Two-level games and market constraints on politics in Europe
McMenamin, IainORCID: 0000-0002-1704-390X, Breen, MichaelORCID: 0000-0002-5857-9938 and Muñoz-Portillo, Juan
(2020)
Two-level games and market constraints on politics in Europe.
International Political Science Review/ Revue internationale de science politique, 4
(1).
pp. 136-153.
ISSN 0192-5121
Financial markets understood the euro crisis as a two-level game. They monitored national politics as a source of both national and European policy. The incentives to conform to the market’s preference were weaker for creditor countries than for debtor countries because debtors were providers of their own macroeconomic policy, but each creditor was one of several contributing to bailouts. Worries about default caused investors to sell the bonds of debtors and thereby constrained debtors by raising interest rates. By contrast, if creditor behaviour reduced the probability of a bailout of debtors, the response again would be to sell assets linked to the debtor. The implication is that market responses to creditor elections should have been larger and more turbulent than reactions to debtor elections. We test this theory by analyzing credit default swaps of eleven countries around fifteen elections and conducting a content analysis of 3,126 reports from Bloomberg terminals.
Metadata
Item Type:
Article (Published)
Refereed:
Yes
Uncontrolled Keywords:
elections; international political economy; financial markets; Germany; euro crisis