J. R. (2008). Organization design. Handbook of organization development, 325-352. see also Shafritz, J. M., Ott, J. S., & Jang, Y. S. (2015). Classics of organization theory. Cengage Learning. 18 Hall, P. A. (1993). Policy paradigms, social learning, and the state: the case of economic policymaking in Britain. Comparative politics, 275-296. p. 277 19 Heclo, H. (1974). Modern social politics in Britain and Sweden : From relief to income maintenance (Yale studies in political science ; 25. 843216468). New Haven etc.: Yale University press. 20 Ibid. 21 Skocpol, T., & Amenta, E. (1986). States and social policies. Annual Review of sociology, 12(1), 131-157.by the past. This path dependence emphasizes the historical development of institutions, which is also shown in how much power there is for experts vis-a-vis society. When an institution has a longstanding tradition of public involvement, a state-centrist approach is not able to provide answers as to how policy change occurred. Only when there is a highly centralized government with little to no involvement of society than a state-centrist approach will capture the policy process. However, in most societies, the formal structures of representation and elections are not the only way to influence policies. Primarily when the economy does not function accordingly, the public will ‘blame’ the experts and therefore initiate a broader paradigm shift that can lead to thorough policy changes. This phenomenon of popular disruption has been witnessed throughout history as a recurring event.22 Policy paradigms and policy learning Whereas Skocpol and Amenta focus on policy change as decisions over time in opposition to the autonomous state-centrist approach of Heclo, Peter Hall emphasizes the importance of the state while acknowledging the importance of society in policy formation.23 Policy learning is a process that is heavily influenced by experts, especially in more technical areas. However, these policies concern civil society, and therefore, they also play an essential role in the process. Positive experience generates support for the continuation, and when there is resistance, change can be initiated. The disagreement on the autonomy of the state has created two distinct theoretical approaches. Within analyses of the state, there is a central division between this state-centrist approach that provides high levels of autonomy for the state and the state-structural approach. The second, including Skocpol and Amenta, considers the interplay between the state, organizations, and civil society more as a level-playing-field wherein the state does not hold absolute power. Whereas, state-centric scholars dismiss the idea of a level-playing-field and grant more importance and weight to the ability of the state to develop policies.
In the search for an answer to the question as to why policies change from a state-centrist approach, Peter Hall created a framework that asserts three distinct types of change. First order change occurs only incremental, and there is no change in the general goal or policy paradigm. The only aspect that changes is the instrument, which is specific to this type of policy. When a policy changes both through its instrument and the general setting but the overall policy goal 22 ibid., p. 138 23 Hall, P. A. (1993). Policy paradigms, social learning, and the state: the case of economic policymaking in Britain. Comparative politics, 275-296.
remains similar, this is classified as a second order change. Finally, when the instrument, settings, and the overall goal of a policy change, there is a third order change. This entails a complete paradigm shift and does not occur frequently.24 When a policy change results in a complete paradigm shift, this is more of a sociological process than particularly scientific. The public domain is responsible for this shift, and this can be originated in many different ways. In the event of a third order change, there is, therefore, a significant role for civil society and other non-state actors.25
First and second order changes occur without this strong influence from society because the composition of a policy remains similar, and only specific components are changed. The technical approach relates to the stance of Paul M. Sacks that the most important driving force behind policy change is the failure of the previous policy.26 However, when you have a complete paradigm change, this transcends previous policy dissatisfaction. Therefore, third order changes are not as compatible with a state-centrist approach because it incorporates strong influences from civil society and dismisses the state as an autonomous actor.27 In order to account for policy change, it is therefore imperative to determine what type of policy change has occurred. When this is a first or second order change, the main actors involved come from the field of experts and bureaucrats. Whereas, with third-order change, there is a broader interest throughout civil society that plays a part. Rather than portraying the state as a black box academics like Paul M. Sacks have focused on the internal dynamics within a state and how these influence the autonomy of experts. The research conducted by Sacks focuses on gaining an understanding of state structures. His work focused on the different levels of institutional development that shaped the level of autonomy of experts. He found that strong states, with centralized structures, had various instruments that experts could attribute to overcome societal pressures. If a state was not unitary but highly dispersed like the United States, experts did not have the required number of tools at their disposal to disregard society. Therefore, in these configurations society plays a substantial role in how a policy will develop.28 Strong states are labeled as ‘core’ countries, and the highly dispersed are labeled as ‘periphery’ states. When you have a core country, this does not automatically mean that there is 24 ibid., p. 277 25 ibid., p. 278 26 Sacks, P. M. (1980). State structure and the asymmetrical society: An approach to public policy in Britain. p. 350 27 Hall, P. A. (1993). Policy paradigms, social learning, and the state: the case of economic policymaking in Britain. Comparative politics, 275-296. pp. 283-288 28 Sacks, P. M. (1980). State structure and the asymmetrical society: An approach to public policy in Britain.
