Jnl Publ. Pol., 23, 2, 171–199 2003 Cambridge University Press
DOI: 10.1017/S0143814X03003088 Printed in the United Kingdom
Financial Interventionism and Liberalization
in Southern Europe: State, Bankers,
and the Politics of Disinflation
GEORGE PAGOULATOS International Economic Studies, Athens
University of Economics and Business
ABSTRACT
The article provides a structural and political account of financial
intervention in Spain, Portugal and Greece and examines competing
explanations for financial liberalization. It focuses on the economic and
political objectives underlying financial reform, and the costs and
benefits for government, central bank, and the banking sector. It argues
that financial liberalization was, to a significant extent a necessary
prerequisite for the central banks’ programmatic effort to achieve
effective disinflation. This challenges the dominant arguments viewing
financial liberalization exclusively within the framework of the
European financial integration program or as a result of interest group
pressure. At a subsequent stage, a stabilization strategy based on
monetary austerity entailed the significant political advantage of
allowing governments to avoid a more radical pace of fiscal adjustment.
Both financial interventionism and liberalization displayed a statedriven
policy pattern.
Society-centered approaches tend to treat economic and structural
reforms by mostly focusing on interest coalitions and rent-seeking beneficiaries
of the status quo (Haggard and Kaufman 1992; Williamson
1994). On the other hand, much of the European integration literature
centers attention to the economic dynamics and the political workings
of integration at the European level (be it intergovernmental or
Commission-centered). Such treatment often leaves the impression of
a nearly ‘automatic’ convergence or adjustment of the periphery
towards the EU institutional and policy program (cf. Bennett 1991;
Tsoukalis 1997).
This article presents evidence to qualify the EU-centric view of financial
and monetary policy adjustment, thus taking a more decentralized
172 George Pagoulatos
cross-national standpoint. Contrary to the familiar tendency of almost
singularly attributing financial liberalization to the European financial
integration program, we shift attention to the important additional role
of the domestic reprioritization of monetary policy objectives. On the
other hand, the article takes a centralized view in drawing primary attention
to the state-level objectives, both economic and political, that
underlie financial reform. We thus take exception to the view that seeks
to explain financial reform in terms of interest group pressure; instead
we advance a more state-centric approach that stresses the central
bank (CB) and government interest in financial adjustment. The main
argument to be developed is that the CBs’ effort to disinflate drove
liberalization in all three countries, financial reform being a precondition
for the effective implementation of monetary austerity. Moreover,
under European, external, or purely domestic economic pressure, the
governments of Spain, Greece and Portugal tolerated or embraced
monetrary reform for its advantage in offsetting their own more reluctant
pace in fiscal tightening.
The origins of financial interventionism in Southern Europe
The Southern European (SE) postwar record of developmental state
activism in finance was typical of financial and industrial interventionism
in late industrializing centres (Haggard 1990; Wade 1990;
Haggard and Lee 1995; Woo-Cumings 1999). To expedite industrialization
and to offset market failures (lack of capital markets, undercapitalized
private sector, an investment preference for speculative activities
rather than manufacturing, inability of future profits to compensate
for short-term losses, general information deficiencies) governments
intervened in finance (Amsden 1992: 59). A first step, predicated on
achieving some degree of monetary stability, was to draw public savings
into the banking system. The next step was to encourage banks to lend
long-term, and for that governments intervened in two ways. First, by
creating specialized institutions like industrial development banks.
Second, by requiring commercial banks (through lower fixed interest
rates) to devote funds to private industrial investment or to long-term
development loans or to state bonds for financing public infrastructure.
To facilitate growth, SE authorities decreased financial costs by suppressing
lending rates. Through various interventionist instruments
governments directed cheap credit to favoured sectors (industry,
exports, small enterprises, agriculture) deemed ‘productive’, and discouraged
the financing of ‘unproductive’ sectors (consumption,
domestic and import trade, partly housing). As cheap credit was expansionary
the authorities controlled its inflationary effects through direct
Financial Interventionism and Liberalization in Southern Europe 173
instruments like credit ceilings, special reserve requirements and the
occasional adjusting of interest rates.
Extending cheap credit to recipient groups over time conferred them
considerable economic and political advantage. However, the establishment
of financial interventionism to benefit industry, exports or agriculture
did not come as an expression of these groups’ power, in the
sense that it would have existed even if such demanders were powerless,
given the almost undisputed developmental doctrine of the time.1 The
interventionist financial institutions, universal as they were in their role
of subsidizing manufacture, had more to do with the aforementioned
state-directed strategy of development via industrialization, framed
under the conventional developmentalist wisdom of the time, than with
the bargaining power of national industrial sectors.2 Industrial demand
for subsidized finance increased as a result of the higher emphasis on
capital intensive undertakings and the extensive reliance on external
sources of finance, all standard features of the state-sponsored model
of import substitution industrialization (Haggard 1990; Haggard and
Maxfield 1993: 299; Ce΄sar das Neves 1996: 341). These remarks are
germane in allowing us to conceptualize financial interventionism as
primarily state-led or supply-driven rather than society-led or demanddriven.
This is not to say that the (particularistic) pressure of business
firms and groups did not carry some weight when it came to the specific
arrangements and policies of financial interventionism. Favoring large
established oligopolistic industries over newcomers aimed to protect
their oligopoly privileges also in exchange for their political support (cf.
Ellis 1964: 191ff; Lukauskas 1997: 68). Similarly, subsidized credit was
extended to farmers also in regard of their electoral scope.
Financial interventionism in Greece and Portugal until the early
1970s, being part of a developmentalist policy mix, was premised on
monetary stability.3 On the other hand, Spain’s ‘cheap credit’ policies,
especially over the 1960s, had resulted in persistent inflation (Prados
de la Escosura and Sanz 1996: 368, 372; Pe΄rez 1997). Overall, especially
in the 1960s and up to 1973, SE economies grew at significantly
higher rates than other European economies (Diagram 1). Apart from
its promise in delivering industrialization and growth, financial interventionism
entailed the formidable political advantage of granting
state policymakers (via state corporatism or plain patronage) the ability
to indirectly control the country’s socioeconomic life. At the same time
it allowed government-favored economic groups to translate their political
links into privileged access to financial resources. Thus, overall,
financial interventionism in SE served a function of political as much
as economic stabilization and, quite notably, a particularistic mode of
economic development.
174 George Pagoulatos
-6
-4
-2
0
2
4
6
8
10
12
14
1961
1965
1970
1975
1980
1985
1990
1995
2000
Annual change %
Greece Spain Portugal EU
DIAGRAM 1. Real GDP growth.
