Bailouts and Credibility in the European Union

There is a common assumption that international institutions can confer credibility on their members. But predicated on idea that members follow the rules of the institution (through whatever mechanism). So are the recent spate of European bailouts a sign of the EU''s enforcement of its rules, or of its lack of ability to enforce rules until it is too late? Does credibility suffer when countries do not abide by the rules of an international organization — either the credibility of the rulebreaker or the credibility of the organization itself? Even in a post-financial-crisis world, are the perceptions of market still based on signals and heuristics? This paper examines these propositions using financial market data surrounding the 2007 financial crisis and its continuation. I find that financial markets still put extra faith in international organizations as symbols of credibility -- markets are most responsive to IMF, rather than EU, announcements of similar programs, and do not penalize countries for revising the terms of the Memoranda of Understanding, or to failed policy reform in the wake of bailout packages, or even to countries exiting from those programs. I also find no signicant dierence between IMF/EC bailout programs in EU vs non-EU states.