no input from society, because Sacks also acknowledged that there are certain domains in which it is impossible to exclude society. Therefore, they will always have a voice in policy development to a certain level but more or less will depend on the institutional setup.29 Stephen Krasner elaborates on this state-centrist perspective and the relation to institutional layout. He focuses on the institutional layout of states and its influence on how they can engage in policy making. The central assumption is that states are highly autonomous in their decision-making, but the extent to which depends on the level of development.30 Paul Sacks also emphasizes the importance of the structure of the state. For when a state may act in a way that harms particular parts of the population but is beneficial for the greater good to achieve a set goal only when it can exercise its influence without heavily relying on societal pressure.31 Redefining ‘The Classics’
More recent studies on Peter Hall’s definition of policy paradigms have made fundamental changes to central aspects of policy development. For instance, scholars dispute the three-stage evolvement of policy changes and the fundamental differences between first and second order versus third order changes. Hodson and Mabbett argue that political attractiveness was the main reason for a paradigm shift in British monetary policy.32 This was the opposite of the causes for third order change as mentioned by Hall. In that case, it would have been the inability of the current system to explain economic developments. Experts have significantly less influence in the paradigm shift process than Hall argued because politicians choose options that best address constituents. Whereas, the state and experts versus civil society were the predominant opponents in classic theories on policy learning the influence of politicians has become more critical in contemporary research. Techniques of agenda-setting and windows of opportunity provide politicians with the opportunity to increase public attention exponentially and as a result under pressure of the public change is instigated.33 Therefore, the dominant idea that policies only change when they are not functioning accordingly is undermined. If experts want to instigate change, they have to circumvent the political realm and depoliticize an issue to alter policies without public and political involvement. In this way, they would be able to steer the changes in the desired direction without being subject to the public debate. However, this is difficult to achieve, and therefore, the power of experts is significantly lower than initially stated according 29 ibid., p. 373 30 Krasner, S. (1977). US commercial and monetary policy: Unravelling the paradox of external strength and internal weakness. International Organization, 31(4), 635. 31 Evans, P. B., Rueschemeyer, D., & Skocpol, T. (Eds.). (1985). Bringing the state back in. Cambridge University Press. 32 Hodson, D., & Mabbett, D. (2009). UK economic policy and the global financial crisis: paradigm lost?. JCMS: journal of common market studies, 47(5), 1041-1061. 33 Scheufele, D. A., & Tewksbury, D. (2006). Framing, agenda setting, and priming: The evolution of three media effects models. Journal of communication, 57(1), 9-20.
to Hodson and Mabbett. Because of this tension between experts and politicians, they argue that substantial policy changes occur as the result of an incremental process that originates from the evolution of first and second order changes.34 This process does not entail a complete refinement of policy paradigms as is argued by Peter Hall.35 However, in the case of a third order policy change, this does not have to come from a policy failure, but it can originate in a change in perception by politicians and a successful campaign of agenda-setting and framing.
The research furthermore suggests that the period under investigation in British fiscal history was not representative of the general behavior of the British state. The radical change from Keynesianism to Monetarism was more an abnormality than a standard response from the government. Thus, current research focuses on incremental changes accompanied by depoliticization of the process to increase the level of ‘workability’ for experts. In the analysis of policy development, it is essential to focus on small changes, and not expect one single event that alters the entire configuration of a policy process.36 Whereas these scholars focus on policy change only at the national level, these processes also take place at the international level. Notably, within the EU, where a significant amount of policy that affects member states is formulated and changed on the European stage. How do governments play into these additional administration layers, and how can experts incorporate both domestic and European circumstances into policy formations and alterations? The following section shifts attention to the delicate interplay between national governments and the EU and how this affects policy learning processes. Domestic preferences versus European preferences While scholars like Hall, Skocpol and Amenta, and Sacks have put the concept of policy learning on the agenda of social sciences, their specific theoretical approaches to policy development were the foundation for many scholars to further develop the concepts and theories.37 However, the vast majority of new research focused mainly on policy development by domestic governments while the supranational level of the EU becomes increasingly important. The interplay between the European and national level is traditionally developed by political scientists, and these have 34 Hodson, D., & Mabbett, D. (2009). UK economic policy and the global financial crisis: paradigm lost?. JCMS: journal of common market studies, 47(5), 1041-1061. 35 Hall, P. A. (1993). Policy paradigms, social learning, and the state: the case of economic policymaking in Britain. Comparative politics, 275-296. 36 Hodson, D., & Mabbett, D. (2009). UK economic policy and the global financial crisis: Paradigm lost? Journal of Common Market Studies, 47(5), 1041-1061. pp. 1056-1058 37 Sanderson, I. (2002). Evaluation, policy learning and evidence-based policy making. Public administration, 80(1), 1-22. see also Meseguer, C. (2005). Policy learning, policy diffusion, and the making of a new order. The Annals of the American Academy of Political and Social Science, 598(1), 67-82.
