hrvatski

Consolidated democracy advantage: political instability and sovereign spreads in the EU

We expose the way the market evaluates political risk and instability in democratic polities by analysing the determinants of sovereign spreads of EU member states over the course of the past two decades. Our analysis builds on the “democratic advantage” argument which suggests democracies enjoy preferential treatment on the international market of sovereign debt because of their better ability to make credible commitments. We suggest that, when it comes to the market’s evaluation of political instability and risk in democratic polities, there actually exists a “consolidated democracy advantage”. Older and more consolidated democracies pay less of a premium on their debt than their younger and less consolidated counterparts, and this difference is particularly pronounced during political crises. In other words, the market indeed views the commitment of consolidated democracies with long track records as something qualitatively different – i.e. more credible – than the commitment of new democracies with short track records.

Sovereign debt market ; political stability ; consolidated democratic advantage ; EU

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