Financial Interventionism and Liberalization in Southern Europe 175
Finally, postwar financial interventionism, operating in protected
credit-based systems, benefited the banking sector. All three countries
had cartelized banking sectors reigning over heavily underdeveloped
financial markets; financial interventionism helped consolidate the sectors’
oligopolistic structure. Despite suppressed lending rates to favored
categories and relatively high reserve requirements, banks retained
considerable profit margins resulting from the lack of competition.
These were expressed in the form of suppressed deposit rates or high
commissions and other administrative expenses charged by commercial
banks. A study of the Greek banking system in the mid-1960s estimated
such charges at the levels of 40% of the overall weighted average
of lending rates (Ellis 1964: 55). Thus, under financial interventionism
postwar banking sectors prospered. In Portugal, total banking sector
assets between 1947 and 1973 expanded at an average annual rate of
9% in real terms (Reis 1994: 824), and parallel were the growth rates
in Spain and Greece.
Democratization and the crisis of interventionism
The first steps away from financial interventionism were initiated under
grave concern over its inflationary effects during the 1970s. The combination
of recession and democratic transition in Spain, Greece and
Portugal post-1974 exacerbated the adverse effects of financial interventionism.
Democratization brought an upsurge of socioeconomic
demands for extensive redistribution. This coincided with the need to
cushion the effects of recession amidst generalized industrial crisis. A
common strategy prevailed of consolidating democracy through
expanding public sector and catching up with the levels of social
spending of advanced European countries (Maravall 1993; Gunther et
al. 1995). Thus SE economies responded to the stagflation shock of
1973–74 with significant fiscal expansion. Since budget revenues
remained more or less inelastic, government borrowing, financed by the
banking system, covered public sector expansion. The monetization of
public deficits, combined with the extension of credit at negative real
interest rates, further fuelled the escalating inflation. Though SE monetary
policymakers tried to strengthen monetary policy and gradually
shift to positive rates, the combination of a stagflationary environment
with democratization made government authorities very reluctant to
allow interest rates to rise in parallel with inflation. Still within the
realm of the interventionist paradigm, monetary authorities attempted
to confront the inflationary crisis through adjusting the available direct
monetary policy instruments such as quantitative controls, special
reserve ratios and compulsory investment requirements. By the late
176 George Pagoulatos
1970s monetary policy remained tied to a countercyclical logic; any
upward move of interest rates was aimed at curtailing demand, while
at the same time fiscal expansion sought to stimulate the economy out
of recession (eg, OECD, Spain 1981: 19–20).
Indicative of a standard pattern of learning and paradigm shift (Hall
1993), liberalization in SE was a gradual process. It began with the
monetary authorities recognizing the undesired effects of the interventionist
system, attempting to respond by utilizing the available instruments,
then gradually replacing those instruments until finally abandoning
the entire interventionist system and paradigm.
From a political standpoint, and contrary to financial interventionism
(which both from a demand and a political supply side is far easier to
understand), financial liberalization in general poses something of a
puzzle. As summarized by Haggard and Maxfield (1993: 314): ‘why
would politicians and the recipients of subsidized credit opt for a
market-based system of credit allocation that typically entails higher
interest rates and over which they have less control?’ The rest of the
article reviews proposed expanations of domestic financial liberalization,
providing evidence that will help evaluate their explanatory
relevance for Southern Europe.
Accounting for domestic financial liberalization: the ‘external constraint’
The mainstream argument views the European financial liberalization
and integration program as a principal driving force for domestic
financial liberalization in SE.4 This can be called the ‘external constraint’
argument, broken down into two distinct propositions. One
refers to the ‘objective’ constraints derived from the transformation of
the international economic regime and from the dynamic of financial
liberalization, integration and globalization. Indeed, the economic
backdrop to liberalization can be traced in the momentous changes in
the international political economy after the 1960s and especially
during the 1970s. The changing international context entailed a new
set of external economic constraints to which small open European
economies were pressured to adjust. Changes included the exponential
increase of capital mobility, the collapse of the Bretton Woods system
of fixed exchange rates that had underwritten monetary stability in
Europe, followed by the oil crises and stagflation of the 1970s.
Over the 1970s and 1980s international capital movements were
gradually liberalized. The new financial environment engendered a
logic of competitive deregulation, pressing smaller economies which
had not yet liberalized their capital account to do so (Frieden 1989;
Helleiner 1994; Eichengreen 1996; Forsyth and Notermans 1997; SimFinancial
Interventionism and Liberalization in Southern Europe 177
mons 1999). To crudely summarize the rationale of domestic financial
liberalization: if real interest rates remained negative or at lower than
market levels, and the national financial system was not competitive
and efficient enough, then (when capital controls were lifted according
to the EU program) savings would flow out and the payments balance
would collapse. Thus, the capital liberalization prospect necessitated
the completion of domestic financial liberalization as a necessary prerequisite.
The other compoent of the ‘external constraint’ refers to the
particular ‘positive’’ institutional obligations imposed by the European
single financial market program. As a subsequent wave of institutional
reform came the Economic and Monetary Union (EMU) program, the
entry into which was contingent on the SE currencies’ participation in
the European Monetary System (EMS). The combination of liberalized
capital movements and stable exchange rates necessitated the full
alignment of national monetary policies behind EMS even for those
EC/EU member states that had not yet entered EMS (Branson 1990;
Eichengreen and Frieden 1994).5
There is certainly great power in the external constraint argument
for Greece and Portugal, which began to deregulate credit in the second
half of the 1980s under the unambiguous prospect of the single financial
market. However, Spain had already initiated liberalization from
the first half of the 1970s, long before preparing to open its capital
account.6 At that time any current account shortfall could still be confronted
by tightening capital controls and (at least theoretically) by
raising interest rates (Gros 1993: 149ff). In that sense the Spanish
experience constitutes something of a paradox, for three main reasons,
relating to the international, the domestic and the sectoral level
respectively. First, reforms were initiated before the external constraint
associated with capital liberalization had begun to take effect. Second,
they unfolded in the context of Spain’s transition to democracy, which
was politically unpropitious for structural reforms (cf. Bermeo 1994).
And third, they were implemented despite the opposite interest of
powerful sectoral players such as private banks (Lukauskas 1997: 2).
So the external constraint argument appears convincing in the cases of
Portugal and Greece, but less so in the case of Spain.