focused on different elements. Since, from a traditional state-centrist perspective, mainly European integration and policy creation at the international level have been challenging to explain. Experts at the national level, which are the main instigators of change in state-centrist approaches, are overruled by their counterparts at the European level. Therefore, policy learning does not necessarily proceed from a process of adjusting the previous policy that did not function accordingly. This aspect is particularly important for this thesis because the policy under investigation is that which is created by the EU in combination with the member states. Thus, there is a two-level game situation which requires an analysis of both the domestic and the European level. The concept of a two-level game is developed by Robert D. Putnam, who is both a political scientist and public administration scholar. The work of Putnam has been highly influential in the field of international relations, and his theory on two-level games has been ascribed as one of the leading explanatory theories for European and international decision-making processes.38 The principle of a two-level game derives from game theory and explains on how states should resolve international conflicts. The main principle behind the theory is that governments have distinct sets of win-sets when they engage in a negotiation on the international stage. These win-sets contain how much a country is willing to deviate from the original stance, based on the domestic support proposals received. Negotiations, therefore, occur at both the national and supranational level simultaneously. Negotiators have to satisfy both these goals, which results in ongoing consultations at two fronts during negotiations.39 The principle of a two-level game can explain why preferences at the national and international level deviate or why negotiations have been unsuccessful. However, for a more specific approach on why European policies are implemented across member states without significant deviations, the shift turns to theories of integration. Marino Regini focuses on this interplay within the European Union. The main question that he aims to answer is how it is possible to account for the different positions taken by the European member states concerning economic policy.40 Regini shows that convergence theories, which are used regularly in the EU context, do not account for differences in policy. Convergence theories argue that European economies follow established paths that are shaped by exogenous factors. This entails that domestic experts and bureaucrats do not have any significant influence on
38 Pahre, R. (1997). Endogenous domestic institutions in two-level games and parliamentary oversight of the European Union. Journal of Conflict Resolution, 41(1), 147-174. 39 Putnam, R. D. (1988). Diplomacy and domestic politics: the logic of two-level games. International organization, 42(3), 427-460. 40 Regini, M. (2000). Between deregulation and social pacts: The responses of European economies to globalization. Politics & Society, 28(1), 5-33.
policy-making and the final result would be similar policy throughout the EU.41 As an alternative explanation for different policy responses by member states, Regini focuses on the differences between interpretative frameworks and cognitive biases. This constructivist approach addresses the cultural and bureaucratic differences within different countries and attributes this as the guiding paradigm in which policy change occurs. Furthermore, experts and policymakers are influenced by how the ‘original’ layout of the policy was and have a cognitive bias to return to this old model in an attempt to regain the balance of the original setup.42 This constructivist approach can, therefore, explain why European economies are not converging, but they remain distinct in their approach to economic policy. This entails that in order to be able to explain the behavior of a member state, historical decisions in the policy area under investigation provide the leading framework in which policy experts develop new stances. This is important for the research in this thesis because this would support the empirical expectation that countries with positive experiences with austerity return to the use of austerity during an economic downturn.
