Coping with Crisis: Government Reactions to the Great Recession

Chapter 10. The Liberal Model in (the) Crisis: Continuity and Change in Great Britain and Ireland

Chapter 10 The Liberal Model in (the) Crisis: Continuity and Change in Great Britain and Ireland Lucy Barnes and Anne Wren The current crisis is a global one, but variation has been considerable across countries in the nature and scale of the economic downturn, in policy responses, and in the political impact. Why were some countries affected more than others, and what explains the varied policies implemented in response? The financial crisis has been characterized as a crisis of the Liberal variant of advanced capitalism, whose defining characteristics include light regulation, financial innovation, and credit expansion. We argue that the literature on varieties of capitalism provides an analytical framework for understanding divergence between the fates of the two varieties in the crisis, but, more important, that within these broad categories , considerable variation remains. The crisis has thrown the significance of political-institutional variations within these regimes into sharp relief and made clear that intramodel variation can have important implications for economic development and for patterns of economic performance. Our argument focuses on crossnational variation within the Liberal model, and specifically on a comparison of the Irish and U.K. cases. To some degree, this is an exercise in trying to understand Ireland’s particular vulnerability in the financial crisis in a comparative context: the extreme nature of the crisis in Ireland makes it important to understand its political economy, but it also risks making the Irish case sui generis with few generalizable explanations or lessons. The British comparison provides an analogue to Ireland in which much—though not all—of the political and economic context is shared. 288    Coping with Crisis This allows an analysis of the particular features in Ireland that led to its singularly problematic crisis as well as its divergent policy response. We focus on the initial period of financial crisis, from the fall of 2008 to the spring of 2011, and in particular the divergent responses of the Fianna Faíl-Green and Labour governments incumbent in Ireland and the United Kingdom respectively when the crisis hit.1 We do not deal with the subsequent sovereign debt crisis, which is covered instead in chapter 6 of this volume. Responses to the sovereign debt crisis display little variation in the countries concerned (indeed, Klaus Armingeon and Lucio Baccaro argue in chapter 6 that for the countries involved only one possible policy response effectively exists—internal devaluation—and it is imposed from outside the national political economy). Responses are also less well analyzed through the varieties of capitalism lens. The policy responses of governments in the wake of the financial crisis then can be broadly categorized into two types, which we label fiscal and financial. The first refers to policy packages designed to stimulate the economy —the U.S. archetype here being the American Recovery and Reinvestment Act of 2009 (ARRA). Financial responses refer to policies oriented toward resolving difficulties in the banks specifically, the U.S. example being the Emergency Economic Stabilization Act of 2008, which created the Troubled Asset Relief Program. In the wake of the crisis, the Irish policy response differed significantly from that in the United Kingdom on both of these dimensions. On the former dimension, Ireland implemented austerity responses at a time when most other governments were engaging in fiscal stimulus; and on the latter, the Irish bank bailout was more generous to creditors, left the state on the hook for larger liabilities than elsewhere, and led to the decline in the perceived creditworthiness of the Irish state and its need to access EU-IMF funds for liquidity. This variation is outlined in more detail in the following section. However, the short answer as to why the Irish government pursued policies so different from those enacted elsewhere, and particularly in the United Kingdom, is that it was left with little choice given the severity with which the financial crisis manifested itself. We argue that once the crisis hit, countries’ capacity to respond was strongly shaped by their experience of the crisis. The interesting question from a political economy perspective, then, is how this experience was shaped by long-term political-economic and institutional structures. Variations in Responses The responses to the financial and economic crisis in the United Kingdom and Ireland diverged significantly, despite similarities in their economic The Liberal Model in (the) Crisis    289 models. In this section we describe this variation in policy responses and show how it can...