Two distinct approaches (Lukauskas 1997; Pe΄rez 1997) have been
proposed to explain Spain’s adoption of financial liberalization given its
divergence from the external constraint rule. Both approaches refute
the so-called ‘public interest’ argument, which would attribute reforms
to their merits of higher economic efficiency, as recognized by
policymakers (cf. Toma 1991). Following a public choice approach,
Lukauskas argues that it was the exact conditions of transition to democracy,
with the large, broad-based national parties they involved, which
178 George Pagoulatos
created a ‘new reward structure’ for government policymakers against
particularism. This made ‘the supply of public goods, like strong economic
performance, more attractive and a narrow defense of special
interests less tenable as a political strategy because leaders had to compete
against opposition parties for the support of a heterogeneous array
of voters to stay in power’ (Lukauskas 1997: 3).
This line of argument raises at least two substantial objections. First,
government policymakers cannot be treated as a single unitary
category. Depending on ideological predispositions (more or less pro-
European or free-market oriented, and so on), the exact office held (a
‘spending ministry’ as opposed to a ‘financial ministry’ [Haggard and
Maxfield 1993: 296]), and individual political strategies (clientelistic
versus reformist), policymakers’ interests may substantially diverge (cf.
Peters 1995; Weller et al. 1997).
Second, the political advantage conferred by economic efficiencymaximizing
strategies is highly dubious given the significant time lag
with which the effects of a more efficient allocation of resources can be
manifested. Whether diminished inflationary expectations or an
increased allocative efficiency of the financial system, such public goods
can become visible after a period of time that most probably outlasts
the electoral cycle of a government term.7 Thus, if the beneficial effects
of financial liberalization were what policymakers were targeting, then
one should see this as substantiating a ‘public interest’ rather than a
‘public choice’ argument.
The Greek and the Portuguese cases of belated and reluctant reform
undermine the counterintuitive argument that financial liberalization
could be instigated by political reward-maximizing concerns of policymakers
of the type described above. Both countries went through
parallel transition paths, and yet were late in liberalizing. Though
inflation in these countries was not yet as entrenched as in the Spanish
case, the pursuit of economic efficiency – if rooted in ‘universal’ utility
calculi as public choice accounts tend to assume – should have characterized
the intentions and acts of Greek and Portuguese postauthoritarian
government policymakers as well. In fact, the state ownership of
the majority of the respective national banking sectors would have
allowed Greek and Portuguese government actors to reap the expected
economic benefits of early liberalization while at the same time
retaining a considerable degree of indirect control over credit policies.
However, despite what were certainly reformist pressures from their
CBs, neither the Greeks nor the Portuguese deregulated until well into
the second half of the 1980s and then mostly under ‘external constraint’
pressure, as already remarked. If Lukauskas’ explanation can
claim broader validity one should expect to see the Greek and PortugFinancial
Interventionism and Liberalization in Southern Europe 179
uese governments resorting to financial liberalization with far less
reluctance than they did, and one would not expect such bold divergence
between Spain on the one side and Portugal/Greece on the other.
‘Public interest’ and ‘banking collusion’
Pe΄rez’s powerful refutation of the ‘public interest’ argument appears
more convincing. While agreeing with Lukauskas that liberalization
was viewed negatively by the cartelized and privately controlled Spanish
banking sector, she rightly focuses attention on the main promulgator
of reform, the Bank of Spain. She thus regards the shift of monetary
and financial policy in the early 1970s as the aftermath of the
ascendance, during the 1960s, of a group of CB neoliberal reformers
who gained power over the regime’s technocratic planners (Pe΄rez 1997:
88–9). The CB’s ambition to weaken the government’s financial interventionism
and expand its own control over monetary policy led it to
take advantage of the democratic transition period in advancing its
reform agenda. To that aim, the Bank of Spain established a ‘working
alliance’ with the banking sector, which resulted in serious concessions
in the implementation of financial reform. These concessions allowed
banks, after liberalization, to reap very high profit margins at the
expense of industrial borrowers (Pe΄rez 1997; cf. Lukauskas 1997: 164).
The possible counter-argument to this thesis suggesting a CBbanking
sector collusion (for simplicity: the ‘banking collusion’
argument) is that it is premised on overstating and understating two
sets of factors respectively. Overstated is the importance of the CBbanking
elite accommodation, as it disregards the ‘objective’ reasons
why the Bank of Spain should ‘normally’ treat the banking sector favorably,
that is a CB’s stake in the strength of the banking system. And
understated are the macroeconomic circumstances in Spain that
necessitated a monetary strategy of effective disinflation predicated
upon financial liberalization.
One way of understating the ‘objective’ surrounding circumstances
is by toning down the pragmatic (as opposed to ideological) component
of monetary reform.8 Parallel liberalizing concerns were preoccupying
other SE CBs too. For example, the Bank of Greece’s motives could
hardly be characterized as ideological, especially given the role of its
administration under governor Zolotas in devising the country’s system
of financial interventionism over the 1950s and 1960s (see Zolotas
1965; Halikias 1978). The entrenched inflationary effects of interventionism,
visible even before the 1970s stagflation crisis, were the
principal underpinning of the Spanish shift. Any effort to curtail these
180 George Pagoulatos
effects and allocative distortions through liberalization would be not
only fully compatible with a CB’s role as guardian of price stability, but
also proportionate to the severity of the inflationary effects of ‘cheap
credit’.9
Indeed, as Diagram 2 indicates, the inflationary effects had become
evident alredy since the 1960s. Inability to control inflation – especially
at a time when Greece and Portugal were delivering a more auspicious
combination of price stability and economic growth – amounted to a
CB failure in obtaining its chief institutional objective. The growing
signs of economic unsustainability of the interventionist model
(including an abrupt recession in the late 1960s and an alarming balance
of payments shortfall) followed by a salient banking scandal (the
Matesa affair) offered adequate economic justification for the Bank of
Spain policy shift. The Matesa affair only served to demonstrate the
sustained misuse of administered credit and to discredit its government
defenders (Pellicer 1993: 24; Tortella 1994: 872–3). Thus the Bank of
Spain’s effort to generate the operational preconditions for satisfying
its objective of monetary stability should be characterized as fundamentally
pragmatic, even if conceptually framed by the ascending
(monetarist) technocratic discourse of the time.
The corollary of understating the economic factors that necessitated
monetary and financial reform is to overstate the political intentions,
interest coalitions, and collusive strategies followed by the protagonist
of reform, in casu the Bank of Spain. Thus Pe΄rez greatly emphasizes
the gains Spanish banks reaped as result of the particular pattern of
credit liberalization: the reluctance to allow in foreign banks, and the
lifting of interest rate ceilings and liberalization of commissions that
allowed banks to enhance their profit margins, passing on the costs of
their cartelized behavior to their industrial borrowers. Though these
are valid points, one should view them in the mitigating context of the
previous Franquist corporatist tradition of instrumentalizing banks for
financing industry. Indeed, state-driven industrial activism had resulted
into the banks’ extensive industrial portfolios and preferential, nondiversified
lines of credit to specific industries, which eventually helped
translate the 1970s economic and industrial crisis into a banking crisis.