Contemporary research on Policy learning
Whereas, Peter Hall’s definition of policy paradigms was the foundation for policy learning and paradigm change the theoretical developments in the last twenty years have created new understandings that have been incorporated in contemporary research. Sheri Berman builds on the concepts of Peter Hall while providing useful insights through contemporary literature.43 Despite the significant contribution the work of Hall on policy paradigms has made to the research field, the work has been written during a period that only marked the beginning of historical institutionalism. Therefore, contemporary research is better able to provide a comprehensive understanding of the processes that underlie policy paradigms. Berman emphasizes the importance of ideas in political life. Therefore, this new angle incorporates both historical and sociological institutionalism to widen the scope of the theory on policy development. Whereas Hall only stated that the sociological environment was more important for third order change than the science, there was no clear explanation of what constituted sociological change. The concept remained relatively general. The research of Berman incorporates four core concepts that enable a scholar to identify how the sociological environment changes. Beliefs, norms, cultures, and ideologies are the variational variables that will provide insight into what type of actor is associated with sociological change. These concepts vary from being quite straightforward like norms to more abstract like culture.44 Another 41 ibid., p. 7 42ibid., p. 22 43 Berman, S. (2013). Ideational Theorizing in the Social Sciences since “ Policy Paradigms, Social Learning, and the State”. Governance, 26(2), 217-237. pp. 225-228 44 ibid. p. 228
valuable addition derives from the question of why do some ideas get adopted, and others do not. The idea cycle revolves around a two-stage process. Initially, an existing idea gets challenged because there is political commotion. This allows for the political space to open up and creates space for new ideas. During the second phase, numerous policy ideas are weighed against each other and the current designs. There is a fresh supply of ideas that challenges the existing ones, and that is how the opportunity for new ideas is created. The inclusion of ideational designs bridges the gap between the personal interests of experts and the social context. However, how is it possible that some good ideas do not translate into policies and other ideas do? This question is answered in the research conducted by Robert Cox and Henry Béland. They identify one key element that can account for this and that is valence.45 They define valence as the emotional quality of a specific idea that can make it more or less attractive for society.46 In the search by scholars to explain how ideas have influenced policy-making, issue valence can be the answer. Policy ideas are attractive for society and policymakers when its valence matches the feelings of the population concerned. Policies can become valent trough specific windows of opportunity and the ability of good policy entrepreneurs to place the policy on the agenda. The change in attractiveness for the population makes an issue valent, and therefore, it will turn into actual policy. Thus, when policymakers are presented with valent policy options, they are influenced to change existing policies. On the other hand, when no policy change occurs, this is the result of ongoing support for the status quo of the policy, it has remained attractive.47 In an analysis of policy learning, it is therefore imperative to research what has influenced policymakers in their decisions.
Building on the importance of ideas is the work by Larsen et al., in which they examine Danish welfare state reforms and the impact of interests on these reforms.48 What becomes clear throughout their analysis is that the welfare state reforms were not only initiated by factors like high unemployment rates but by a new perception of what had caused the economic downturn. Despite the organized interests within the country, the importance of new ideas overruled the existing interests. The authors argue that it would have been impossible to account for the level of change without considering a change in ideas. For a social democratic party to engage in such far-reaching economic reforms, the perception of what is the ‘right’ way to move forward should 45 Cox, R. H., & Béland, D. (2013). Valence, policy ideas, and the rise of sustainability. Governance, 26(2), 307-328. 46 ibid., p. 307 47 ibid., p. 323 48 Larsen, C., & Andersen, J. (2009). How New Economic Ideas Changed the Danish Welfare State: The Case of Neoliberal Ideas and Highly Organized Social Democratic Interests. Governance, 22(2), 239-261.
have changed. The change in paradigm, which meant a loss in election votes and sacrifices on predominant policy stances, was the direct result of the importance of ideas in shaping policy.49 Contemporary scholars like Cox and Béland have broadened the scope of policy learning and the function of the state as described by Peter Hall.50 The state has a pivotal role and cannot be seen as a mere instrument for change, but as an individual actor that can shape policy outside the realm of society. However, when there are pressing issues that are highly politicized, there is substantial involvement of the community. This leads to a process of revolving ideas that become dominant or challenge the existing paradigm in a battle to be transferred into actual policy. These policies become guiding as policymakers revise or uphold their ideas in the process of policy learning. The current focus lies on this battle for dominance and the variation in variables. Each specific aspect has to be investigated and constructs the overall image of how policy change comes to play. In areas with very explicit ideological orientations, like the generosity of the welfare state, political ideology also plays an important role. For a social democratic party to engage in strict neoliberal policies, there would have to be compelling considerations that ‘overrule’ the traditional stance of a party. In such areas, policy learning by policymakers therefore also depends on which political party holds office. This thesis will focus on such a politically sensitive area, namely, monetary policy. Within the field of monetary policy and more specifically austerity, Mark Blyth is one of the most influential authors.
