Rescuing the Rich? Financial crisis management and inequality

Critics of the Eurozone crisis management maintain that the measures taken at the height of the Great Recession have increased economic inequality across Europe and especially within the most affected member states of the European Economic and Monetary Union (EMU). Such assessments face, however, a double challenge. First, financial crises have typically divergent effects on the gap between the rich and the poor, with currency and inflation crises enlarging it and banking crises reducing it. Second, certain rescue measures by national governments or international donors can partly offset the negative impact of austerity. To address the puzzling variety of crisis management outcomes, we develop a political economy framework that links the type and severity of the crises to the measures of the national governments and the international donors. Empirically, we compare the effects of the crises measures for the OECD world from 1970 to 2018. The empirical study uses a difference-in-difference design and shows how both crises and rescue measures have affected the real wage development in different economic sectors and in the entire society. Our research design differentiates between spending- and tax-based austerity programmes and accounts for the underlying conditionality of international loans. The analysis demonstrates the moderating role of government ideology and polarization. We also assess whether regional crises such as Great Recession have more pronounced effect than purely national crises.