States debt and power saints and sinners in european history and integration

Part I Debt and Political Rule in European History4 The Evolution of Public Debt 5 Financial Repression, Debasement, and the Historic Arc of Default 6 Theological Traces and Social Conte

States, Debt, and Power: 'Saints' and 'Sinners' in European History

and Integration

Kenneth Dyson

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(p.v) With thanks and love to my son Charles George, for reminding me of what is most important in life.

Title Pages Dedication [UNTITLED]

Acknowledgements List of Tables List of Abbreviations Archival Sources

1 Contextualizing Debt

2 The Nature of Sovereign Creditworthiness

3 Moralizing Credit

Part I Debt and Political Rule in European History

4 The Evolution of Public Debt

5 Financial Repression, Debasement, and the Historic Arc of Default

6 Theological Traces and Social Contexts

7 The Dynamics of Public Debt in Historical Perspective

Part II Law, Culture, and Statecraft

8 Law, Public Debt, and the Paradoxes of Power

9 Economic Cultures, Ideologies of Debt, and State Virtue

10 Space, Time, and Statecraft

Part III State Liability and Territorial Control

11 States and Financial Markets

12 Professional Consensus, Political Silence, and Sovereign Creditworthiness

13 The Dynamics of External Imbalances and Debt

14 Which Truth? The Power of Numeric Indicators and Probabilistic Reasoning about Public Debt

15 Public Debt Dynamics

16 Public Debt and Multilevel Statehood

Part IV Sovereign Creditworthiness and European Integration

17 Still the ‘Old’ Europe? Historical Legacies and Long-Term Political Challenges

18 The Achilles Heel of Post-War European Integration

Epilogue

Glossary References Name Index Subject Index

(p.vi) The writer today should be not so much the mouthpiece of a community (for then

he will only tell it what it knows already) as its conscience, its critical faculty, its generous

instinct Louis MacNeice (1938), Modern Poetry: A Personal Essay (Oxford: Oxford

University Press), preface, iii

Never take a risk that you cannot afford to lose Unattributed ‘golden rule’ of investing

(p.vii) Acknowledgements

Paraphrasing the French poet Paul Valéry, a book is never finished, only abandoned.Nevertheless, this sense of incompleteness and loss has its compensations It provides mewith the opportunity to thank all those who have contributed, in their various ways, tohelping make this book possible My debts are numerous, many contracted in longdiscussions with kind and patient colleagues

The stimulus to work on the book came from the Sixth Framework Programme of theEuropean Union (EU), Priority 7, Citizens and Governance in a Knowledge-Based Society(CIT3-CT-2005-513421) This research project grant helped me to undertake the initial,

exploratory research In writing European Economic Governance and Policies (Oxford

University Press, 2010), with Lucia Quaglia, I unearthed a number of historicaldocuments that highlighted the significance of creditor-debtor state relations in shapingEuropean macroeconomic governance Study of neglected Bank of England and HMTreasury documents of 1931–1932, alongside the much-better-known Keynes’ documents

of 1933–1944, led me to rethink longer-term patterns in European macroeconomicgovernance Looking back at the role of creditor-debtor state relations in Europeanhistory posed the question of how far these relations have been reframed and formalizedwithin a ‘new Europe’ The book began life as an exercise in pattern detection, in tracingand teasing out continuities and changes in European macroeconomic governance overtime

I benefitted from scores of elite interviews in Amsterdam, Brussels, Berlin, Frankfurt,London, Luxembourg, Paris, and elsewhere, conducted on terms of anonymity andconfidentiality They led me to identify and examine the informal ‘creditor-state club’ atthe heart of European macroeconomic arrangements I came to recognize the significance

of this informal club in imparting substance to negotiating the foundations of Europeanmacroeconomic arrangements, in setting its historic trajectories of path-dependentbehaviour, and in exercising disproportionate influence on crisis management This bookwould have been much weaker without the frankness, patience, and good will of theseinterviewees

