We expose the way the market evaluates internal 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 internal political instability and risk in democratic polities, there actually exists a “consolidated democracy advantage”. In times of political instability, older and more consolidated democracies pay less of a premium on their debt than their younger and less consolidated counterparts. In other words, the market indeed views the commitment of consolidated democracies with long track records of democratic competition and survival as something qualitatively different than the commitment of new democracies with short track records.
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The only EU member states missing are Cyprus and Estonia which did not have outstanding long-term debt securities with a residual maturity of close to ten years during the period covered. (Eurostat 2018).
We also tested whether the data are stationary using the Im–Pesaran–Shin unit-root test (for unbalanced data). The null hypothesis in the test was rejected, indicating that the data do not contain a unit root (p < 0.001) and our findings are not driven by spurious correlation.
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This work was supported by the Croatian Science Foundation (HZZ) under the project 1356: “Economic, statistical and political aspects of sovereign bond markets”.
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Glaurdić, J., Lesschaeve, C. & Vizek, M. Consolidated democracy advantage: political instability and sovereign spreads in the EU. Comp Eur Polit 18, 437–459 (2020). https://doi.org/10.1057/s41295-019-00193-2
- Sovereign debt
- European Union
- Democratic consolidation
- Democratic advantage
- Political instability