Governing by Panic

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.