In writing a book that grounds historical and political analysis in a great deal of economicand technical argument and detail, I have accumulated many debts of gratitude Veryoften, friends and colleagues, in and outside academia, will be unaware of just howhelpful they have been They have not just supplied me with papers, documents, andhistoric data sets They have forced me to clarify my thinking Above all, they havebolstered my confidence in crossing disciplinary boundaries and in reassuring me aboutthe value of history in enlightening policy-makers They have also shown me theimportance (p.viii) of engaging with the moral and emotional aspects of debt Debtevokes complex and powerful sentiments of guilt, shame, fear, humiliation, resentment,and anger Popular emotions, and their manipulation by governing elites, complicate thepolitics of sovereign debt crises They give it a fragile and indeterminate nature that

macroeconomic modelling cannot internalize This interest was stimulated by colleagues

at Cardiff University, notably Paul Crosthwaite, Kate Griffith, Bruce Haddock, and MartinKayman, as well as by Noel O’Sullivan at Hull University In their own individual ways,friends and colleagues have helped to shape and correct my thinking However, they arenot accountable for errors of fact and judgement that may affect this book These errorsremain entirely my own responsibility

I am hugely indebted to those who have helped me to track down historical debt data OnBelgium and the Netherlands, I was assisted by Ivo Maes (Catholic University of Leuvenand National Bank of Belgium); on France, by Guillaume Daudin (University of Lille 1and Sciences Po, Paris) and Nicolas Jabko (Sciences Po); on Germany, by Klaus Deutsch(Deutsche Bank); on Greece, by George Pagoulatos (Athens University of Economics andBusiness); on eighteenth-century Ireland, by Aidan Kane (NUI Galway); on Italy, byMaura Francese (Bank of Italy) and Francesco Stolfi (Exeter University); on the OttomanEmpire, by Şevket Pamuk (London School of Economics); and on Spain, by FranciscoComín (University of Alcalá, Madrid) My insights into the history of public debt weregreatly enriched by the advice of Erik Buyst (Catholic University of Leuven), JackHayward (Hull University), Scott Newton (Cardiff University), and Helen Nicholson(Cardiff University)

With respect to the complex relations between public debt, macroeconomic theories, andfinancial markets, my debts are again too numerous to catalogue However, a few peopledeserve special mention Ivo Maes has been enormously generous with his time.Hanspeter Scheller (formerly the European Central Bank and the Bank for InternationalSettlements) helped me greatly in shaping my thinking On a more practical level, I

remain indebted to the research officers who worked on the two-volume European

Economic Governance and Policies—Ruth Mullineux, Martin Pasiak, Marc Pollentine,

and Katja Seidel My invaluable guides to research on financial journalism were GaryMerrill (Goldsmiths College London) and Damian Tambini (London School ofEconomics) More generally, Graham Bishop, Michael Moran (Manchester University),and Lucia Quaglia (York University) offered helpful guidance on financial markets andpublic debt

Dealing with the complex relationships between law, debt, and statecraft was made mucheasier by the good advice I received from Dorothee Bohle and Bela Greskovits (both at theCentral European University, Budapest) The subtleties of the law were unravelled for me

by Ioannis Glinavos (Reading University), Jiri Priban (Cardiff University), and MichaelWaibel (Cambridge University)

My work on sub-national fiscal governance benefitted hugely from the advice of MassimoBordignon (Catholic University of Milan), Alistair Cole (Cardiff University), MarkDonovan (Cardiff University), Kyle Hanniman (University of Madison Wisconsin),Michael Keating (Aberdeen University), and Wolfgang Renzsch (Magdeburg University).Through the complex writing and revision process I have once again been supported by

the patient guidance and practical support of Dominic Byatt and his colleagues at OxfordUniversity Press As with my previous books on the history and politics of

t h e (p.ix) euro, they have helped steer this book from its early beginnings to finalproduction Dominic has been throughout a source of great reassurance as well asexcellent technical advice In addition, I have benefitted inestimably from the anonymousreviewers for Oxford University Press As only they will know, their influence has beenconsiderable

Inevitably, the greatest pleasure of all resides in expressing my most personal thanks.Colleagues at Cardiff University have been a source of continuing intellectual stimulationand congenial company They have provided me with the happiest years of my academiclife

