Tag: euro crisis

The End of Austerity…It’s Death is No Great Exaggeration


Something extraordinary happened in Europe this week.  Enrico Letta, Italy’s Prime Minister nominee, upon being tapped to form the next government made a bold press conference announcement that his primary objective upon taking office will be to end Italy’s austerity program and join other leaders calling for an end to austerity across Europe.  Presto!  The bond markets did not go berserk.  Contrary to wide expectations, instead of punishing Italy investors remained calm and did not proceed to increase its borrowing costs.  And voila, the euro crisis has come to an end.

News also spread like wildfire this week about the notorious austerity paper scandal.  An academic paper by the well regarded economists Kenneth Rogoff and Carmen Reinhart, which has been used by policymakers far and wide to justify their fiscal retrenchment, has been discredited.  Among other high profile examples, EU Vice-President for Economic and Monetary Affairs Olli Rehn gave several prominent speeches in the early stages of the crisis explicitly basing European austerity programs on their work.

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Shakespeare, Cyprus, and the End of the Euro Crisis

Shylock. "Is that the law?"

Much ado.  Investors keep getting burned in betting on the exit of members of the Eurozone, let alone the breakup of the currency/monetary union of the EU.  And econ/business experts keep getting their predictions wrong.  The simple reason:  the EU, from its econ/financial area to the vast array of its other policy areas, at heart is a political project.  Events continue to show that despite the painful strains of major economic duress, this commitment remains intact.

Despite the messy manner in which its member state governments deal with crises–largely explained by institutional reasons, less so by incompetence–the EU and the euro are around for good.  The EU certainly has some major restructuring to do in terms of necessary banking and fiscal unions, and it rarely looks good in a crisis.  But it will carry on muddling through its challenges and in a wider historical perspective continue to provide its citizens with a considerable range of benefits.  Just as it has for decades, particularly since the advent of its single internal market nearly 30 years ago.

Nonetheless, the EU made major mistakes in the bailout of Cyrus and nearly botched the entire thing.  Even worse, the whole affair demonstrates a distinct inability to act strategically when the stakes are high.  Repercussions from this episode that haven’t been captured in the headlines will continue to reverberate for years.  Surprise, it was politics that accounted for bringing back the specter of crisis, not economics.

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Europe can stay irrational longer than the EU can stay solvent

The horror, the horror

 What the hell happened to Europe?

There’s still a chance that the EU may be pulled back from the [metaphor], whether that metaphor be an “abyss“, a “chasm”, or “the flames”. But it’s beginning to look a lot like the end of Europe-as-we-knew-it.

Much as the fall of the Soviet Union simultaneously showed that most Soviet experts were unable to predict the central event of the twentieth century, so too will the fall of the European Union leave a lot of Europeanists with (as Dan Rather put it) not just egg on their faces but omelettes all over their suits. (Not that this is wholly bad for Europeanists. Sovietologists enjoyed a brief dead-cat bounce in citation counts from justifying their bad predictions; surely Eurologists will have the same good fortune.)

“Europe” is a fascinating construct for students of institutions and international relations alike. It is neither domestic nor foreign; neither a democracy nor an autocracy; neither a dessert topping nor a floor wax. This was by design. But if Europe’s architects thought that obscuring accountability in a maze of councils and commissions would bolster the edifice’s stability, they have been proven decisively wrong. There are still loci of accountability, albeit by default located in the bond markets instead of in parliaments.

The fundamental difficulty, however, is that national governments coexisted with the supernational. More than coexisted: They got the supernational government’s credit ratings. And that has made all the difference.

The crisis of Europe is the gravest political-economic crisis of the past hundred years. The goals of European integration were to move the continent into a bright future and away from a sanguinary past. The logical corollary is that European disintegration will do the opposite. (For IR theorists, this may mean that John Mearsheimer may yet have the last laugh.)

If grand bargains and fervent hopes built Europe, however, gritty realities will undo it. And the most banal point is the most critical one: In political economy, politics comes first. Europe is not dying because the eurozone is not an optimal currency area. The eurozone is dying because it was not designed to be an optimal currency area. Europe is not dying because the European Central Bank is unable to bolster its credibility. The union is dying because the European Central Bank (and the lack of a concomitant fiscal mechanism) was designed to be incredible.

