Were we to take this ideas‐rich definition of austerity at face value, we would think the so‐called “troika” — the group of international lenders that forces austerity upon peripheral European Union member states — traveled with Adam Smith at hand.
Such a definition tends to overlook the fact that the austerity packages imposed by the European Commission, the International Monetary Fund, and the European Central Bank are, shall we say, less than linear from an intellectual standpoint. The case for “expansionary fiscal austerity” developed, actually, in studies that aimed precisely at discriminating between different kind of fiscal consolidation. In the Euro‐crisis, austerity measures have been at best a mix of some spending cuts and tax increases. To be sure, Keynes would disapprove of both, but Hayek wouldn’t agree with the latter.
Professor Blyth rails against a more coherent set of ideas, those typically associated with a “classical liberal” (or sometimes “conservative” in the American sense) position. These ideas are “dangerous,” according to him, because they ignore the externalities they generate. That is, spending cuts reduce the disposable income of the middle and lower middle classes.
The book opens with a succinct narrative of the U.S. financial crisis but quickly moves to the migration of that crisis to Europe. Blyth argues that, although European countries typically sit “left of the U.S.” politically, they acted “right of the U.S.” economically, in the crisis, because they built a banking system “too big to bail, which is the real reason why a bunch of putative lefties are squeezing the life out of their welfare states.” The hypothesis that “too big to bail” systems might be the result of mistaken policies, stemming from regulators’ off‐kilter assumptions and lack of accurate information, escapes consideration here.
That European governments are “squeezing the life out of their welfare states,” moreover, seems a bit exaggerated. In 2013, public spending as percentage of GDP was on average 49.4 percent in the Eurozone.
Still, the overwhelming fear for the stability of the banking system could well explain the behavior of the European elites in the crisis. Such an explanation would require a cool‐headed investigation of the tangle of interests and incentives involved, and a closer look into the European banking system, which is largely, in countries like Italy, Spain, Germany and France, directly or indirectly controlled by politics — and heavily regulated everywhere. Alas, Professor Blyth prefers to immerse himself in the more exciting history of economic and political thought. For him, austerity becomes an all‐purpose political explanation of the evils of the world.
He sees “austerity at work” in the 1920s and 1930s all over Europe, and blames on it the emergence of National Socialism. Hitler, he believes, won Germans’ minds and hearts with stimulus policies. “The fact that this turn against austerity took a particularly murderous direction in Germany,” he writes, “does not invalidate the basic point that austerity didn’t work.”
Such a one‐dimensional explanation of very complex political phenomena can hardly be taken seriously.
More interestingly, echoing Barry Eichengreen’s work, Blyth sees any monetary “straightjacket” as inherently incompatible with democracy. That democratic polities, in the last century, showed a certain tendency toward fiscal profligacy is a point often made and certainly worth exploring. But I found rather bizarre the idea that this should be seen as a simple natural fact to be accepted, rather than a problem that deserves to be addressed at the level of constitutional design. Pace Blyth, not seeing democracy “as an end in itself” doesn’t necessarily mean considering it “an inflation‐causing pathology from which only rules, not discretion, can save us.”
Also, whatever friction may exist between fiscal responsibility and democracy, it is not immediately clear why fiscal profligacy should be a positive catalyst in democratic life. Latin American politics, for example, abound in examples showing exactly the opposite.
For all that he cares about ideas, Blyth surprisingly lacks the precision that one should expect from a student of the history of thought. I will provide just two examples.
He maintains that the Italian classical liberal economist Luigi Einaudi embodied the very essence of the Euro‐austere spirit. Indeed, Einaudi argued for a version of European federalism, believed in sound money, and was a champion of fiscal responsibility. He was briefly treasury minister and then governor of the Italian central bank, after World War II, before being elected president of the Republic. His legacy didn’t seem to hold in Italy, at least if you consider the country’s dismal record of fiscal profligacy and inflationism in the second half of the 20th century.
Blyth argues that