Above all else, however, my family remains the firm, loving foundation on which thisbook and my academic career have been built As a young academic, my parents, Arthurand Freda, were always there to support me The joy of my life has been to share it with

my wife Ann and with our two wonderful boys, Charles and Thomas They have enriched

my life beyond measure We three have been beneficiaries—along with all our friends—ofAnn’s unfailing love, affection, and kindness

Kenneth Dyson

Cardiff University

November 2013 (p.x)

(p.xiii) List of Tables

4.1 British National Debt, 1702–1920 121

5.1 Top Twenty Currency Debasements in Europe, 1258–1799 130

5.2 Top Currency Debasements in Europe during the Nineteenth Century 131

5.3 European States in the World Top Defaults and Reschedulings between

5.8 Country Distribution of the Outstanding Ottoman Debt, 1881–1914, in Millions

of Pounds Sterling, in Percentages 148

5.9 Greek Domestic Debt, External Debt, and Total Debt, 1843–1914 152

5.10 Debt Erosion through Inflation in Europe, 1500–1799 156

5.11 Debt Erosion through Inflation in Europe, 1800–2006 157

7.1 Historical Data on the US Federal Debt, 1790 to 2000, as Percentage of GDP 1997.2 French Public Debt/Total Revenues and Debt Interest Rates, 1815–1914, in

Millions of Old Francs203

7.3 French Public Debt as Percentage of Total Revenue, 1815–1914 204

7.4 French Debt Interest Payments as Percentage of Public Expenditure, 1815–

1869 205

7.5 Debt Burden and Debt Structure in the Austro-Hungarian Dual Monarchy,

1880–1895 206

7.6 Belgian Public Debt/GDP Ratio, 1835–2009 208

7.7 Dutch General Government Debt/GDP Ratio 1815–2005 209

7.8 Prussia and German Reich Public Debt/GDP Ratios and Per Capita Public Debt

in Marken, 1794–1913 211

7.9 Public Debt of German Empire 1877–1945, in Millions of Marks 212

7.10 Public Debt of the German Empire, Per Capita of Population in Marks 213

(p.xiv) 7.11 German Public Debt 1950–2009, as Percentage of GDP and as Debt PerCapita 214

7.12 English/British National Debt 1688–1817 215

7.13 UK National Debt Since 1855 216

7.14 Italian Public Debt Since 1861 222

7.15 Spanish Public Debt Since 1850 226

7.16 Net Impact of Financial-Sector Support on General Government Gross Debtand Contingent Liabilities in Euro Area Member States, 2008–2012, as Percentage

of GDP 230

10.1 Typology of Creditor and Debtor States 292

10.2 Size in Creditor-Debtor State Relations 300

10.3 Typology of Instruments of Statecraft 303

12.1 Largest Sovereign Wealth Funds, by Assets under Management, May 2013 38813.1 Current Account Balances, as Percentage of GDP, 2009 423

13.2 International Patterns of Savings, 1988–2009 427

13.3 Gross Household Savings Rate, Selected EU States, 1999–2008 428

13.4 Unit Labour Cost Development, in Manufacturing, 1992–2011 430

13.5 Unit Labour Cost Development in EU and Euro Area, Average Annual

Percentage Changes, 1996–2012 430

13.6 EU and Euro Area Inflation Differentials, Annual Percentage Changes in

Harmonized Index of Consumer Prices (HICP), 1996–2012 431

13.7 IMF Heat Map of Macro and Financial Indicators: The Most Vulnerable

European Emerging Market Economies, 2010 433

13.8 Global Financial Flows: Amounts Outstanding and Net Issues of InternationalDebt Securities, in Billions of US Dollars, 2004–2008 434

13.9 Gross and Net External Debt Indicators for Key States, Percentage of GDP,

2006 and 2009 435

13.10 Ratio of External Debt to GDP, as Percentage, 2002–2009 436

13.11 The World’s Top Twenty Biggest Debtor States: Gross External Debt to GDP,

13.17 External Positions of Banks in Foreign Currencies vis-à-vis All Sectors, in

Billions of US Dollars, December 2009 443

(p.xv) 13.18 Net External Positions of Banks in all Currencies vis-à-vis all Sectors,

in Billions of US Dollars, December 2007 and December 2009 444

13.19 Foreign Claims of Banks on Individual European Countries, in Millions of USDollars, End December 2010 and End December 2012 445

