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Defying the 'Juncker Curse': Can Reformist Governments Be Re-elected?

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  • Marco Buti
  • Alessandro Turrini
  • Paul Van den Noord
  • Pietro Biroli

Abstract

European policy makers, notably in the euro area, seem to take for granted that the electorate will punish them for bold reform in product and labour markets. This may explain why progress in the euro area has been comparatively limited. This paper posits and, using a dataset for 21 OECD countries, shows that this fear of electoral backlashes is unfounded, provided that financial markets work well. The mechanisms involved are relatively straightforward: well functioning financial markets "bring forward" future yields of structural reform to the present, thus permitting to overcome possible short-run costs. As a result, the electorate tend to reward, not punish, reformist governments. This has important implications for the design of structural reform packages, with financial market reforms being an essential ingredient beside product and labour market reforms.

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Bibliographic Info

Paper provided by Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission in its series European Economy - Economic Papers with number 324.

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Length: 37 pages
Date of creation: May 2008
Date of revision:
Handle: RePEc:euf:ecopap:0324

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Keywords: Economic and Monetary Union; structural reforms; electoral cycle; financial markets; Buti; Turrini; Van den Noord; Biroli;

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References

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  1. Duval, Romain & Elmeskov, Jørgen, 2006. "The effects of EMU on structural reforms in labour and product markets," Working Paper Series 0596, European Central Bank.
  2. Brender, Adi, 2003. "The effect of fiscal performance on local government election results in Israel: 1989-1998," Journal of Public Economics, Elsevier, vol. 87(9-10), pages 2187-2205, September.
  3. Beck, T.H.L. & Clarke, G. & Groff, A. & Keefer , P. & Walsh, P., 2001. "New tools in comparative political economy: The database of political institutions," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3125517, Tilburg University.
  4. Adi Brender & Allan Drazen, 2004. "Political Budget Cycles in New versus Established Democracies," NBER Working Papers 10539, National Bureau of Economic Research, Inc.
  5. Giuseppe Bertola, 2007. "Finance and Welfare States in Globalising Markets," RBA Annual Conference Volume, in: Christopher Kent & Jeremy Lawson (ed.), The Structure and Resilience of the Financial System Reserve Bank of Australia.
  6. Fernandez, Raquel & Rodrik, Dani, 1991. "Resistance to Reform: Status Quo Bias in the Presence of Individual-Specific Uncertainty," American Economic Review, American Economic Association, vol. 81(5), pages 1146-55, December.
  7. Jean Pisani-Ferry & Xavier Debrun & André Sapir, 2008. "Government Size and Output Volatility: Should We Forsake Automatic Stabilization?," IMF Working Papers 08/122, International Monetary Fund.
  8. Guido Tabellini & Alberto Alesina, 1988. "Voting on the Budget Deficit," UCLA Economics Working Papers 539, UCLA Department of Economics.
  9. Buti, Marco & Röger, Werner & Turrini, Alessandro Antonio, 2007. "Is Lisbon far from Maastricht? Trade-offs and Complementarities between Fiscal Discipline and Structural Reforms," CEPR Discussion Papers 6204, C.E.P.R. Discussion Papers.
  10. Poplawski Ribeiro, Marcos & Beetsma, Roel, 2008. "The political economy of structural reforms under a deficit restriction," Journal of Macroeconomics, Elsevier, vol. 30(1), pages 179-198, March.
  11. Peltzman, Sam, 1992. "Voters as Fiscal Conservatives," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 327-61, May.
  12. Drazen, Allan & Eslava, Marcela, 2010. "Electoral manipulation via voter-friendly spending: Theory and evidence," Journal of Development Economics, Elsevier, vol. 92(1), pages 39-52, May.
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Citations

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Cited by:
  1. Lucifora, Claudio & Moriconi, Simone, 2012. "Political Instability and Labor Market Institutions," IZA Discussion Papers 6457, Institute for the Study of Labor (IZA).
  2. Jacques Pelkmans & Lourdes Acedo Montoya & Alessandro Maravalle, 2008. "How product market reforms lubricate shock adjustment in the euro area," European Economy - Economic Papers 341, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  3. Larch, Martin & Van den Noord, Paul & Jonung, Lars, 2010. "The stability and growth pact: lessons from the great recession," MPRA Paper 27900, University Library of Munich, Germany.
  4. Alberto F. Alesina & Dorian Carloni & Giampaolo Lecce, 2011. "The Electoral Consequences of Large Fiscal Adjustments," NBER Working Papers 17655, National Bureau of Economic Research, Inc.
  5. Paul den Noord, 2011. "Turning the page? EU fiscal consolidation in the wake of the crisis," Empirica, Springer, vol. 38(1), pages 19-51, February.

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