Other West European industrialized countries too, including Greece
and Portugal, underwent similar industrial crisis in the second half of
the 1970s, their industries suffering a financial shock from which they
were rescued by the state undertaking their debts. However, the Spanish
banking system, whose banking model of industrial activism was
more pronounced, was harder hit.10 This, in the eyes of the Bank of
Spain, justified a pattern of financial reform that would also allow banks
to accumulate the necessary profits so as to recover from the crisis.
Financial Interventionism and Liberalization in Southern Europe 181
0
5
10
15
20
25
30
35
1961
1965
1975
1985
1995
Greece Spain Portugal EU
DIAGRAM 2. Inflation (CPI).
182 George Pagoulatos
Several authors in general have affirmed the elective affinity of CBs
with their banking sector constituency (Woolley 1984; Moran 1984;
Goodman 1992). Indeed, by their institutional role, CBs are chiefly
responsible for the ‘well-being’ of their national financial and banking
sectors (Goodhart 1995: 210). This task became even more demanding
especially over the 1980s under the imminent prospect of competition
by other more robust and efficient EU banking systems. In other words,
the project of strengthening the banking sector via credit deregulation
need not presuppose banking sectoral pressure on any collusion with
the CB, but only the latter’s ability to pursue its institutional objectives
of banking systemic strength and stability. This argument substantially
weakens the banking collusion thesis for the case of Spain, and even
more so for Greece and Portugal. It would indeed be even less convincing
to claim that the politically weaker, government-subservient, statecontrolled
banking sectors of Greece and Portugal could have the bargaining
clout to effectively push through their demands.11
That the ‘banking collusion’ argument is substantially overstated at
the expense of the objective constraints surrounding the Spanish
financial system and economy can be inferred if one looks at the
development of Spanish credit policies compared to the rest of the EU.
It was only after 1985–86 that real credit rates or financial costs for
industrial firms notably began to diverge upward from the EU standard.
Only toward the end of the 1980s Spanish banks began to exhibit overall
higher rates of profitability – though more in return on assets than
in terms of return on equity, indicating the higher provisions following
the banking crisis (OECD 1992). So the emergence of Spanish banks
as beneficiaries of liberalization only became a salient feature towards
the later stage of reform. In any case, the increase of financial costs for
business has been noted as a typical direct aftermath of credit liberalization
(Caprio et al. 1994: 426). Like in Spain, credit costs rose both in
Greece and Portugal from the late 1980s through much of the 1990s,
before intensifying banking competition, the development of financial
markets, and the reduction of inflation as part of EMU nominal convergence
allowed real interest rates to decline (Diagram 3). By mislabeling
a transitional cost as a long-standing redistributive one, one can easily
underestimate the reform’s longer-term efficiency objectives, as vindicated
by the visible improvement of SE macroeconomic indicators over
the 1980s and 1990s in terms of growing convergence with the EU.
Looking at rising bank profitability post-liberalization one could
easily elicit the conclusion that liberalization from the second half of
the 1980s and into the 1990s benefited SE credit institutions. However,
this only occurred to the extent to which it also served the CBs’ own
policy objective of allowing their national banking sectors to recover
Financial Interventionism and Liberalization in Southern Europe 183
-17
-16
-15
-14
-13
-12
-11
-10
-9
-8
-7
-6
-5
-4
-3
-2
-1
0 1 2 3 4 5 6 7 8 9
10
11
12
13
14
15
16
17
1966 1967 1968 1969 1970 1971 1972 19731974 1975 1976 1977 1978 1979 1980 1981 1982 19831984 1985 1986 1987 1988 1989 1990 1991 1992 19931994 1995 1996 199 7
Sources: IMF, OECD
Greece
Spain
Portugal
DIAGRAM 3. Real lending rates.
184 George Pagoulatos
from accumulated bad debts, overhaul their balance sheets, offset
structural weaknesses, meet the EC capital adequacy requirements,
and successfully compete with the more advanced banking sectors in
the single market. In that sense, of allowing banks increased profitability
and strength, SE CBs tolerated high interest rate spreads (the difference
between lending rates and deposit rates), especially since they
were highly compatible with their own monetary austerity strategy, as
will be seen further below.
Sectoral interests and state-driven reform
Generally speaking, and referring mostly to capital liberalization, the
beneficial effects of liberalization on financial sectors have given rise to
the argument that reform often occurs under pressure on the part of
the financial and banking sector. Powerful and internationally competitive
financial sectors in countries with established financial markets
(US, Britain, Germany, the Netherlands) were indeed a principal
source of liberalization pressure, as financial interests were eager to
enlarge the circuit of capital and volume of transactions and to capture
wider profit margins (Kurzer 1993: 22–3).
However, financial markets in Southern Europe were credit-based
(Zysman 1983) and heavily underdeveloped, and the national banking
sectors were relatively weak, overprotected and domestically oriented
(Gibson and Tsakalotos 1992). Thus they were anxious over the potential
effects of capital liberalization, which would be inconceivable
anyway before domestic liberalization had been sucessfully completed.
While SE banking sectors favored the abolition of restrictions on their
portfolios and policies (such as obligatory investment requirements,
credit controls and interest rate ceilings) they feared that liberalization
could erode their comfortable oligopolistic margins, forcing them to
compete with each other and with far more efficient European banks.
Hence, initially they were reluctant if not negative towards reform,
especially state-controlled banks of Greece and Portugal.12 Thus it was
not banking pressure that brought about financial liberalization.
All that said, liberalization did eventually serve the interests of
domestic financial and banking sectors, vesting them with considerable
strength. On the aftermath of liberalization, and despite the competition
by non-bank financial institutions, banks throughout Southern
Europe reaped remarkable profits by colonizing the new financial markets
and institutions (Edey and Hviding 1995: 15ff; OECD 1997). Liberalization
(especially after capital movements were freed in the first
half of the 1990s) overall advanced banking interests by lifting imposed
restrictions and multiplying profit opportunities. The recourse of govFinancial
Interventionism and Liberalization in Southern Europe 185
ernments to public debt markets enhanced the banks’ bargaining
power, given their role as principal buyers of government paper. They
were able to place their assets on risk-free government securities, and
negotiate not only market rates but also other significant concessions
(underwriting privatization schemes, providing counterpart finance to
large-scale infrastructure projects, etc).
Given these prospective benefits, CBs often relied on their national
banking sectors as strategic allies for certain liberalization measures
also favored by the banks, especially given the retentionist pressures
on the part of socioeconomic beneficiaries of financial interventionism.
