The Lost Continent by Gavin Hewitt

The challenge with European democracy is its constantly shifting notions of demos - who are the people who should exercise political determination. The current Euro crisis - and the ensuing imposition of austerity policies on Greece and Ireland, Spain and Italy - demonstrate a democratic irony. As Gavin Hewitt points out, there is nothing democratic about the adoption of austerity; austerity is not a lifestyle choice struggling countries freely assume. The Euro crisis precipitated changes of government (left to right and right to left) in the affected Member States and fierce popular backlash. Yet Angela Merkel, the physician prescribing austerity to faltering countries, responds to democratic signals given by her German electorate (who balk on bailing out their neighbors). Hewitt constructs a story where the democracy of Germany is pitted against the democracy of Southern and Peripheral Europe. 

The Lost Continent focuses on national stories - and national leaders - and so at times has the feel of a tell-all. Silvio Berlusconi, to no-one’s surprise, comes off the worst. His cynical disregard for anyone’s interest saves his own marks, a new low in post-War Italian politics. Imagine how Angela Merkel felt upon receiving his ‘political’ advice to take on a lover. And even more respectable characters, such as Sarkozy, engage in behind-the-back smirkiness with regard to Merkel. But much of the focus falls on Merkel herself; we’re never quite sure whether she is (as she claims) acting just like a Swabian housewife, guided by common-sense and prudence, or whether she is the instrument of peculiar German obsessions outside her control.

And so The Lost Continent is to a great extent a German story of Europe (the UK barely figures). Germany is able to impose austerity on its EU partners because it is German resources that largely fund the rescue. Germany’s economic primacy permits it an outsized influence in contemporary European affairs - Hewitt and various of his informants note that Germany may be more powerful than ever. Germany has benefited from this new Europe; its products are consumed throughout. Its economic success permitted the reunification of Germany, an enormous political and social success (ironically, Merkel developed her political skills in the East).

Austerity: The History of a Dangerous Idea by Mark Blyth

There is nothing ambivalent about Mark Blyth’s view of austerity: he is against it. Blyth’s Austerity is more than a brief against today’s accepted form of treatment for all that ails a slumping economy - it is an intellectual history of a powerfully attractive idea, though in Blyth’s view, a dangerous one. Austerity fails for a number of reasons: it is unfair (it hurts the poor), it cannot be pursued simultaneously by all (someone must spend to ignite economic expansion), and (most damning) history shows it doesn’t work.

Blyth admits to being a Keynesian. There is no shame in that: many neo-Keynesians are calling for an end to austerity. Blyth states, however, that he need not prove Keynes right (“for what it’s worth, he was right, but that’s in another book”); his goal here is simply to prove austerity wrong.

While austerity figures in contemporary U.S. politics, it is predominantly a European fix and fixation, famously imposed on Greece, Spain, Ireland and Portugal as a condition for European and IMF support in response to the Euro Crisis. Blyth begins the book by correcting the dominant narrative: Greece aside, the Euro Crisis did not originate by reckless government spending, but in private irresponsibility. Excessive private sector lending (provoked by cheap borrowing costs associated with the adoption of the Euro) sank the banks in Ireland and Spain (and their respective economies); the states became indebted in attempting to clean up the mess. Setting this history right is important -- as part of the moral authority for the imposition of austerity is a judgment of state fault. Austerity is not merely an economic prescription -- it is a punitive response. As Blyth points out, there was little else Spain or Ireland could have done. Their banks were not only too big to fail; they were "too big to bail" -- that is, their liabilities were beyond the state’s capacities to absorb. Hindsight suggests the better course might have been to abandon the banks -- but that course would have presented other grave difficulties. By shouldered bank indebtedness, several European states wildly exceeded the European limits on budget deficits and overall indebtedness. So why, Blyth asks, is the Euro crisis consistently described as a sovereign debt crisis? One must blame the state in order to justify the imposition of austerity.

Volcker: The Triumph of Persistence by William Silber

So what would a Democrat central banker look like -- if there could be one? Resembling Paul Volcker, answers William Silber. That said, it is hard to recognize much in Volcker's policies marking him as a Democrat. Nixon did not trust him -- but that alone scarcely defines a Democrat. Volcker famously endorsed Barack Obama in the 2008 election -- but then so did Republican Colin Powell.

Silber adores Volcker -- which weakens Silber's ability to answer (or even ask) tough questions. It is clear that Silber believes Volcker saved the dollar -- and that he is a swell guy to boot. Pity poor Mrs. Volcker who spends an isolated life in a series of ratty apartments while her husband chases glory (in public service, mind you) rather than wealth. Neither Volcker nor Silber seem to realize what a lousy husband he was -- and Mrs. V. was too tactful to point this out.

