Did the Eurozone crisis arise from the decision to unite export-led and domestic-demand-led growth models in a single currency area?

The Eurozone’s reaction to the crisis beginning in late 2008 involved not only efforts

to mitigate the arbitrarily destructive effects of markets but also vigorous pursuit

of policies aimed at austerity and deflation. To explain this paradoxical outcome,

I build on Karl Polanyi’s account of a similar deadlock in the 1930s. Polanyi argued

that a society-protecting response to malfunctioning markets was limited under the

gold standard by the prospect of currency panic, which bankers used to push for

austerity, deflationary policies, and labor’s political marginalization. I reconstruct

Polanyi’s “governing by panic” theory to explain Eurozone policy during three key

episodes of sovereign bond market panic in 2010–12. By threatening to allow financial

panics to continue, the European Central Bank promoted policies and institutional

changes aimed at austerity and deflation, limiting the protective response. Germany’s

Ordoliberalism, and its weight in European affairs, contributed to the credibility of

this threat.

For the past three years, Europe has been mesmerised by the Euro crisis, namely the

struggle to resolve the debt problems facing Greece, Ireland, Italy, Portugal and

Spain (the GIIPS) without breaking up the monetary union or precipitating a wider financial crisis in Europe. This long-running drama has had serious economic consequences, especially for those who have lost jobs or income in its wake, and profound

political implications for the future of integration in the European Union.

At the heart of the crisis are several puzzles. Commentary in the financial press has

a Rashomon-like quality: after years of presenting economic and monetary union

(EMU) as a great success, the media often present it now as an abysmal failure, as

if it were incomprehensible how the Euro could have been created in the first

place.1 Why did the Europeans agree to a currency union apparently doomed to

such problems? There are also clashing narratives about the roots of these problems.

In northern Europe, the crisis has been blamed on the fiscal fecklessness of southern

European governments. While many in the south accept this critique, they attribute

the depth of the crisis to anaemic support from their northern neighbours and the

harsh conditions imposed in exchange for it. Where do the roots of the problem lie?

The crisis also raises questions about the future of Europe. Will the crisis ultimately

advance the process of political integration in the European Union (EU) or impede

that process?

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