That, clearly, is different from saying that the CBs’ deregulation program
was overall molded so as to serve banking interests. Under this
framework, the accommodation of banking interests by CBs should not
be viewed as indicating CB susceptibility and thus weakness vis-a`-vis
banking pressures, but quite the contrary, as expressing CB strength
in advancing its own policy objectives.
The banks’ role was more important when it came to supporting the
monetary austerity that followed in all three SE economies from the
late 1980s into the 1990s. As will be explained in the next section,
the CBs’ main objective from domestic liberalization was to increase the
effectiveness of their monetary policy. It can thus be argued that the
strengthening of national financial sectors through policies of liberalization
and, later, privatization entailed the additional ‘political’ advantage
of providing SE CBs a reliable and increasingly powerful (given the
momentous sectoral growth) strategic ally for disinflation. Banks are
generally averse to cheap credit and inflation because it erodes their
real interest earnings (Maxfield 1990: 24ff), whereas monetary
stability enhances financial growth and bank profitability. Though monetary
austerity implied burdensome restrictions on their liquidity
(Borges 1990: 320), SE banks were able to benefit in the high-interestrate
period that followed liberalization by retaining (as already said)
wide interest rate spreads, indicative of the sectors’ persisting oligopolistic
structure.13
In that sense, the specific pattern of liberalization-cum-disinflation
from a CB standpoint also resolved the fundamental conflict of allegiance
of a ‘Janus-faced’ CB, turned towards public/government objectives
on the one side, and the financial sector on the other (Moran 1984:
46–7). The program of disinflating through releasing interest rates
upwards served both the ‘public’ objective of disinflation and eventually
the commercial banks’ preference for market-determined interest
rates.
186 George Pagoulatos
The predominance of economic, especially macroeconomic, objectives
in domestic financial liberalization has two main theoretical implications.
First, it demonstrates the vital link between financial liberalization
and monetary stabilization (as will be further elaborated). And
second, it points out the state-driven character of reform, financial
liberalization being promulgated by state authorities, the CB in
particular.
The state-driven character of the reform contradicts the standard
view that sees socioeconomic interests as the crucial push factors for
liberalization. For example, echoing rent-seeking approaches, Haggard
(1990: 260–1) sees economic reforms including financial liberalization
as responsive to particularistic collective interests and thus potentially
modeled in terms of group conflict or collective action problems. Such
interests (with the part exception of banks, as already discussed) had
very limited if any role to play. First, the main direct gainers of credit
liberalization were confined to the public as depositors (who under the
high-inflation interventionist regime had to put up with negative real
deposit rates, subsidizing the cheap lending rates for favored production
categories) and trade (which – considered unproductive – was penalized
with higher lending rates). Depositors, being dispersed, suffered
an obvious collective action problem, which made it impossible for them
to organize. The trade sector’s power, on the other hand, was hugely
offset by the accumulated influence of the status quo interests and
socioeconomic losers from credit liberalization. These included manufacturing
industry and the handicraft sector, exporters, and farmers,
all of which were especially vocal groups, well entrenched after several
decades of preferential financial treatment under the interventionist
regime (Pagoulatos 2000). Second, socioeconomic group pressures in
any case confronted the notoriously esoteric, close, unilateral and
exclusive patterns of monetary policymaking exercised by CBs over
issues falling within their own jurisdiction, rarely open to public debate
and safeguarded as the CBs’ own exclusive preogative (Moran 1984).
Indeed the program of financial liberalization was framed and phrased
in terms of the CBs’ exclusive sphere of monetary policy responsibility,
as the annual CB reports demonstrated.
We have so far examined SE reform in light of the main theses normally
proposed to explain financial liberalization. We have rejected or
seriously discounted the theses that liberalization resulted either from
interest group or banking sector pressure, also by pointing out the CBs’
institutional interest in the well being of their banking sector. We have
thus established liberalization as a state- rather than society-driven
reform. We have futher qualified the ‘external constraint’ thesis by
arguing that it cannot be claimed to apply for Spain’s early liberalizFinancial
Interventionism and Liberalization in Southern Europe 187
ation. This brings us to the principal driving force of liberalization in all
three countries, namely the CBs’ programmatic effort for disinflation.
Financial liberalization as precondition for effective disinflation predates
the implementation of the EMU program (especially in the case
of Spain) though the two programs overlap significantly.
CBs, governments, and the political economy of monetary austerity
CBs favoured financial liberalization because it increased their policy
autonomy towards government, improving their ability to conduct monetary
policy unhindered by government interventions – though the completion
of capital liberalization would surrender that autonomy to the
international markets.14 The emergence of persistent deficits and inflation
after the 1970s had dramatically altered the conditions for the
effective exercise of monetary policy. For one thing, direct credit controls,
the postwar state’s leading stabilization instrument, were becoming
increasingly incapable of stabilizing the economy: as public deficits
were pushing money supply growth upwards, it was hard to control
credit supply without changing the levels of the interest rate. Government-
administered interest rates, however, prevented CBs from applying
their own interest rate policy. Special rediscount lines (as in Spain
until 1971) or special compulsory investment ratios (as in all three
SE economies until liberalization) and the borrowers’ recourse to the
informal credit markets precluded the CB exercise of effective monetary
control. Government securities forced upon the banking system at
a government-determined interest rate forestalled the CB exercise of
open market policy (that is, buying and selling government paper). In
that framework, only a developed money market, the underlying CB
view held, would allow effective control of monetary aggregates by
enabling the CBs’ regular unobstructed response to short-term liquidity
changes. Liberalization removed the constraints of interventionism,
allowing CBs to employ their indirect monetary policy instruments
more effectively towards disinflation and to respond more flexibly to
the restrictive conditions of the international markets (IMF 1995;
Padoa-Schioppa 1994).15
Of course, at least theoretically, interest rates could still be raised
administratively within the interventionist framework of direct credit
policy instruments, at levels high enough to satisfy the need for monetary
harshness or corresponding to their estimated equilibrium prices.
However, none of the three major actors involved (CB, government,
later the European Commission) favoured this adjustment strategy,
which hence never really entered the agenda in any of the three coun188
George Pagoulatos
tries. The Commission, in view of the single market program, encouraged
complete (albeit gradual) financial liberalization. The CBs had
internalized the orthodox view that only liberalized interest rates and
market-determined allocation of finance (with the exception of some
ad hoc quantitative ceilings whenever credit expansion threatened
overheating) would allow the necessary monetary policy leeway and
flexibility to rip the inflation out of the system. Administered interest
rates, even if fixed at disinflationary levels, would keep monetary policy
subject to constant political bargain and government-imposed objectives,
as they had done throughout the interventionist period. Thus
credit liberalization also served the long-held CB pursuit for more political
and policy autonomy from government. From its own standpoint,
and given the pressing need to proceed with stabilization, the government
also had some interest in doing so by setting interest rates free
(thus shifting the responsibility and blame for monetary stringency to
the CB) rather than raising them administratively (which would have
burdened government with the political cost of disinflation).
