Austerity, Non-Austerity, and the Eurozone Crisis Review of Mark Blyth

Austerity, Non-Austerity, and the Eurozone Crisis

Review of Mark Blyth

Glyn Morgan

Maxwell School, Syracuse University

Mark Blyth’s book on Austerity shows quite convincingly that sharp cuts in government expenditure haven’t solved the problems of the Eurozone. If anything, his argument is stronger now than when he first wrote this important and deservedly much-praised book more than five years ago.  The Eurozone Crisis certainly isn’t over. Greece is on the verge of another bailout; Italy totters; and the IMF, in an embarrassing mea culpa, now admits it got its sums wrong.  Blyth’s book actually defends two theses: one, that austerity doesn’t work; and two, that austerity isn’t fair. The ostensible unfairness of austerity policies lies in the fact that they hit hardest those who rely on government programs—the poor, pensioners, and the unhealthy.  If we care, as we should, about the least well-off, then we can scarcely support policies that target such people.

This brief review focuses exclusively on Blyth’s account of the Eurozone Crisis. No one can now plausibly dispute the inefficacy of austerity. The question remains only that of the efficacy of non-austerity. In other words, could a robust counter-cyclical fiscal policy restore economic prosperity to the faltering Eurozone periphery countries? Broadly stated, one can distinguish three answers to this question. First, the view of Mr. Schauble and the Bundesbank who are deeply skeptical of the rejuvenating power of fiscal policy. For them, what matters is business and consumer confidence, which is largely a function of sound public finances and growth-sustaining structural reforms (Weidmann 2015). Those countries incapable of meeting these requirements—Schauble has mentioned Greece—would be better off leaving the European Monetary Union (EMU).  Second, the view of Paul Krugman and others, who favor counter-cyclical policies but remain skeptical of the long-term prospects of the EMU, which they believe was never a viable endeavor (Krugman 1993, 2012). And third, the view of Martin Sandbu and others, who favor countercyclical policies and see nothing fundamentally wrong with the EMU (Sandbu 2015). The difference between the second and third perspectives is important, because on the second view an end to austerity might mean nothing more than a delay of the EMU’s still inevitable crack-up.

On Blyth’s telling of the story, the Eurozone Crisis is essentially a banking crisis exacerbated by a dysfunctional Monetary Union (“a financial doomsday weapon,” as Blyth calls it). Blyth is scathing about the failings of the EMU, which he describes as “a bit mad from the get go…an  exercise in insanity” (p. 77). Nor is he very impressed with the institutional efforts to improve the EMU taken in the last few years. “Europe, he concludes,” is not and still cannot be made into a single economy (p.263).”  Austerity policies, which are hopeless in solving a banking crisis, simply make things worse. They “harm not help” (p.252).

In terms of the three positions noted above, one might interpret Blyth as a defender of the second position. The EMU (with its Fiscal Compact) and austerity fit together, and both are harmful.  It remains unclear, however, what he thinks of the prospects of a reformed EMU (perhaps along the lines advocated by Sandbu) which would allow greater fiscal flexibility.  Given the harshness of his language (“financial doomsday machine”), it would seem that Blyth thinks that any type of  monetary union is unworkable and cannot but deliver the worst of all possible worlds for contemporary Europeans. That line of thought raises the paradoxical prospect that austerity might, if it led to the demise of the EMU, actually be a desirable policy, one that anti-EMU zealots should support. We can now see how austerity has bolstered the fortunes of anti-EMU and anti-EU political parties like Lega Nord, Front National, and Syriza. Perhaps with a bit more austerity, such parties would acquire sufficient power to sweep away for good not merely the EMU but the EU too.

Doubtless, Blyth would resist any suggestion that an EMU-destroying level of austerity would be desirable. The reason why is obvious. The EMU, even in its present deeply-flawed condition, might be replaced by something much worse—a Europe of nation-states governed by amateurs, protectionists and nationalists, for example.  This dismal prospect brings us back to the question posed at the start: what can Europeans expect from non-austerity?  Not much is, I think, the implication of Blyth’s argument. Perhaps non-austerity might delay the Eurozone’s break-up, but—absent fundamental reform in the institutional architecture of the EMU and in the periphery political economies—European unity would be purchased only at the price of permanent North-South transfers and ever-increasing intra-European enmity.

Another way of describing the problems contemporary Europe faces is that its peoples lack a shared conception of fairness. Political theorists interested in issues of transnational justice will find Blyth’s book a useful point of departure. He writes with the passion of a moralist and highlights the unfairness of current austerity policies in the Eurozone and elsewhere. But again to say that austerity is unfair isn’t to say non-austerity is fair. Without offering any solution to the problem here, let it simply be said that the Eurozone Crisis requires some consideration not merely of the claims of those suffering economic privation in, say, Greece, but also the claims of those living in other relatively poor Eurozone countries (Slovakia, for example). No less importantly, non-austerity in Europe immediately raises the tricky question of conditionality. In other words, what structural reforms (if any at all) must European countries accept before they are granted, say, debt relief? It’s partly because conditionality is so hard to justify and even harder to enforce that creditor countries resort to austerity.  Yet if we abandon austerity, does this mean that there will need to be more conditionality?  And doesn’t conditionality entail an insidious form of surveillance? Blyth doesn’t answer these questions. Anyone interested in pursuing them will find Blyth’s great book a useful place to start.

Krugman, Paul, (1993), “Lessons of Massachusetts for EMU” in F. Torres and F. Giavazzi, eds., Adjustment and Growth in the European Monetary Union, Cambridge University Press, New York, pp. 241-261.

Krugman, Paul (2012), “Revenge of the Optimum Currency Area,” New York Times, June 24 (https://krugman.blogs.nytimes.com/2012/06/24/revenge-of-the-optimum-currency-area/?_r=0)

Sandbu, Martin (2015), The European Orphan, Princeton: Princeton University Press.

Weidman, Jens (2015), “A Sound Footing for Monetary Union: Karl Otto Pohl Lecture,” Deutsches Bundesbank, March 12. (http://www.bundesbank.de/Redaktion/EN/Reden/2015/2015_12_03_weidmann.html#doc356864bodyText1)