Austerity as the dominant policy paradigm
In his book Austerity: The History of a Dangerous Idea Mark Blyth asks the question why governments have a partiality towards the use of austerity.51 Austerity measures imply limitations on fiscal spending by the government in order to reduce public debt. Throughout economic history, the use of austerity has become the predominant measure to deal with crises. After the period of Keynesianism, modern western states have massively turned towards the use of austerity during an economic downturn. However, no scientific and economic foundation supports the claim that austerity works. Despite the obsession with budget cuts and decreasing public spending countries that have undergone these programs have not been benefited. The incompatibility between theory and empirics is the focus of the book of Blyth.52 However, he provides only very limited explanation on the reason why this could be the case. 49 ibid., p. 258 50 Hall, P. A. (1993). Policy paradigms, social learning, and the state: the case of economic policymaking in Britain. Comparative politics, 275-296. 51 Blyth, M. (2013). Austerity: The history of a dangerous idea. Oxford University Press. 52 Ibid.
Other scholars have conducted research on the effect on healthcare during periods of austerity and found that the policies had detrimental effects on both the economy and public health.53 They found that in Iceland, which has not engaged in austerity, there were no negative health effects as a result of the crisis. Whereas, in countries like Portugal, Greece and Spain public health had declined directly after the government turned to the use of austerity. Furthermore, public debt had only increased and the countries did not yet show any sign of economic recovery as opposed to Iceland.54 However, the main question that remains is why do governments remain supportive of austerity in light of the abovementioned scientific proof that it has not been very successful. The possible explanation for this phenomenon can be found in a more sociological explanation. People perceive arguments of a technical kind more reliable than arguments based on beliefs and ideas.55 Shela Dow argues in her paper on why austerity remains the dominant policy that neoliberal scholars have managed to provide an argument pro-austerity that is purely technical. Whereas, Keynesian scholars have presented an argument that was technical but not free of beliefs and ideas on how an economy should function. Therefore, Keynesian scholars have not been able to go up against the vested interests of neoliberalism. According to Dow Keynesian scholars will have to find a way to formulate arguments against austerity without portraying any emotion and focusing purely on the technical flaws of the policy.56 Empirical expectations As a result of the theoretical framework shown above, the following empirical expectations arise. Why should the previous support for austerity translate into support for current limitations on fiscal spending? Policy continuity is always easier than policy change. Therefore, a third order policy change will only occur incidentally when there is a significant inability to account for lack of success by experts. Thus, support for austerity will most likely remain because there is no societal change, and other ideas are not alluring. Policymakers will weigh whether they will hold on to the dominant ideas or instigate change Policy learning emphasizes how policymakers use their knowledge gathered through experience to gain a better understanding of the consequences of policy change. Therefore, they look to the past to see how previous policy changes have occurred. Because of the 1970s, and the inability of Keynesianism to explain why counter-cyclical 53 Karanikolos, M., Mladovsky, P., Cylus, J., Thomson, S., Basu, S., Stuckler, D., ... & McKee, M. (2013). Financial crisis, austerity, and health in Europe. The Lancet, 381(9874), 1323-1331. 54 ibid., p. 1325 55 Dow, S. C. (2015). The role of belief in the case for austerity policies. The Economic and Labour Relations Review, 26(1), 29-42. p. 36 56 ibid., p. 38
spending did not have the desired effect during periods of economic downturn and inflation, I expect policymakers to be hesitant to deviate from the policy of austerity. Furthermore, it is likely for countries to remain supportive of austerity when it does not directly influence them. The German economy was not as badly affected as the Irish. Therefore, it was less complicated for the government to support European measures that placed limitations on fiscal spending. For the Irish case, the economic situation is more volatile than in Germany. Thus, this could mean that a motivation to uphold budgetary discipline is motivated even more by an insistence by experts and the elite to uphold the status quo. So, when research finds that there is continued support for austerity, I expect this to be the result of an unchanged policy paradigm and an insistence to maintain the status quo.
The research will investigate policy development using the concepts of policy paradigms and social learning as initially described by Peter Hall and the contemporary corrections and additions made to the theory. Sociological and Historical institutionalism are valuable contributions that make the ‘sociological environment’ a less abstract concept. How ideas shape policy paradigms changes the dynamics of decision-making and helps to build a comprehensive framework. This will possibly shed light on why countries resort to the use of austerity and uphold this policy despite the lack of empirical proof of success. The goal of this thesis is to provide a deeper understanding of the claims made in the book of Mark Blyth supported by the theory of policy learning. The main question that arises is: when there is no empirical foundation for upholding strict austerity, then why do countries keep on resorting to this specific policy?