In the language of software engineers, the institutional arrangements whose failings are now becoming woefully apparent were “known issues”–and even more, they weren’t bugs, they were features. The fact that the PIIGS could issue bonds using Germany’s credit rating was the whole point of the arrangement–and the fact that the Germans couldn’t ultimately guarantee that they would bring cheaters to heel was also the whole point of the arrangement. To wonder what could have been done better–what miraculous set of technocratic policy arrangements could have avoided these potholes–is to misunderstand what Europe was all about.

Megan McArdle puts her finger on it:

When I was a young and naive economics writer, I used to write about developing countries a fair amount.  Time and again they would make these bizarre and pointless moves, like suddenly and for no apparent reason defaulting on a bunch of debt.  They would engage in obviously, stupidly unsustainable fiscal practices that caused recurring crises.  They would divert critical investment funds into social spending which was going to become unsustainable when underinvestment reduced government revenue.  And the other journalists and I would cluck our tongues and say “Why can’t they do the right thing when it’s so . . . bleeding . . . obvious?” Then we had our own financial crisis and it became suddenly, vividly clear: democratic governments cannot do even obvious right things if the public will not tolerate it. 

Keynes once wrote that “Markets can remain irrational a lot longer than you and I can remain solvent.” Criticizing the behavior of Europe’s leaders and publics as “irrational” is more than a little unfair–Silvio Berlusconi is extremely rational, and so are the Greek pensioners and Irish voters–but the essential point is the same. Whenever European bureaucrats have had a choice between making the “right” choice and making the socially justified one, they have chosen the latter, even when it has clearly been the wrong one.


War and the Eurozone

PM and Chancellor Merkel press conference

Last week, at University of Bristol, I gave a talk called “The Future of World Order” to the student International Affairs Society. It was a speculative lecture, based on my 17 years directing the Grawemeyer Award (for Ideas Improving World Order) more than my scholarship per se. I warned the audience from the start of two personal biases: (1) I am an optimist; and (2) I don’t really put much stock in specific predictions. I tried to stick to big ideas more than particular policies.

In the presentation, I argued that any order built on coercion and force would inevitably face a legitimacy crisis — and would ultimately collapse. The implications are twofold, I think. Domestically, people will demand greater control of their own lives. This means the world will see many more emancipatory movements to topple autocrats and unaccountable sources of power — as illustrated just this year by events in Egypt, Syria, Libya, Bahrain, the city of London, Wall Street, etc.

Internationally, it means order built on deterrence, brute force, or even the balance of power will give way to something that is more consensual, such as a security community. In support of this position, I talked a bit about John Mueller’s thesis that major power war is becoming obsolete — an outmoded institution, abandoned like slavery and dueling previously were. Could this thinking become even more pervasive, so that virtually any talk of war — internal or external — becomes outmoded? Eventually.

In the talk, I did not explicitly argue against the traditional state-centrism of international relations, nor call for the end of the states-system. However, I strongly implied that the future of world order will be more cooperative, focused on low rather than high politics (elevating the human security agenda), and much less violent.

This week, recovering from jet lag, I’ve been following the efforts to save the euro and Eurozone. One interesting aspect is that conservative leaders in Europe have certainly made some bold claims to sell their preferred outcomes. For instance, while traveling in Australia, British Prime Minister David Cameron used some classic statist language to highlight his concerns about the implications of ongoing negotiations:

“This is our key national interest, that Britain, a historic trading nation, has its biggest markets open and continues to have those markets fairly open and fairly governed.”

He later told the BBC’s political editor Nick Robinson: “In business often it’s selling more to your existing customers that’s the best strategy.

What his comments reveal is that when – if – the eurozone crisis ends, big political questions will replace the big economic problems”

“We’re big sellers into Europe, we can do better in those markets if we liberalise further.”

Mr Cameron has vowed to protect the UK’s position and said on Friday that the City of London was one “area of concern… a key national interest that we need to defend”.

“London – the centre of financial services in Europe – is under constant attack through Brussels directives,” he said.

Note the words and phrases Cameron used: “key national interest,” “attack” and “defend.”

Next, consider these remarks Wednesday from German Chancellor Angela Merkel:

“Nobody should take for granted another 50 years of peace and prosperity in Europe. They are not for granted. That’s why I say: If the euro fails, Europe fails,” Merkel said, followed by a long applause from all political groups.

“We have a historical obligation: To protect by all means Europe’s unification process begun by our forefathers after centuries of hatred and blood spill. None of us can foresee what the consequences would be if we were to fail.”


Based on these quotes, scholars should perhaps worry about the long-term durability of Mueller’s thesis.

Well, at least slavery is gone. Right?


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