How the Economy Hit Bottom—and What Comes Next

Mark Blyth, Austerity: The History of a Dangerous Idea
and John Authers, Europe's Financial Crisis: A Short Guide to How the Euro Fell Into Crisis and the Consequences for the World

The recently announced EU bailout of the Republic of Cyprus had immediate benefits, but not for ordinary Cypriots. The mainly German monetary transfusion caused bounces in major world stock markets, while bond dealers stopped their massive Cypriot money exodus. Banks that sank depositor money into crazily risky Greek investments will remain afloat, but the state must introduce “capital controls” so common citizens can’t access their own money.

This is a microcosm of the entire world economy since the banking crisis of 2007-2008. And it serves as an important cautionary tale about how we might work going forward, because many of the controls the European Central Bank imposed in Cyprus, Greece, and Spain perfectly mirror controls already implemented in Britain, and which have been proposed in America. And if we don’t understand the current economy, these controls look surprisingly appealing.

We cannot understand current economics if our horizons stop at national borders. Financial journalist John Authers titles his latest book Europe’s Financial Crisis, yet he leaves Europe for entire chapters, because the influences jeopardizing the Eurozone have causes, and effects, in America, China, Brazil, and elsewhere. Europe’s hybrid economy, rife with compromise, couldn’t withstand transnational forces which had no known precedent.

But we also mustn’t mistake how the crisis occurred. Political economist Mark Blyth first notes that this financial crunch, like many others, began when banks overleveraged themselves, then let the state backstop their debt. In other words, ours is essentially a private-sector collapse. Second, Blyth explicates the history of the idea that cutting the state opens the economy—and what real consequences financial austerity has had over the ages.

No one economic explanation suffices. The common parables of capitalist decay and moral failure don't explain how different firms and nations took different hits. No, Blyth and Authers see a single effect with many causes. This includes American investment banks blinded by fallacies of composition, and European economies shackled with one currency but seventeen fiscal policies. Blyth calls this "too big to fail" versus "too big to bail."

The Euro meant to bring Europe into a single integrated economy, but didn’t address underlying gaps. Seventeen nations shared a currency, but did not tie their fortunes together. Thus the Eurozone has one monetary policy, but seventeen fiscal policies, meaning member states had no autonomous recourse when financial markets did anything outside the accepted model.

When the European Central Bank, governed by fiscally conservative Germans, saw Greece, Portugal, and Ireland in such dire straits, it demanded a single fix, even though different economies had different problems. But the ECB's mandatory austerity didn't work, so it demanded even more austerity. Not surprisingly, this made a bad situation even worse. What economists initially termed a "haircut" turned into a scalping.

The desire to slash governments goes clear back to the late Seventeenth Century, with the rise of early capitalism. But as Blyth notes, economic circumstances differed then. England and America had only salutary competition, and states were led by self-serving monarchs. When competition became more fierce, firms needed governments to take a coordinating hand. Laissez faire only works in limited circumstances.

Only in the Twentieth Century have states become big enough to cut. But when nations do so, results have been disputable. Though capitalist purists claim small states encourage trade, look at today’s Eurozone: massive youth unemployment, skyrocketing debt, anarchic markets, and widespread suffering. Cutting the state hurts most those who can absorb hardship the least.

The problems were exacerbated by transnational supply lines and Internet banking. The global financiers who stuck money in Euro-American markets while the sun shone moved their money posthaste at the first sign of weakness. State-based financial policy proved unprepared for such foundational surprises, and conventional remedies crumpled. This was worsened by the fact that Eurozone nations can't print their own money to control supplies.

These books don’t make easy reading. Though Blyth and Authers translate complex economic principles into plain English, they use a lot of ideas, which readers must keep in mind indefinitely. These authors do their best to remain accessible, and inject them with moments of unexpected humor, but readers should prepare to invest a healthy chunk of time into the reading process.

But for those willing to make such an investment, they makes a complex case regarding how we reached this impasse, and where we go from here. We have to know the economy as it is, not as our ideologies make it. Only then can we solve the economic bleed that puts us all at risk.

See also: High Noon For the Economic Assassins