Governing by Panic: The Politics of the Eurozone Crisis

David M. Woodruff

No 1, Europe in Question Discussion Paper Series of the London School of Economics (LEQs) from London School of Economics / European Institute

Abstract: The Eurozone’s reaction to the economic crisis beginning in late 2008 involved both efforts to mitigate the arbitrarily destructive effects of markets and vigorous pursuit of policies aimed at austerity and deflation. To explain this paradoxical outcome, this paper builds on Karl Polanyi’s account of how politics reached a similar deadlock in the 1930s. Polanyi argued that democratic impulses pushed for the protective response to malfunctioning markets. However, under the gold standard the prospect of currency panic afforded great political influence to bankers, who used it to push for austerity, deflationary policies, and the political marginalization of labor. Only with the achievement of this last would bankers and their political allies countenance surrendering the gold standard. The paper reconstructs Polanyi’s theory of governing by panic and uses it to explain the course of the Eurozone policy over three key episodes in the course of 2010-2012. The prospect of panic on sovereign debt markets served as a political weapon capable of limiting a protective response, wielded in this case by the European Central Bank (ECB). Committed to the neoliberal Brussels-Frankfurt consensus, the ECB used the threat of staying idle during panic episodes to push policies and institutional changes promoting austerity and deflation. Germany’s Ordoliberalism, and its weight in European affairs, contributed to the credibility of this threat. While in September 2012 the ECB did accept a lender-of-last-resort role for sovereign debt, it did so only after successfully promoting institutional changes that severely complicated any deviation from its preferred policies.

Keywords: Euro; European Central Bank; European Central Bank; fiscal policy (search for similar items in EconPapers)
Date: 2014-10-24
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon, nep-pke and nep-pol
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.lse.ac.uk/europeanInstitute/LEQS/LEQSPaper81.pdf Full text (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://www.lse.ac.uk/europeanInstitute/LEQS/LEQSPaper81.pdf [301 Moved Permanently]--> https://www.lse.ac.uk/europeanInstitute/LEQS/LEQSPaper81.pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:erp:leqsxx:p0081

Access Statistics for this paper

More papers in Europe in Question Discussion Paper Series of the London School of Economics (LEQs) from London School of Economics / European Institute
Bibliographic data for series maintained by Katjana Gattermann (k.gattermann@lse.ac.uk this e-mail address is bad, please contact repec@repec.org).