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Capital mobility, exchange rates and fiscal policy in the global economy

The central claim of Partisan Politics in the Global Economy is that social democracy continues to be both distinctive and successful in the global economy in cases where powerful left-of-center parties are allied with strong and centralized trade union movements. Hay asks whether this means that countries without entrenched corporatist institutions must give in to global market forces by shrinking state activism. The first part of this article demonstrates that there is scant evidence that the international integration of financial markets has been associated with a reduction in fiscal activism in the OECD. This is consistent with my partisan mediation thesis. Here, however, I wish to take up Hay's challenge of analyzing policy developments without recourse to my institutional typology. The second part of the article shows that fiscal policy in the OECD has been considerably more restrictive where governments have committed to fixed exchange rates. I argue that European countries have nonetheless chosen to fix their exchange rates as part of the broader regional integration project. The final part of the article suggests that the eurozone may well not be dominated by conservative fiscal policies. The European Central Bank is unlikely to be as conservative as the Bundesbank and the political and economic incentives for fiscal prudence in the eurozone are weaker than under the EMS.