Small States, Nationalism and Institutional Capacities: The Paradox of the Danish and Irish Responses to the Financial Crisis

This paper presents a paradox to the “Varieties of Capitalism” school of comparative political economy. Proponents of this approach typically describe Denmark as a coordinated market economy in which the state works with centralized corporatist institutions to coordinate economic activity. In contrast, Ireland is seen as a liberal market economy in which state intervention is limited and corporatism largely absent, with market forces dominating economic activity instead (Hall and Soskice 2001, p. 19; Soskice 2007). This leads one to expect that the Danish state would have shouldered the costs of rescuing the banking sector during the financial crisis, which began in 2008, while private actors in Ireland would have done so. Yet the opposite was true.
Resolving this paradox requires attention to literatures that rarely speak to each other. The first concerns size. Katzenstein (1985) argued that small states are especially vulnerable due to their dependence on international trade and their need to navigate geopolitical seas dominated by larger states (see also Cameron 1978; Garrett 1998; Jones 2008). Fear concentrates minds whilst small size allows close linkages. There was an elective affinity between this situation and corporatism—defined best as a centralized system of interest groups, decision making through continous political bargaining between business, labor, the state, and political parties, and a national ideology of social partnership. Much has been written about the first two points (e.g., Becker and Schwartz 2005; Hemerijck et al. 2000; Ó Riain 2004; Schwartz 1994, 2001), but
little about the ideology of social partnership.