3. Methods Chapter
Research Design
Because this research aims to investigate a real-life multifaceted, complex issue, the desired approach is a case study. This allows a comprehensive investigation that incorporates multiple explanatory variables. Furthermore, case study research allows explaining phenomena that occur in the natural world and that do not have a simple yes or no answer. In this comparative case study on Ireland and Germany, the main task is to analyze the position of both countries regarding their stance on austerity and their experience with austerity. Due to the qualitative nature of this research, there is an intricate interplay between empirics, theory, and methods.57 This comparative case study will investigate multiple cases simultaneously to gain a better understanding of the broader concept. The analysis of both Ireland and Germany attempts to identify empirical evidence of the existence of covariation between the independent variable, government experience with austerity, and the dependent variable, government stance on austerity. This covariational design is often used in more theoretically oriented research. Since this thesis attempts to connect the theory of policy learning with the real-life ‘issue’ of austerity, a covariational design is equipped to identify the relationship. In this particular research design, it is imperative to have cases that vary in the independent variable as long as the control variables are similar.58 Both countries were part of the EMU and experienced an economic downturn, which instigated government action. Moreover, in both countries it is required to form government coalitions and make decisions through consensus. While it is not possible for two distinct countries to be similar, the control variables EMU and government structure are equal. For Ireland, their experience with austerity during the first period of economic downturn was different from that of Germany, and therefore, there is variance in the independent variable. Moreover, this research also contains a temporal comparison because it analyzes both a historical and a current case. Therefore, the validity of the research increases because it contains a process over time and not a specific event that occurred at a particular moment that could be a deviant case. The following section will clarify and elaborate on the specific concepts attributed in this research. 57 Bryman, A., & Burgess, R. G. (1994). Analyzing Qualitative Data. London: Routledge. 58 Levy, J. S. (2008). Case studies: Types, designs, and logics of inference. Conflict management and peace science, 25(1), 1-18. p. 10
Conceptualisation and operationalisation of the variables
This thesis aims to identify the position of governments on austerity as a result of previous experiences. Therefore, the independent variable is the experience with austerity, and the dependent variable is the stance taken by governments. This means that on the one hand, I will analyze government experience with austerity and on the other hand, the political stance governments take on the use of austerity. The independent variable, government experience with austerity, is separated into two distinct features. The first part focuses on the concept of austerity, and the second part focuses on the operationalization of experience with austerity. Firstly, it is essential to clarify how austerity is measured and defined. Austerity generally refers to limitations on fiscal spending, either imposed by cuts in public spending and an increase in taxes in order to decrease the deficit. Therefore, this thesis divides the concept of austerity into three distinct variables. The first aspect is a change in public spending, the second focuses on changes in tax rates, and the final component focuses on endorsements of European packages concerning fiscal spending. The two first variables show whether the government has indeed consequently imposed measures that are defined as austerity. This would mean that there would have been cuts in public spending and increases in taxes. The final component of endorsement of European packages that impose limitations on fiscal spending shows whether the country has showed a consistent stance on both the domestic and supranational level.
There is a vast amount of literature on the discrepancy between a government’s stance domestically and the international level. In order to show a full image of the stance of a government on the use of austerity, it is therefore imperative to show whether this only accounts domestically or that this is the position that is also portrayed at the European level. This additional variable increases the validity of the statement on the effect of experience with austerity on the government stance on the subject. The results can, in turn, show whether the research expectations can only account for domestic behavior of governments or also on the international stage.
The second component of the variable is the operationalization of experience of governments with austerity. In order to see whether an experience has a positive or a negative outcome, we have to compare the economic situation pre- and post-crisis. Therefore, the debt to GDP ratio is an important measure. Governments turn to austerity when they need to decrease the government debt and deficit; therefore, the comparison of the debt to GDP ratio can show whether this has improved or decreased. The World Bank provides a database of the debt to GDP
ratio of countries all over the world.59 Furthermore, the Gini coefficient, which shows the level of inequality in wealth within a country, portrays how the fiscal measures have affected society. In this case, the World Bank also has a database for countries worldwide.60 Thus, the debt to GDP ratio and the Gini coefficient are both indicators of how the use of austerity affects the economy and whether this has been positive or negative.