13.20 EU Banks’ Exposure to Greek Institutions, 2010 445

13.21 Exposure of Banks Headquartered in Euro Area to Sovereign Debt of Greece,Ireland, Portugal, and Spain, Totals and Compared to Tier 1 Capital 446

13.22 Ratio of Reserves to Imports of Goods and Services, 2002–2009 450

13.23 Time Series Data on Key International Reserves and Foreign Currency

Liquidity Official Reserve Assets, in Millions of US Dollars at End of Month, 2009–

2010 451

13.24 Foreign Official Reserves: Annual Data for Selected EU States Outside theEuro Area, 2002–2009 Total Reserves Including Gold in Millions of Euro 453

14.1 The Development of Debt in Selected Euro Area States and Sizeable

Government Debt Reduction, as Percentage of GDP 467

14.2 IMF Statistics on General Government Deficits/Surpluses, Selected States, asPercentage of GDP, 2002–2009 468

14.3 General Government Deficits/Surpluses in EU, as Percentage of GDP, 2002–

15.2 Public Debt in EU, as a Percentage of GDP, 2002–2012 492

15.3 Public Debt Accumulation in Euro Area Member States, as Percentage of GDP,1999–2007 and 2008–2012 493

16.1 Sub-National Fiscal Power 516

18.1 Annual Net Deficits or Surpluses under the European Payments Union: 1 July

1950 to 27 December 1958, in Millions of US Dollars 603 (p.xvi)

(p.xvii) List of Abbreviations

European Financial Stability Facility

International Swaps and Derivatives Association

(p.xxi) Archival Sources

The book has benefitted from access to various indispensable data sources The singlerichest general historical source remains the monumental reference work of Angus

Maddison, The World Economy, in two volumes (OECD 2006) However, it is more

useful for GDP statistics than for national debt More relevant for historical data is theEuropean State Finance Database, which was originally created by Professor RichardBonney (http://esfdb.websites.bta.com) There are also some useful, more time-limiteddata sources They include the League of Nations Archive in the United Nations Office,Geneva, as well as the more complete and consistent European time series data available

(http://ec.europa.eu/economy_finance/ameco/user/serie/SelectSerie.cfm)

The data bank HISTAT of the GESIS-Lebnitzinstitut für Sozialwissenschaften is anindispensable source of historical data on public debt for the nineteenth and twentiethcenturies Schremmer (1994) is an additional useful general source on public debt inBritain, France, and Germany before 1914; Comín (1996, 2012) provides data on Spanishpublic debt since 1850; whilst Güran (2003) is invaluable for Ottoman fiscal data The UKOffice for National Statistics has a data series for Britain’s national debt as percentage ofGDP going back to 1855 (Government Statistical Service 1999: 46) Various sources onItalian public debt have been traced back to unification (1861) and consolidated

in Francese and Pace (2008) They identify its central and local, and short- and long-termcomponents Although they present Italian public debt in absolute figures, they makesome attempt to relate public debt to GDP The Bundesbank (1976) provides German data

on public debt from 1877 to 1945, breaking it down into its various components (federaland state, long and short term) However, the German data is expressed either inmonetary terms (like Italian) or in per capita terms Hence it is not readily comparablewith British data which is expressed as percentage of GDP

I have made use of the copious post-1945 statistical series available from the

F r e n c h Institut de la statistique et des études économiques (INSEE), the German Statistisches Bundesamt, the Italian Banca d’Italia, the UK Office of National

Statistics, and the US Congressional Office for the Budget The 1997–1998 East Asian andRussian debt crises were important in highlighting the interconnectedness and theopacity of creditor-debtor relations In their wake the Bank for International Settlements(BIS), the International Monetary Fund (IMF), and the World Bank worked to introducegreater consistency, transparency, and comparability into data on external debt InEurope, Economic and Monetary Union (EMU) was a major catalyst for the EuropeanCommission, (p.xxii) the Statistical Office of the European Communities, and later theEuropean Banking Authority (EBA), to pursue the same objectives, notably the

annual Public Finances in EMU The statistical series of these bodies enabled a more

complete picture of European public debts to emerge Similarly, the annual reports onsovereign bond outlook produced by the Organization for Economic Cooperation andDevelopment (OECD) are invaluable for data on sovereign bond issuance and regional

breakdown The EU bank stress test also generated new data on exposure of banks tosovereign debt, especially in cases like Greece (e.g Committee of European BankingSupervisors (CEBS), Aggregate Outcome of the 2010 EU Wide Stress Test Exercise, 23July 2010).

