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Debt and Punishment: Market Discipline in the Eurozone

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  • Charlotte Rommerskirchen

Abstract

This article challenges the conventional wisdom of weak market discipline in Economic and Monetary Union (EMU). In so doing, we empirically analyse the dynamics of market discipline for all 27 EU member states between 1992 and 2007. The existing literature tends to assert that markets discipline governments, without measuring whether the interest punishment markets impose actually has the purported effect on government policy. To better grasp the dynamics of market discipline it is essential to consider both sides. Market discipline is thus understood as a two-sided phenomenon. On the one hand, financial investors react to policy developments. On the other hand, policy-makers react to market signals. We find strong evidence that although the impact of fiscal policy developments on market punishment slightly decreases with monetary integration, government responsiveness to market punishment increases. This runs counter to the conventional narrative of policy-makers banking on bailout from fellow EMU members.

Suggested Citation

  • Charlotte Rommerskirchen, 2015. "Debt and Punishment: Market Discipline in the Eurozone," New Political Economy, Taylor & Francis Journals, vol. 20(5), pages 752-782, October.
    • Handle: RePEc:taf:cnpexx:v:20:y:2015:i:5:p:752-782
    DOI: 10.1080/13563467.2014.999760
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    References listed on IDEAS

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    1. L. Randall Wray, 1998. "Understanding Modern Money," Books, Edward Elgar Publishing, number 1668.
    2. Blyth, Mark, 2013. "Austerity: The History of a Dangerous Idea," OUP Catalogue, Oxford University Press, number 9780199828302.
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    Cited by:

    1. Stavros E. Arvanitis & Theodoros V. Stamatopoulos & Dimitris Terzakis, 2018. "Is There a Non-linear Relationship of Market Value with Cash and Ownership?," SPOUDAI Journal of Economics and Business, SPOUDAI Journal of Economics and Business, University of Piraeus, vol. 68(1), pages 3-25, January-M.
    2. Fichtner, Jan & Heemskerk, Eelke & Petry, Johannes, 2021. "The new gatekeepers of financial claims: States, passive markets, and the growing power of index providers," SocArXiv x45j3, Center for Open Science.
    3. Pühringer, Stephan, 2017. "The "eternal character" of austerity measures in European crisis policies: Evidences from the Fiscal Compact discourse in Austria," Working Paper Series Ök-32, Cusanus Hochschule für Gesellschaftsgestaltung, Institut für Ökonomie.
    4. Stavros E. Arvanitis & Theodoros V. Stamatopoulos & Maria Chatzimarkaki, 2017. "Cash and Ownership on Firms Market Value: Evidence from Greek Panel Data," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(1), pages 70-91.
    5. Naqvi, Natalya, 2018. "Manias, panics and crashes in emerging markets: an empirical investigation of the post-2008 crisis period," LSE Research Online Documents on Economics 90368, London School of Economics and Political Science, LSE Library.
    6. Stephan Puehringer & Laura Porak & Johanna Rath, 2021. "Talking about competition? Discursive shifts in the economic imaginary of competition in public debates," ICAE Working Papers 123, Johannes Kepler University, Institute for Comprehensive Analysis of the Economy.
    7. van Riet, Ad, 2017. "Addressing the safety trilemma: a safe sovereign asset for the eurozone," ESRB Working Paper Series 35, European Systemic Risk Board.
    8. Guter-Sandu, Andrei & Murau, Steffen, 2022. "The Eurozone’s evolving fiscal ecosystem: mitigating fiscal discipline by governing through off-balance-sheet fiscal agencies," LSE Research Online Documents on Economics 109790, London School of Economics and Political Science, LSE Library.
    9. repec:ers:journl:v:v:y:2017:i:1:p:70-91 is not listed on IDEAS
    10. Canale, Rosaria Rita & De Simone, Elina & Spagnolo, Nicola, 2021. "Financial markets and fiscal discipline in the Eurozone," Structural Change and Economic Dynamics, Elsevier, vol. 58(C), pages 490-499.
    11. Armin Mertens & Christine Trampusch & Florian Fastenrath & Rebecca Wangemann, 2021. "The political economy of local government financialization and the role of policy diffusion," Regulation & Governance, John Wiley & Sons, vol. 15(2), pages 370-387, April.

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