The dependent variable, the government position concerning austerity, specifically addresses how the government motivated their chosen fiscal tools. We, therefore, want to research what the government used as fiscal policy and what motivated their actions to do so. In order to measure the preferences of an actor, it is necessary to look at primary sources that contain ideas and statements that are directly linked to the party concerned. In order to portray the position of the government, this thesis will use primary sources consisting of parliamentary debates, party manifestos, and public statements. These sources contain written justifications for specific actions and motivations. Secondary sources such as academic literature are also used to provide additional context and insights in the position of both the Irish and German governments.
Motivation case selection
In the broad question concerned with how previous decisions have influenced the current economic position, this thesis focuses on two specific cases to provide an empirical basis for theoretical claims on the development of policy stances. Therefore, I will investigate both Ireland and Germany and their history with the use of austerity. This will be connected to their current stance towards limitations on fiscal spending, and this will show whether there is a connection to be drawn. This thesis will focus on the stance both Germany, and Ireland took in direct response to the financial crisis of 2008. However, in order to provide an image of how the policies on austerity developed an additional period in time is added. Therefore, it is necessary to take an additional period in the past wherein the countries were forced to respond to an economic downturn. For Germany, this will mark the beginning of 2000. During this period in time, the entire EMU was experiencing economic growth besides Germany and France. Direct consequences of the Reunification and an outdated economy led to the German economy falling behind.61 At the time 59 World Bank (2019). central government debt, total (% of GDP). retrieved from: https://data.worldbank.org/indicator/GC.DOD.TOTL.GD.ZS?end=2016&start=1998&view=chart 60 World Bank (2019). GINI index (World Bank estimate). retrieved from: https://data.worldbank.org/indicator/si.pov.gini 61 Burda, M. C., & Hunt, J. (2001). From reunification to economic integration: productivity and the labor market in Eastern Germany. Brookings Papers on Economic Activity, 2001(2), 1-92.
Germany was even labeled the ‘Sick man of Europe’. Thus, the government was forced to act, which will be the focus of this thesis.
For Ireland, we have to go back two decades to the 1980s. During this time, government spending was excessive, and the budget was not under control. The government acted irresponsible, which led to budgetary chaos. During this period, it was Ireland that was labeled the ‘Sick man of Europe’.62 The Irish economy started to show signs of recovery only in the early 1990s, and once again, I will analyze whether fiscal measures caused this or that there were other explanations. Thus, for both Ireland and Germany the response to the financial crisis in 2008, which they both suffered from, and their approach to the crises in the 1980s and 2000 are the timespan of this thesis. Whereas both countries were in serious economic problems in 1980 and the 1990s, Germany was significantly less affected by the financial crisis than Ireland, which nearly faced a total collapse of the financial sector. Therefore, the economic situation is an important possible explanation for the stance towards austerity. I have selected Ireland and Germany precisely because of the aspects that they had in common and the elements that were fundamentally different. They both shared experience as the ‘Sick man of Europe’ and were forced to restore the economy while surrounding countries were experiencing economic growth. On the contrary, both countries were in a completely different position during the financial crisis. Therefore, this situation shows two different scenarios. The difference between the impact of the financial crisis makes the comparison more legitimate because we can investigate how different economic circumstances affect the decisions of both governments. Besides, both countries were part of the EU/EEC during both the financial crises; therefore, they experienced the same consequences of being part of the Economic and Monetary Union (EMU) or the common market.
Method of Data Collection
Due to the emphasis on government stances and motivations, the majority of data is collected via primary sources that are made available through the public archives of both Ireland and Germany. For the Irish government sources the Houses of Oireachtas debates database contains all debates, whether from committees, the senate or parliament, since 1900.63 The Deutscher Bundestag,Drucksachen und Plenarprotokolle des Bundestages - ab 1949 database contains all documentation 62 Grdqa, C. Ó., & Gráda, C. Ó. (1997). A rocky road: The Irish economy since the 1920s. Manchester University Press. 63 Houses of the Oireachtas (2019). Debates. retrieved from: https://www.oireachtas.ie/en/debates/find/?datePeriod=all&debateType=all&resultsPerPage=100
from parliament since 1949.64 These online databases contain all publications of governments and parliaments. These sources consist of parliamentary debates, committee meetings, government statements, policies, and party manifestos.