Other useful data sources on contemporary debt figures include the various national debt

management offices They include L’Agence France Trésor, the Irish National Treasury Management Agency (NTMA), the Italian Dipartimento del Tesoro, the Portuguese IGCP, and the Spanish Tesoro Público Other helpful sources include the German Federal Finance Ministry Monthly Report; the Greek Ministry of Finance, Hellenic Republic Debt

Bulletin; the Bank of Canada Banking and Financial Statistics; and the US

Treasury Monthly Statement of the Public Debt.

However, when one wishes to look at the interactions between public debt and thebroader national accounts, corporate and household, the situation is less satisfactory.Until the first decade of the twenty-first century, creditor and debtor state data on gross,and especially net, external debt have been variable On balance, as the 1997–1998 EastAsian and Russian debt crises demonstrated, the frequency and timely availability of datahas been better from creditor than from debtor states (Bank for International Settlements2002) Analysts lacked a fully comprehensive and consistent measure of total externaldebt, especially of short-term debt in total external financing Gaps included directinvestment, inter-company lending, and domestically issued debt securities held by non-resident non-banks The figures contained discrepancies Data was limited on externalborrowing by the non-bank private sector (companies and households), especially withliberalization of exchange controls; on foreign holdings of debtor state debt securities;and on the short- and long-term maturity distribution of bank debt

The East Asian and the Russian sovereign debt crises of 1997–1998 and the huge, coerciveArgentinean default of 2001 proved turning points The IMF (1999, 2002) and

t h e Institute of International Finance (IIF) (2006)began to concern themselves with

‘principles of fair debt restructuring’ and ‘good faith debtor behaviour’ The World BankGlobal Development Finance Team concerned itself more systematically with sovereigndebt restructuring Even if inadequate for the purpose of offering an early-warningsystem on systemic risks, the new Financial Stability Forum (FSF) began to concern itselfwith monitoring financial risk (Brown 2010) The three major US-based credit ratingagencies expanded their capacity in sovereign bond ratings and in examining defaultissues

Not least, the key international financial institutions––the BIS, the IMF, the OECD, andthe World Bank—sought to draw lessons about the dangers of excessive foreign debt,especially short-term external debt They developed the Joint External Debt Hub (JEDH).Launched in 2006, it replaced an earlier joint exercise begun in 1999 JEDH providesmore comprehensive, detailed, and consistent external debt data so that meaningfulcomparisons can be made However, for the purpose of this book it offers only a veryshort historical picture The quality and comparability of data diminishes as

one (p.xxiii) goes back in time This difficulty is serious because it is important to try toset contemporary events in a longer-term time frame The book has had to make cautioususe of the past data available to us, for instance for Greece and Spain, if only to get asense of how external debt has developed over time in different domestic settings.

The situation with respect to data on public debt has been better within EU MemberStates and EU accession states because of EMU EMU was associated with new datarequirements for the purpose of the excessive deficit procedure (Article 104c and theProtocol on the Excessive Deficit Procedure, the Treaty on European Union, 1992), andconsequent on the creation of ESA 95 (the European System of National and RegionalAccounts) They provided an opportunity structure within which the EuropeanCommission and the Statistical Office of the European Communities (Eurostat) coulddevelop common standards for presenting budgetary accounts (Savage 2005)

However, even in the EU, there is greater consistency in the treatment of gross publicdebt than net public debt, notably due to different treatment of assets (InternationalMonetary Fund 2010c: 15) More seriously, some very important data remained for longpublicly unavailable, for instance on the share of public debt that is held by non-residents(external public debt) Earlier historical data on gross public debt suffers from cross-national and temporal variations in scope and methodology so that again one has to treatdata with caution