There is considerable evidence of the programmatic intention of SE
CBs to liberalize in order to acquire better use of monetary instruments
against inflation. Probably the first such evidence is contained in the
Bank of Spain report for 1974, which forcefully stated the
(monetarism-inspired) targeting of monetary aggregates as its main
intermediate objective:16
The monetary policy objectives pursued by the Spanish monetary authorities
are centrered in obtaining a fixed rate of growth of the available liquidity . . .
Given the tight dependence between liquidity of the monetary system, private
sector financing, and interest rates, it is practically impossible to define independent
objectives for every one of these variables. The first implication of
this is that, whatever the importance assigned to every one of these variables,
the control of all of them must pass from the direct manipulation by the
authorities of one only and the indirect determination of the other two. In
that respect, the Spanish solution, which coincides with that of several other
countries, consists in exercising control over the liquidity of the monetary
system. All recent reforms in the implementation of monetary policy have
been directed towards allowing and improving the control of that variable
(Banco de Espan˜a 1974: 115).
As a Bank of Spain paper explained several years later, ‘the nonexistence
of freely formed interest rates precluded selecting either the
money stock or interest rates as the intermediate target of monetary
policy’ (Pellicer 1993: 33). From the second half of the 1980s, the
endorsement of monetary adjustment via liberalization became regular
in all SE CB reports. For example, the Bank of Greece annual report,
after describing the deregulation policies abolishing direct administraFinancial
Interventionism and Liberalization in Southern Europe 189
tive credit controls and fixed interest rates, stated: ‘These [liberalization]
measures have expanded the Bank of Greece’s ability to exercise
effective monetary control . . . in pursuit of replacing direct with indirect
monetary controls’ (Bank of Greece 1987: 37).17 On the money
market it said: ‘The reduction of the public sector’s borrowing requirement
. . . combined with the government’s recourse to the non-bank
money and capital market . . . enable better control of money supply
and of the liquidity of the credit system and the economy’ (Bank of
Greece 1987: 42). The next year’s report left no doubt as to the use of
liberalized interest rates for disinflation: ‘More than the growth rate in
money supply, high real interest rates offer safer evidence of the
restrictive direction of monetary policy . . . [which] played the principal
role in the successful outcome of the stabilization effort’ (Bank of
Greece 1988: 34). Two expert committee reports for Greek financial
reform also contained such arguments (Harissopoulos Committee
1981; Karatzas Committee 1987). Similar pronouncements can be
found in the reports of the CB of Portugal in the 1980s and early
1990s. Diagram 4’s display of real short-term interest rates gives an
indication of the severity of monetary stabilization.
Thus CBs pursued financial liberalization in order to strengthen
their ability to conduct monetary policy, and eventually – by removing
government actors from finance – their political autonomy. For that,
CBs exploited their power of suasion toward government, as well as
any windows of opportunity created by European pressure, domestic
economic and financial conditions, government indecisiveness or
internal divisions, and any backing that could be drawn on the part of
the banking sector. For example, the Bank of Greece took advantage
of an urgent balance of payments crisis in the aftermath of the 1985
elections, as well as a favorable conjuncture at both government and
EC level, to decisively put liberalization on the agenda. At the same
time, however, governments too had a positive stake in pursuing stabilization
through extensive if not nearly exclusive reliance on monetary
austerity. This strategy allowed them to retain a relative laxity in fiscal
and structural reforms, two fields where the political cost of adjustment
is particularly high.18 All three SE economies in the second half of the
1970s and into the 1980s carried an extensive and highly corporatistic
public enterprise sector, high public deficits, and labor market rigidity.
Thus fiscal and structural adjustment involved far-ranging and politically
costly reforms, especially if one considers the time lag with which
fiscal tightening and especially structural reforms produce their efficiency
results, as opposed to the short-term emergence of their sociopolitical
cost.
Contrary to fiscal and structural adjustment, stabilization via mon190
George Pagoulatos
-24
-23
-22
-21
-20
-19
-18
-17
-16
-15
-14
-13
-12
-11
-10
-9
-8
-7
-6
-5
-4
-3
-2
-1
0 1 2 3 4 5 6 7 8 9
10
11
12
13
14
15
1966 1967 1968 1969 1970 1971 1972 19731974 1975 1976 1977 1978 1979 1980 1981 1982 19831984 1985 1986 1987 1988 1989 1990 1991 1992 19931994 1995 1996 199 7 1998 1999 2000
Sources: European Commission, OECD
Portugal
Spain
Greece
EU-15
DIAGRAM 4. Real short-term interest rates.
Financial Interventionism and Liberalization in Southern Europe 191
etary austerity (that is, a real appreciation of the currency and high
interest rate differentials relative to the EMS basket of currencies) is
politically attractive also because it allows the stabilization cost to be
distributed in an apparently indiscriminate manner, saving government
from hard redistributive choices (Pe΄rez 1997: 39–40). That is of course
far from saying that disinflation is costless. High interest rates squeeze
demand for credit and raise the cost of private sector debt servicing,
suppressing business expansion. A ‘hard’ currency is detrimental for
the tradeables sector of the economy. However, compared to fiscal and
structural adjustment, monetary austerity in a regime of liberalized
interest rates is the stabilization strategy that politically implicates government
to the relatively lowest extent, as interest rates are supposedly
determined by the market as a result of the CB’s monetary policy.
Notably, this strategy allows a government to shift part of the political
cost of adjustment to its CB through an implicit tactic of scapegoating
(cf. Woolley 1984: 191ff). The higher the perceived CB strength, the
more the chances the CB would be regarded as responsible for the
policies of monetary austerity.
