Consolidated democracy advantage: political instability and sovereign spreads in the EU

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 diferent than the commitment
of new democracies with short track records.