Strategic interdependence and preferences for debt mutualization in the eurozone

Existing research argues that a ‘democratic constraint’ blocks the path towards fiscal integration in the eurozone: Voters in creditor countries are fundamentally opposed to debt sharing, while voters in debtor countries are unwilling to leave the euro, which constrains the ability of their politicians to negotiate a more equitable distribution of the burden of adjustment. However, this literature neglects that preferences are strategically interdependent across countries and are affected by the type of information processed by individuals. Based on two linked survey experiments in Germany and Italy, conducted at a crucial moment during the COVID-19 pandemic, we show that Germans respond to information that highlights the possibility of a break-up of the euro as a result of Italexit by increasing their support for debt mutualization. In contrast, Italians are more affected by information about the costs of remaining in the euro than of exiting it and drastically reduce their support for the euro if they are told that austerity and structural reforms are required to remain in it. Our results help to explain why German politicians relaxed their hostility to joint debt and agreed to the introduction of the EU’s pandemic recovery fund in 2020.