Democracies under strain – the political effects of financial bailouts

How do national governments respond to supranational demands? Drawing on a new book covering the Eurozone crisis, Rubén Ruiz-Rufino shows that governments often have no choice but to accept externally imposed policies, despite their unpopularity.

Membership of the European Union is important for many countries, not only for emotional and identity-related reasons but also for political and economic ones. Being part of this exclusive club grants unrestricted access to one of the world’s largest and wealthiest internal markets, and member states often improve their economic standing upon joining.

However, membership also entails assuming critical commitments that limit the policy autonomy of national governments, requiring them to delegate full control over key areas – particularly monetary, budgetary and fiscal policy. These commitments are necessary to enhance economic coordination among member states and to create the conditions of economic certainty required for the proper functioning of the internal market.

The trade-off between responsiveness and stability

Assuming these supranational commitments also requires a reconsideration of how governments and citizens interact. Governments trade a degree of policy responsiveness in exchange for increased capacity to generate wealth, and citizens accept this trade-off as long as governments deliver on that promise.

This arrangement, however, becomes fragile in the face of a severe economic shock that threatens the macroeconomic stability of member states and, by risk of contagion, the overall stability of the internal market. In such circumstances, affected member states may be asked by supranational institutions to honour their binding commitments and accept remedial policies that overlook their national consequences, aiming instead to restore economic certainty at the supranational level.

Putting democracies under strain

When supranational institutions override national governments to impose specific policies, democracy comes under strain. In these situations, national governments have no choice but to accept such impositions, as refusal would signal a failure to honour commitments and a lack of institutional credibility. Citizens may vote to replace governments, only to discover that electoral mandates have little effect on policy during periods of supranational intervention. As a result, democracies under strain generate political disaffection, disrupting existing electoral equilibria.

The management of the 2010 sovereign debt crisis in Europe illustrates what democracy under strain entails. EU authorities and EMU member states responded to the crisis by imposing severe financial assistance programmes on countries whose economies posed a real risk to the financial and monetary stability of the euro. The financial bailouts granted to Greece, Ireland, Portugal and Spain came with conditions: recipient countries were required to implement stringent fiscal adjustment packages and carry out critical institutional reforms.

Citizen responses and electoral consequences

These supranational impositions did not go unnoticed. Citizens interpreted the bailouts as new information, updating their understanding of how decisions were made, what policies they would experience and how little influence they had over those policies. As a result, affected citizens revised their prior attitudes toward democracy. They became deeply dissatisfied with how democracy functioned and lost trust in key institutions of political representation.

Figure 1: Differences between perceptions about democracy in countries receiving assistance and other EMU countries

Source: European Social Survey (round 6 – rotating module on democracy).

This political frustration soon translated into electoral consequences. By prioritising institutional responsibility over policy responsiveness, mainstream establishment parties – those historically in office – opened themselves to severe electoral punishment. Voters penalised parties that managed the bailouts, particularly when those parties were on the left. The near-total electoral collapse of Greece’s PASOK after 2012 exemplifies the magnitude of these changes.

Figure 2: Differences in vote share for establishment parties before and after bailouts in countries receiving assistance (receivers) and other EMU countries

Source: Data from the ParlGov dataset.

These electoral defeats also triggered a dramatic reshuffling of national party systems. Countries subject to financial bailouts experienced significant transformations in their electoral landscapes, including the rise of anti-establishment platforms such as Greece’s Syriza and Spain’s Podemos. These changes persisted for years after the conclusion of the financial assistance programmes.

Figure 3: Differences in vote share for non-mainstream parties before and after bailouts in countries receiving assistance (receivers) and other EMU countries

Source: Data from the ParlGov dataset.

The relevance of these theoretical arguments and empirical findings extends beyond the specific case of the 2010 sovereign debt crisis. The experience of democracies under strain has informed how the European Union manages subsequent crises. For instance, the response to the COVID-19 pandemic – particularly efforts to foster economic recovery – was marked by the creation of new instruments that aligned EU priorities with the policy preferences of national governments.

This return to policy responsiveness during a crisis elicited a positive reaction from citizens. Previous research using quasi-experimental evidence has linked the announcement of the Recovery and Resilience Facility in 2020 to increased satisfaction with democracy, especially among individuals in countries that had received financial assistance between 2010 and 2012.

Beyond Europe

The logic of democracy under strain is, however, not necessarily confined to the European context or to episodes of economic crisis. In a world of rising international insecurity and escalating geopolitical tensions, defence instruments might also become bargaining chips.

Current frictions within the NATO alliance, for example, raise the possibility that military assistance could be made conditional on strict compliance with policy requirements that diverge significantly from the preferences of citizens in the requesting countries. Moreover, some member states not directly under threat could potentially impose such conditions on those at risk if they credibly believe that an attack on one country could destabilise the entire alliance.

While none of these scenarios are currently unfolding, recent public disagreements over increasing budgetary contributions from European NATO members suggest that hypothetical situations like the one described above are not implausible. The consequences would be severe, as geopolitical tensions would be compounded by social and political unrest.

Fortunately, the logic of democracy under strain also reveals that the dangers of imposing policies during crises can be mitigated by strategies that reconcile the priorities and preferences of all actors involved. When supranational institutions and national governments work collaboratively – rather than hierarchically – democratic legitimacy is preserved, and citizen trust is strengthened.

For more information, see the author’s accompanying book, Democracies Under Strain: The Political Effects of Financial Bailouts on Citizens and Parties (Oxford University Press, 2025).

Note: This article gives the views of the author, not the position of EUROPP – European Politics and Policy or the London School of Economics. Featured image credit: thelefty / Shutterstock.com