Abstract
This chapter examines the effectiveness of Stabilizing Programs in the European Union for the time period from the Maastricht Treaty in 1993 to 2013 (the recent bailouts of Greece, Ireland, and Portugal). A binary logistic model is used which specifies binomial as the distribution and logit as the link function, using an unbalanced panel of annual data. Two main conclusions emerge: a) the probabilities of an economic recession, a high debt to GDP ratio, and a high current account deficit to GDP ratio, are greater when a Stabilization Program is adopted than without one, and b) a Stabilization Program has a negative short-run effect on the GDP growth rate, as well as negative long-run effects (8 years after the adoption) on the debt to GDP ratio and the current account deficit to GDP ratio.
TopTheoretical Background
The International Monetary Fund (IMF) has always had a unique position within the “global financial safety net”, i.e., the set of institutions and mechanisms that provide financial support to countries to prevent or dampen financial crises (Essers and Ide 2019). The IMF has always had a significant presence in Europe too (see Table 1 presented in the next section), but most of its international role has upgraded after its participation in the bailouts of Greece, Portugal, and Ireland. Actually, after 2008 IMF conducts SPs in cooperation with EU (in October 2008 Hungary requested a Stand-By Arrangement (SBA) first joint EU/IMF-program, a precedent for programs that followed in Latvia on December 2008 and in Romania in March 2009) (IMF 2008; IMF 2009; IMF 2011; Seitz and Jost 2012). More recently, a new mechanism, the Troika (IMF together with the European Commission and the European Central Bank), was developed. It was involved in the rescue actions of the European Union to fight the sovereign debt crisis in several European countries, elaborating their economic adjustment programs and closely monitoring their progress (Greece, Ireland, and Portugal).
Key Terms in this Chapter
Austerity program: A program of economic controls aimed at reducing current consumption to improve the national economy.
International Monetary Fund: International organization headquartered in Washington, D.C., consisting of 189 countries working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.
Fiscal adjustment: Reduction in the government primary budget deficit, obtained from a reduction in government expenditures, an increase in tax revenues, or both simultaneously.
Maastricht Treaty: The official Treaty of the European Union, signed on 7 February 1992 by the members of the European Communities in Maastricht, Netherlands, to further European integration.
Bailout: The act of a business, an individual, or a government providing money and resources to a failing company or economy.
Troika: Decision group formed by the European Commission, the European Central Bank and the International Monetary Fund whose usage arose in the context of the “bailouts” of Cyprus, Greece, Ireland, and Portugal necessitated by their prospective insolvency caused by the recent global financial crisis of 2008.