Phrased differently, SE governments undertook monetary austerity
(and financial liberalization as its necessary precondition) under the
pressure or ‘moral suasion’ of their CBs as a ‘self-binding’ strategy for
compensating for the expansionary effects of fiscal policy (cf. OECD,
Spain 1989: 34) or for implementing stabilization while eschewing a
bolder curtailment of public spending.19 This interpretation is especially
strong for the cases of Portugal, whose fiscal convergence towards
EU levels began in the late 1980s, and Greece where (despite the
1985–87 stabilization) fiscal laxity persisted well into the 1990s
(Diagram 5). Admittedly, as Pe΄rez contends, the argument appears less
convincing for Spain whose public deficits and debt remained close to
EU levels through the 1980s and 1990s. Given the moderate aggravation
of the fiscal front then, the intensity of monetary austerity in Spain
from the late 1980s through the 1990s could be regarded as particularly
harsh, especially considering the entrenchment of unemployment
at 20% levels. However, the disinflationary commitment remained
unflinching as Spanish authorities, in view of the economy’s heavily
corporatistic structures, interpreted unemployment as structural not
cyclical, advocating labor market liberalization instead of monetary
relaxation (cf. OECD, Spain, 1992: 55ff; Boix 1998: 130ff). The relatively
high overall growth rates of the second half of the 1980s also
permitted a harsher disinflationary trade-off between growth and monetary
stabilization.
While SE governments acceded to the necessity of monetary austerity
to a degree that was proportionate to their own fiscal laxity, they
192 George Pagoulatos
-10
-5
0
5
10
15
20
1975 1980 1985 1990 1995 2000
Source: OECD
Spain Portugal Greece EC
DIAGRAM 5. General Government Deficit (%GDP).
Financial Interventionism and Liberalization in Southern Europe 193
patently tried to delay as much as possible their own financial detriment
from monetary reform. The need to retain low debt-servicing
costs operated as a serious brake to the expansion of financial liberalization
(OECD, Spain, 1988: 43). Thus can be explained the survival of
compulsory investment ratios on government securities until well into
the first half of the 1990s (exhausting the Maastricht deadlines against
privileged government recourse to finance) and the procrastination in
the creation of a money market.20
Spain’s monetary policy shift took place after the previous ‘cheap
credit’ paradigm (cf. Hall 1993) had become part of the status quo to
such an extent as to be blamed for the conspicuous policy failures. By
the mid-1970s, when the Bank of Spain launched financial reform, the
inflationary policies of monetary expansionism had been applied for
several decades under Franco. As domestic macroeconomic conditions
were aggravated in the 1970s, the aggravation was perceived as a crisis
of the entire financial/monetary policy model rather than simply one
of a conjunctural nature. Even more pronounced was the paradigm shift
in Greece and Portugal.
An additional factor weighed heavily in the Bank of Spain’s ability to
initiate its reforms earlier and to pursue what could be characterized as
perhaps excessive monetary austerity. This factor concerns the greater
strength of the Spanish CB, compared to the CBs of postauthoritarian
Greece and Portugal. The Bank of Spain was the only SE CB whose
leading group of reformers under the Franco regime not only survived
democratic transition but proceeded reinvigorated into the second half
of the 1970s and through the 1980s and 1990s (see Pe`rez 1997: 118–
9). The consolidation in the Bank of Spain of that strong monetaristleaning
technocratic elite representing ‘change through continuity’
afforded it a leading role in monetary and financial reform. Given its
internal cohesiveness and crystallized agenda, the CB reformist elite
commanded the influence that allowed it to win government approval
for its policies. Moreover, the consensual character of the Spanish
transition to democracy necessitated a symbolic breach with the Franquist
past, which was served by the cross-party adoption of a Europeanizing
agenda that identified liberalization with modernization (cf.
Maravall 1993; Pe΄rez-Diaz 1993: 20ff; Bermeo 1994; Alvarez-Miranda
1996). This afforded the Spanish CB vital leeway with government,
exemplified in the adoption of financial liberalization as one of the
major structural policies included in the 1977 Moncloa Pacts (OECD,
Spain, 1980: 32). On the contrary, less strength and continuity characterized
the CBs of Portugal and Greece during the 1970s and 1980s.
In both countries political exigencies increased government control,
imposing monetary expansion. The Bank of Portugal was nationalized
194 George Pagoulatos
in 1974, its functions redefined. The Bank of Greece, whose administration
was replaced after the dictatorship, supported the reflation of the
1974–77 period, objected to that of the 1979–80 but was unable to
contain it, while during 1981–84 it officially came under the Economy
minister. In both countries, intensified electoral competition rendered
the surrender of financial interventionism politically undesirable.
The above help to account for the power of suasion enjoyed by CBs
vis-a`-vis government in their effort to apply monetary reform. Though
they lacked the especially conducive circumstances enjoyed by the Bank
of Spain, CBs in Greece and Portugal also emerged stronger in the
environment of the second half of the 1980s. Their significant macroeconomic
divergence from the EU, combined with their governments’
declared objective of adjustment (Greece’s 1988–89 expansionist diversion
notwithstanding), and framed by a European context of ascending
monetarist ideas and policies and growing CB authority, bestowed CBs
with increasing bargaining power towards their governments (cf. Dyson
et al. 1995; Dyson and Featherstone 1996). Under these conditions,
CBs were given the green light even by otherwise expansive governments
to steer financial liberalization, economic stabilization and monetary
adjustment. Thus, while CB strength is conventionally presented
by the economic literature as being positively correlated with low inflation,
21 from a political viewpoint SE also points to the reverse causation:
CBs in an inflationary environment, under their governments’ auspices
or mere tolerance, are in effect strengthened not weakened. The persistence
of high inflation itself strengthens the role of CBs, forcing
governments to allow them to acquire more effective monetary instruments
in pursuit of disinflation.
Conclusion
Contrary to standard accounts, we have argued that both financial
interventionism and financial liberalization in Southern Europe did not
result from interest group or sectoral pressure but corresponded to a
state-driven pattern of reform in which CBs played a prominent role.
However, both financial interventionism and liberalization, while principally
serving broader economic stabilization and efficiency objectives,
remained marked by a pursuit of political expediency and beneficial for
banking interests. Political expediency can be attributed to the ultimate
government control over both interventionism and liberalization
– given the lack of CB independence prior to the EMU program
leading to a system of independent CBs. The accommodation of banking
was heavily associated with the pivotal policy role of the CBs and
Financial Interventionism and Liberalization in Southern Europe 195
their institutional commitment to the ‘well being’ of their financial
sectors.
The CB accommodation of banking interests should not be exaggerated.
If CBs implemented liberalization in a way as to alleviate the cost
of adjustment for their banking sectors and even to increase their profit
opportunities, this was to the extent to which it principally served their
own dual purpose of controlling inflation and boosting their national
banking sectors’ strength. In their institutional capacity as banking
supervisory authorities and guarantors of systemic stability, CBs
encouraged bank profitability as a condition for enabling national banking
sectors to survive in the single market by affording competitive
interest rates. Even more so given the SE banking sectors’ standing as
the weakest and least competitive in the EU, and their aggravation by
the industrial and financial crises of the late 1970s and early 1980s.