I have used search strings within the defined time period such as: austerity OR limitations on public spending OR budgetary discipline, Keynesianism OR counter-cyclical spending OR economic stimulus packages, economic crisis, fiscal policy OR fiscal management, Stability and Growth Pact, Legislative Six Pack, Macroeconomic Imbalances Procedure, bailout and the Hartz reforms. Besides government databases, quality newspapers, such as Der Spiegel, BILD and The Irish Times, have paid significant attention to government approaches to the financial downturn.65 The search string used were: Gerhard Schröder, Angela Merkel, Charles Haughey, Albert Reynolds, Brian Cowe, Enda Kenny Hartz reforms, financial crisis reforms public opinion and all the above mentioned search strings from the previous paragraph. The names of government leaders were always combined with fiscal terms, to filter out the important articles. All these sources combined will create an understanding of how both governments developed their views on the use of austerity. The more diverse the data is, the higher the validity of the outcome. After all this data has been collected a systematic review follows that provides a comprehensive summary of all relevant information that systematically shows these views. This enables the research to formulate what position both the Irish and German governments took in the past and the present.
Method of Data-analysis
Within qualitative research, the process to understand sources is a complicated combination of interpretations and the formulation of connections.66 The main task in this research is to identify patterns as a result of specific positions taken by governments. When the Irish government has a negative experience with austerity, and this results in decreased support for future limitations on fiscal spending, there is a pattern. However, the next step is to connect this pattern with the German case in order to identify whether this is also the case. When patterns are established and connections made, we have to categorize the data. Within this research, the most important category is whether the government had a negative or positive experience with austerity. The concept of experience is directly related to the economic situation. Therefore, both the Irish and 64 Deutscher Bundestag (2019). The Deutscher Bundestag, Drucksachen und Plenarprotokolle des Bundestages - ab 1949. retrieved from: http://pdok.bundestag.de 65 https://www.irishtimes.com; https://www.bild.de; https://www.spiegel.de 66 Saldaña, J. (2011). Fundamentals of Qualitative Research. New York: Oxford University Press. p. 8German economic situations are compared prior- and post-financial crises to establish potential patterns. When we see that the government openly criticizes previous policies than we can establish a change in position, and therefore, this can be seen as a negative experience. However, when the government states that the chosen policy was a success, this is categorized as a positive experience. Within the analysis, the importance of the theory reflects in the connection of actions and stances. Policy learning places great importance with the previous experience policy makers had with policies, when this was positive the logic path is to continue with the same approach. When the opposite action follows a positive experience with austerity this undermines the theoretical framework.
Reflection on validity and reliability
Qualitative research has always had problems with external validity but high internal validity. Therefore, it is important to acknowledge that the results cannot be generalized across countries and that this thesis does not aim to do so. Nonetheless, the results of this research can be attributed to test whether this also counts for other countries to increase external validity. Because this research investigates a relationship and incorporates several control variables, there is correlation between X and Y through a thorough understanding of how a process has evolved. Therefore, internal validity is high, while the external validity is relatively low. This thesis could, therefore, contribute to the literature on policy learning and the academic literature on the impact of austerity. This does not mean that this thesis uncovers a universal standard on how governments act in response to austerity, but it can show how for two distinct countries, the process of policy learning influenced decisions on austerity. Future case studies on other countries can show whether this accounts only for Ireland and Germany or that there is a more general trend. One of the main problems with qualitative research is that as a result of the interplay between numerous factors and sources, it becomes difficult for a reader to reconstruct the developments. In order to assure the replicability, it is imperative to formulate each statement as precise as possible and state in each case whether conclusions are the result of the interpretation of the researcher or factual representations. This touches upon another dilemma, namely that of the role the researcher plays in interpreting results and formulating connections. It is never possible to completely exclude any potential bias that the researcher has; thus, it is the case to make sure that each statement or conclusion is a carefully weighed consideration of potential influences. When this stays in mind during the research, it is possible to minimize the risk of research bias that will discredit results. Notably, during this thesis, it is important to state whether stances are directly linked to the concerning government or that it is a derivative constructed by the
researcher. As a result, the replicability remains substantial, and the reliability also substantially increases. The following chapters will provide an empirical analysis of the stance taken by both the Irish and German governments concerning austerity measures. How these positions have evolved and how the past affected future policies on austerity are analyzed. The theories on social and policy learning as mentioned throughout the theoretical chapter are the framework in which these empirical findings are positioned.
