by Jeffrey Chwieroth, Cohen R. Simpson & Andrew Walter
June 1, 2015
Many fear that a Greek default would lead voters elsewhere in Europe to favour default over austerity. This column argues that it is more likely to have the opposite effect. Network interdependencies among countries affect the domestic politics of default because defaults are both rare and vivid. Foreign default increases the propensity for voters to punish their governments for failing to repay external private creditors.
Governments in Ireland, Portugal, and Spain have adopted a conspicuously hard line stance in negotiations with the new Greek government, partly out of concern that a Greek default would strengthen anti-austerity parties at home (Wyplosz 2015).1 How do we know if a default would have such an effect? Since most of the academic literature on the politics of debt default overlooks political and economic interdependence, it is not of much help in answering this question (Jackson et al. 2015). Our new research starts with the simple premise that interdependencies among different countries in economic networks are likely to have a profound impact on the politics of default (Chwieroth et al. 2015). Specifically, we provide evidence that foreign defaults tend to increase the propensity of voters to punish their own governments for failing to repay external private creditors.
Ultimately, our results suggest that a Greek default would be more likely to lower rather than to raise the political incentives for other European governments to default, contrary to the expectations of many commentators and political leaders.