Mark Mazower on the Eurozone crisis

Terrific article by Mark Mazower here.

18 replies on “Mark Mazower on the Eurozone crisis”

Some interesting comments on that article.
It’s important not to over simplify things.
There is a simple rule:
Populations must fund the services they provide through the taxes they raise – using sovereign debt to fund services is akin to using your credit card to pay for your household bills. It doesn;t work. People get this.

So people will accept austerity as long as there is a hit taken by banks. The big mismatch in this is that financial institutions are profiting from misery and are forcing countries into debt cycles that make the situation worse.

Sovereign debt is the opium of democracy.The markets are the dealers (including the head don the ECB) and are providing methadone but the countries need to go cold turkey.

Mazower speaks a lot of wisdom here but one line which caught my eye was ”While they [Monti & Papademos] may understand money…”

Initially this is going to sound outlandish but let me back it up – I don’t think there’s any reason to suspect that Monti & Papademos understand the monetary system.

They both would have learned that money is created first of all by the central bank printing and then indirectly through the ‘money multiplier’ affect. i.e. A bank which takes in a €100 deposit may keep €10 aside and lend out €90 and since the original depositor’s bank balance of €100 acts like money also, banks indirectly create money through loans. So goes the story but of course this model only applies if banks process every loan in cash form. Sadly this model is still taught in economics today.

Of course banks process cashless loans and to do so they create the money for the loan by simply increasing the borrower’s account. Hence every euro has an even higher debt. I doubt Monti or Papademos have ever thought about that.

It’s also likely that a Monti & Papademos would blame a lack of money in a contracting economy on either collective saving, government cuts, deposit flight or a lack of investor confidence. Because of course they wouldn’t have learned in university that money is destroyed through loan repayments. Hence why reducing our debts to banks doesn’t leave us in a better position.

Thankfully the New Economics Foundation have produced the book, ‘Where Does Money Come From?’ which explains all of the above. Although it’s only on one college course at the moment, analysis of the monetary system is growing and hopefully the next generation of economic advisors will fully understand that money has to co-exists with an even higher amount of debt. Hopefully this will prompt discussions on the many other ways we could create money for the economy.

The book can be purchased from:

Or our guide to the eurozone system can be downloaded for free at:

To me, it’s remarkable to look back at how far the Eurozone framework has moved since the crisis began. The initial position was that there would be no bail-outs and no monetary financing, and that the system would rely on “market discipline” to enforce fiscal sustainability at national level. We have now moved to a position where bail-outs are available, ECB bond-buying is available, and controlled write-offs of government debts have been permitted, all subject to conditionality that is no longer enforced by markets but by EU institutions themselves. That is a very substantial shift, although it has taken 2 years to occur. Notably, progress on the political front has slowed considerably since Draghi took the pressure off by introducing OMT (not to say that step wasn’t necessary).

It remains to be seen whether the current model, in which national governments ostensibly control fiscal policy but are policed by EU institutions (and by ESM conditionality if they require bail-outs or OMT), is a workable substitute for a proper Eurozone level fiscal authority. The Italian elections suggest it may not be, although we don’t know the final outcome there yet. It is inevitable that many will portray this model as a “foreign” imposition, and citizens may ultimately reject it. If that occurs, EA politicians will have a hard time finding the next stone to leap to.

Tbh, I think that it’s a particular simplistic article full of broad statements about single issues. The author seems to attribute all the countries’ political turmoils to the EU austerity policy without considering any established precedents. It’s like saying that Fianna Fáil’s electoral collapse was ONLY because of the troika’s austerity policies.

@ PR Guy
This couldn’t be legal. If the bank could not foresee some changes in capital requirements etc over a 30 year period then it was trading incompetently and should be simply made take the hit. There is an argument that they sold faulty products in the first place and they should be made liable for any losses incurred by the purchasers as a result of this action.
Hope the Brits take them to the cleaners on this one (don’t think we’re going to pick up more tabs for BOI either)

skeptic01 and Marky make some good points above.

People who like their economics in soundbite chunks, of course have the simple narrative and the Italian election was a rejection of austerity.

It is not unusual for electorates to reject tax rises and spending cuts.

Tony Barber in the FT said: “It is being read as the repudiation of austerity, but Italy’s inconclusive election is so, so much more than that. The election that made Beppe Grillo, an anti-establishment blogger-comedian, leader of the largest parliamentary force in terms of votes cast was an election that passed a damning verdict on Italy’s corruption-infested political party system.”

Berlusconi first came to power in 1994 in similar circumstances, following the collapse of the traditional right and left parties amidst stories of massive corruption.

The fact that almost a quarter of Italian voters still chose his party, and nearly a third backed his coalition, months after being found guilty of tax fraud and while facing a pending case of child sex and prostitution, tells its own story.

What economic policy were they supporting? A national gambling tax and amnesty for tax dodgers with money in Swiss banks.

Berlusconi with the help of his media is good at running for office. The reluctant Mario Monti couldn’t compete at this level.

Tyler Cowen commented last year: “austerity is a misleading and often misunderstood word. It is better if we describe policies more concretely, and in fact that is not hard to do. Furthermore, insisting on a clearer accounting should not be equated with ‘austerity denial.’”

Taxes on the well-off come under that umbrella and from a low base in Ireland. IBEC was making its case today that its folk have suffered enough. In the US, raising the wealthy people’s most common taxable rate from the punitive level of 15% was an attack on ‘job creators.’

This is not to argue for slash and burn policies.

Mazower writes: “It is possible that southern Europe will give the Germans until the autumn to come around to a new approach. But toleration for austerity is unlikely to last much beyond then.”