The Silber account establishes Volcker's self-sacrifice -- and I suppose there's some foundation for it. Volcker spends many years as an underpaid public servant while having far more lucrative opportunities in the private sector. Yet one gets the sense that Volcker is simply more comfortable in the world of the Fed than he would ever have been in a bank. Generals are willingly generals -- there is something (glory? military music?) that draws them to their role. Their renunciation of wealth and a stable home-life only prove their ambition. While we should be grateful for their service, it is not clear that the generals are sacrificing anything. And so perhaps it is with Volcker.

There's good character present -- Volcker likes cheap cigars and hates potted plants. He doesn't really care about his shoes -- and silently worships confident political stars like John Connally. His devotion is peculiarly institutional: not to the United States, but rather to the Fed and its mission, as he perceives it, protecting a sound dollar. Silber's worshipful treatment of Volcker places Volcker's character in the center. The fundamental excellence of who Paul Volcker is (an excellently common man) spills over into his professional life. The strange mixture of talent, insecurity and ambition suits him to his mission.

Paper Promises: Debt, Money and the New World Order by Philip Coggan

As its subtitle suggests, Philip Coggan's book examines the relationship between debt and money and its implications for the 21st century economy. Coggan takes us through familiar territory (the nature of money) and familiar debates (Keynesianism vs. monetaristm), yet offers a novel framing that make this book a valuable read.

Coggan has an unusual view of the fundamental divide in political economy. Rather than seeing class struggle everywhere, Coggan treats the conflict between creditors and debtors as the central fracture motivating politics, though he notes that -- all things being equal -- creditors tend to be wealthier (and fewer in number) than debtors.

In speaking of debt, Coggan slides (perhaps too easily) between private and public debt. The debt that interests Coggan is the burgeoning debt that tends toward default (as opposed to the under-remarked debt that is extinguished by repayment in the ordinary course). This is the persisting debt that in usual times is rolled over upon each maturation. He writes of unsustainable debt -- again, both private and public -- that will of necessity lead to some degree of default. In the case of public debt, the default scenarios include -- importantly -- devaluation, a course open to most states to reset the exchange value of the money in which a debt is expressed and thus unilaterally reduce the value of the debt (as expressed in some other value, such as gold or a harder currency).

For most states, there is a limit to this strategy. Devaluation has consequences. It may throttle domestic expectations, igniting inflation. And devaluation -- in a global society -- has consequences, distributing at least some of the lost value to other countries (by readjusting the terms of trade) as well as to the disappointed creditors. Devaluation will also make future borrowing more difficult.

But -- of late -- there appeared the possibility for at least one country to escape the devaluation trap. The United States has enjoyed an extraordinary privilege, in that its currency seemed to be highly valued notwithstanding its horrific trade deficits. This reflects its historical (though waning) primacy in world economic affairs. What matters now is the role of this particular national money as place for storage of value: China (as do Japan and others) continues to re-funnel its vast export earnings into dollar-denominated obligations of the U.S. Treasury, thus keeping prevailing U.S. interest rates low. Exchange values may reveal more about capital flows than trade balances, Coggan argues.

This perceived signal within the U.S. economy is a green light for expansion. Prior to the 2007 financial crisis, this green light released a frenzy of asset acquisitions, including the real estate bubble. And even now, the continued low interest rates may serve to mask the severity of the U.S. debt crisis. Confronting the debt crisis may be postponed (though not avoided) through the simple expedient of increasing the U.S. money supply.

Money today is simply debt, Coggan reminds us. Money has been detached from its historic anchors (precious metals), as each sovereign seeks to discover the sweet spot between too little and too much money. The likely course is one of oscillation, where the costs of each extreme is regularly felt. Post-crisis austerity, while an upright policy, may lead to a downward spiral, as consumers pull back current expenditure to service debt (their own and, via taxes, those of the state), magnifying economic contraction. And too much debt can drive away the creditors -- the monolithic bond market James Carville fears -- as they come to believe that 'borrowing' is just a ruse to transfer their accumulated stores of wealth to others. Better to hoard (if that remains possible).

Moving debt into the future has been a viable strategy - but it resembles a Ponzi scheme, in that success depends in part of an increasing number of new players, the upcoming generations. Their ability to work off the burdens of their grandparents may depend on the prospects of their grandchildren, and so on. But the intergenerational strategy seems to have limits as well, as advanced economies (such as the United States, Japan and Europe) feature extremely low population replacement rates. In an odd way, pushing the U.S. debt back onto China (through a devaluation of the dollar against the renminbi) has both an international and an intergenerational aspect, given China's continued projected population growth.

Coggan paints a rather bleak future, involving inevitable U.S. decline. More crisis is ahead, as the mountain of public and private debt is either devalued or postponed - or results in outright default.