Though acknowledging that the shift to liberalization was rooted in
the transformations of the international and European political economy
over the 1970s and 1980s, we have offered evidence to considerably
qualify the mainstream argument that views domestic financial
liberalization simply in terms of adjustment to the external constraint.
Such evidence is provided by Spain’s early liberalization and by the
employment of domestic liberalization by CBs as a vital precondition
for the effectiveness of their disinflationary effort.
NOTES
1. Nearly every mainstream economic development book of the early postwar decades communicated
the conventional wisdom of state-directed or state-assisted economic development via
industrialization. See, for example, Meier (1989).
2. For Greece, the argument is developed in Pagoulatos (2003).
3. This was not only because of a tendency towards balanced budgets – excluding investment –
but also due to the extensive use of credit controls for monetary stabilization, and to a limited
reliance on rediscounting facilities.
4. We distinguish domestic financial liberalization (the abolition of the institutions and instruments
of national financial interventionism) from external financial liberalization (the liberalization
of the capital account through the abolition of inward and outward capital and foreign
exchange controls).
5. Spain joined the Exchange Rate Mechanism of the EMS for the first time in 1989, Portugal
in 1992, and Greece in 1998. The deadline for the elimination of all remaining capital controls
extended to the end of 1992 for Spain and July 1994 for Portugal and Greece; all made
it in time.
6. Indeed, between 1971 and 1974 in Spain special rediscount lines were eliminated, and bank
commissions and branch banking were liberalized. In 1974 deposit and lending rates of more
than a two-year term were liberalized. Much bolder were the 1977 liberalization reforms, that
included deregulation of certain longer-term interest rates, abolition of specific institutions of
targeted credit, and steps towards developing a money market – which however remained
limited until the second half of the 1980s (OECD, Spain, 1988: 53).
7. The characterization ‘public goods’ is not meant to discount the significant redistributive
196 George Pagoulatos
implications that even ‘universal’ economic desiderata such as low inflation and economic
growth are bound to carry.
8. Pe΄rez invokes the adoption of monetary targeting by the Bank of Spain from as early as 1973
as argument for the Bank’s ideological orientation. However, this is less impressive if one
considers that Portugal began setting monetary targets in 1977, and Greece followed in 1979,
and both continued to pursue expansionary or accommodative monetary policies until well
into the 1980s.
9. The Bank of Spain itself until the late 1970s continued to justify its policy as pragmatic and
middle of the road, as ‘a middle course which could not lead to a deceleration of the inflationary
process – nor to its uncontrollable acceleration – and which was hoped would not contribute
to exacerbating the falling rate of economic activity and rising unemployment’ (Banco de
Espan˜a 1979: 203).
10. Credit liberalization, combined with the banks’ cartelized behavior, may have exacerbated
the effects of the Spanish crisis: by raising industry’s financial costs, it aggravated the effects
of the energy shocks, leading many industrial firms to failure, which confronted the banks
with a surging number of bad loans. The banking crisis that began in 1978 peaked between
1982–84, by which time half of the banks operating in 1977 had failed and had to be rescued
(Caminal et al. 1993: 277). This crisis led the CB to temporarily defer its liberalizing intentions,
but it also provided a justification for a more favorable treatment of Spanish banks in
the second phase of liberalization.
11. In portugal, the nationalization of the entire banking system by the revolutionary regime of
1974 was devastating for the country’s old banking oligarchy; the sector remained in state
hands until the 1990s. Similarly in Greece, where most of the banking sector had been already
under state control, the Karamanlis government in 1976 nationalized the second largest
banking group, Commercial Bank. Only the Spanish privately owned banking sector remained
practically intact after transition to democracy.
12. Overall, banks stand to lose from financial liberalization if under the restricted regime they
were able to set interest rates by cartel collusion; they stand to gain if credit rates were
determined by government. They can offset the competitive effects of liberalization if they
continue to set interest rates through cartelization. The least efficient ones are bound to be
disaffected if real competition erupts (usually through the entry of new market players) forcing
them to narrow profit margins in order to withstand competition.
13. Only towards the mid-1990s did banking competition begin to take effect.
14. The weakening of CB autonomy by capital liberalization was the reason why SE CBs were
not as favourable to external as they were to domestic liberalization – though they did appreciate
the benefit of subjecting the government’s fiscal and other policies to the constant disciplinary
mechanism derived from a liberalized capital account. However, contrary to domestic
liberalization which began earlier and in which CBs carried a central role, capital liberalization
was exogenously imposed by the single financial market and EMU program, and thus
CB skepticism was of lesser importance.
15. I am using this argument in the positive rather than the normative sense, as it is far from
incontrovertible that liberalization is better for monetary control. The exact opposite may
be argued: by allowing banks to begin to market credit aggressively liberalization is usually
accompanied by rapid growth of monetary aggregates, which in the interventionist regime
were strictly controlled. At the same time the demand for money tends to become unstable,
which makes it rather difficult to use monetary aggregates as indicators of the monetary
stance. For an excellent discussion see Gibson and Tsakalotos (1994).
16. The exact same extract was emphatically repeated the year after (Banco de Espan˜a 1975:
141).
17. In personal interviews, an ex-governor and a former deputy governor of the Bank of Greece
confirmed that the most important objective of domestic financial liberalization was to enable
the CB to effectively implement monetary stabilization.
18. In the narrow sense, the high interest rates of monetary adjustment undermine fiscal stabilization
by raising the cost of public debt – hence what is regarded as liberalization’s ‘disciplining’
effect on public spending.
19. For example, the Bank of Greece report stated: ‘the [restrictive] monetary policy of high real
interest rates and relative exchange rate stability was and continued to be necessary for the
stabilization of the economy until the necessary adjustments in fiscal policy and the reduction
of pressures on the part of the public sector upon money and foreign currency markets’ (Bank
of Greece: 1988: 35).
Financial Interventionism and Liberalization in Southern Europe 197
20. In that Spain was the leader, Greece and Portugal following with a time lag of several years.
Initially, the money market was exclusively an interbank market; a secondary market for the
sale of government securities to the public (mostly under repurchase agreements) did not
begin to develop until after the mid-1980s. Even more delayed was the decision of government
authorities to issue their securities at market rates, as well as the activation of a secondary
market in medium and longer-term debt – which only began after inflation de-escalated.
21. See, for example, Grilli et al. (1991); Cukierman (1992); Alesina and Summers (1993).
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GEORGE PAGOULATOS
Assistant Professor
Department of International and European Economic Studies
Athens University of Economics and Business
Patission 76, Athens 10434, Greece
Email: gpag@aueb.gr