This highlights the problems with lack of specificity as the people who are taking the brunt of austerity will never be heard by Mazower and so many more like him.

Before the crash, in several countries, the social model was being supported by the development of dual labour markets and there wasn’t a tweak to be heard from the various branches of the elite including the media.

Mario Draghi said yesterday: ‘Fairness starts within countries.’ He could have been talking about Italy or Ireland.

It always is easier to set sights on what is not under our own noses.

Even after a recovery, battles within countries on the sharing of resources will continue.

Michael Hennigan: People who like their economics in soundbite chunks, of course have the simple narrative…

Hmmm. Who does this remind me of? Drawing a blank here. Anyone? Anyone? Bueller?

@ Ernie Ball

Thanks! I’m taking the rest of of the day off.

@ All

More democratic accountability in Europe is seen by some as an answer but people also don’t seem to like having outsiders holding them to account.

What if pesky Europeans started to make a song and dance about the Irish helping to divert as much as €50bn of their taxable business revenues each year?

What the ‘anti-austerity’ clowns won’t accept (because to do so would require a long look in the mirror) is that the damage is not being done NOW, it was done a long time ago, when Keynesian maniacs like Gordon Brown were in charge.

From today’s IT. HSE to reduce health spending by €721 million this year, shedding almost 4,000 posts this year.

And yet the unions who played a central role in the disastrous birth of the overstaffed, overpaid, profligate HSE will accept no blame for the current crisis.

The sad little war between economists should be ignored. Academics need to focus on the real questions of importance to European citizens in the wake of the crisis. For example, how do we build health systems to be resilient to the economic cycle?


To answer the question.You can’t – and that’s the actual problem – to quote the aforementioned Gordon Brown -“to bring an end to the boom and bust economic cycle..” – this is a myth.

Booms and busts are absolutely necessary for the long term as it forces change which forces change etc etc and the cycle continues. The biggest myth of all was the era of the so called ‘Great Moderation’ as this merely ensured change was kept at bay because the credit creation madness that allowed it so. We all know the consequences and outcomes of that particular policy.

Govts are just another cog in the economic wheel and their costs will suffer in line with the general economy so trying delude oneself that Govts can somehow build organisations that live outside the norms of the cycle is well, daft squared.

What we need to strive for is boom times that are significantly less boomy than we’ve witnessed and busts that don’t leave 25% plus of those unfortunate to be aged less than 25 without a job.


Indeed and we wonder why the number and levels of comment here is fading by the day when such intemperate language is used. Clowns and maniacs and saddos oh my…

Like the communists and wobblies before them, the 5-star movement can be easily dealt with by propaganda, goon squads, smear, and subterfuge. So the 5-star movement is not going to be the cause of a breakdown in deomocracy in Italy. The response of Italy’s political class will be.

The democratic endgame in Europe is not difficult to navigate. Populations will eventually kick, threatening to uproot their incompetent political classes. Faced with the prospects of, albeit peaceful, democratic revolution, the political class will be faced with a choice: a) accept the will of the people, retire gracefully, and allow a new breed to finally fix these mess or b) terrified by the prospect of losing power, and of later being held to account, fight tooth and nail to stay in power and control.

In Greece, we are seeing the rise of old fascism, probably tacitly backed by the existing political class as a backstop in case of a democratic revolution. In Italy, we may shortly begin to see similar developments. Even in Ireland, we are seeing the re-emergence of conservative organisations once thought vanished during the boom.

Societies react. The scary thing may be that such reaction is entirely unconscious. Predictable, but unconscious. If so, all it will take for trouble to really begin is a few unscrupulous leaders willing to consciously direct the proceedings.

This is a stonker from the New York Review

Why TARP generated so much political anger, why Geither couldmn’t care less about foreclosures and why the US economy is so weak as a result

“The nation is still undeniably living with TARP’s flaws. Bank lending even as late as the fall of 2012 had still not reached the levels of late 2008. Thirteen or fourteen million home owners are still underwater. Four million have already lost their homes. Many people remain angry about the failure to hold bankers responsible—no major banker has been criminally prosecuted for the financial fiasco. It will be hard to bail out the system again should a new crisis occur five or ten years from now.

Moreover, the financial community has not been reorganized and regulated in ways that give confidence that it will be a productive contributor to the American economy, rather than a danger zone, for decades to come. The crisis could have led to sweeping reform, but that opportunity was wasted.

The fundamental danger to the economy that must be addressed is that the outsize profits to be made from unregulated and ultimately damaging trading and speculation attract money away from the forward-looking investments in American business that can strengthen the American economy and create more jobs. The question for the US today is not merely how to avoid another financial crash but also how to do much more to channel the nation’s precious savings into more productive uses.”

@ All

The Bundesrat, where the opposition now has a majority, has blocked adoption of the fiscal act pending agreement between it (i.e. the Laender) and the Bundestag on improvements in the allocation of funds between them and the central federal government.

Merkel is reportedly over the moon.

Monti is reported as not being best pleased – as well he might – at sticking to the budgetary targets set for 2013 when others i.e. Hollande have asked for delays. The new Dutch government is also, it seems, about to do the same thing.

@ All

For “act” read, of course, “pact”. The new majority has also passed a proposal for a statutory minimum wage (€8.50 an hour) which puts it up to the CDU/CSU and the FDP.

Such an outbreak of political common sense is unusual. Too late for Monti, however.

Mazower is preaching to some of the converted; democratic legitimacy is certainly under threat when the Financial System captures EZ Governments to act in the Financial System’s, rather than the Citizenry’s, interests.

Locally, FF, FG & Lab have been captured.

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