Similarly, historical data on foreign exchange reserves are incomplete, for instance theratio of reserves to short-term debt The IMF sought to strengthen transparencyrequirements on central bank reserves, particularly their currency composition However,especially outside Europe, reserve accumulation shifted to sovereign wealth funds(SWFs) in many states with large current account surpluses, especially commodityexporters The governance reforms of SWFs under the Santiago Principles of October2008—agreed under the auspices of the IMF––improved their transparency Since April

2009 coordination was also strengthened with the new International Forum of SovereignWealth Funds Nevertheless, the minimum disclosure requirements on SWFs remainedlow The Norwegian SWF was in this respect one of the most virtuous in the world

Finally, this book has benefitted from considerable advances in theoretical and empiricalresearch on the history of sovereign debt defaults and restructuring Reinhart and Rogoff(2008) remains an indispensable starting point in accessing sources of historicaldata Tomz and Wright (2007, 2012) have examined the economic and political sources ofsurges and the costs of defaults in the 1820s, 1870s, 1890s, 1930s, and 1980s I havesupplemented these sources in two ways First, this book provides more detailedhistorical public debt data on key European states Secondly, it draws on sources thathighlight the specific domestic social and political contexts as well as the internationalcontexts of sovereign debt defaults Domestic context helps understand why, forideological or opportunistic reasons, some governments are more disposed than others toresort to default or financial repression International context shows that coercivebehaviour towards creditors is more likely when global ‘bad times’ of stagnating or falling

economic output affect creditor as well as debtor states States face the unavailability ofcredit when it is most needed. (p.xxiv)

The Perils of Sleepwalking

When the past speaks, it always speaks as an oracle

Friedrich Nietzsche, Untimely Meditations (1876: 93)

This book examines the problem of debt and its relationship to political power over amuch longer historical period than that of the post-2007 crisis and its post-1960s’antecedents Its time frame stretches from Ancient Greece to the euro area It deals withchanging representations of debt and their complex relationship with economic andpolitical realities This time frame helps bring out the roots of the problematic nature ofthis relationship Its problematic nature stems from a proclivity to illusion, hubris, andcomplacency, leading governing elites, financial markets, and households to sleepwalkinto sovereign, corporate, and personal debt crises The value of this approach lies inplacing current debates about the sustainability of the euro area in an historicalperspective It helps to see what is contextually specific to these debates and what isconsistent with long-standing patterns It also avoids the temporal problem of trying toassess a crisis that is far from over and that does not offer an opportunity to look backfrom an historical distance

The Problem of Debt

One of the most striking developments in early twenty-first-century Europe has been theshift of debt to the centre of political discourse This trend was evident in the EuropeanUnion (EU), the euro area, and their Member States In fact, well before the prolongedand existentially threatening post-2007 financial and economic crisis, public financeswere being represented as in a condition of continuing crisis The state’s capacity to makepolitical choices seemed to be increasingly constrained by accumulated implicit as well asexplicit liabilities in pensions, health, and social care (Pierson 2001) These liabilitiesderived from heightened expectations of social entitlements, political competition tosatisfy these expectations, and powerful demographic changes, above all populationageing Accumulating liabilities were not matched by political willingness to

be (p.2) taxed or to make higher insurance contributions or by rates of economic growththat ensured sustainable financing The perception of crisis in public finances washeightened by greater opportunities for tax avoidance and evasion These opportunitiesgrew with international and European moves to capital liberalization They were alsorelated to the size of the underground or grey economy

Even before 2007–2008, governing elites seemed sleepwalkers, caught up in discourses

of ‘tax crisis’, and increasingly of ‘debt crisis’, over which they seemed to have littlecontrol Generational accountancy researchers calculated that in 2012 Germany had animplicit public debt/GDP ratio of 147 per cent, mainly resulting from unfunded social

security liabilities (Moos and Raffelhüschen 2013) Taken together with explicit publicdebt, total German liabilities were estimated at 227 per cent of GDP and as equivalent to

an increase of 11 per cent in taxes and contributions or a fall of 9.4 per cent in publicexpenditure The estimates were even more alarming for Belgium, Britain, France, andthe Netherlands

The post-2007 financial and economic crisis served as a tipping point in helping toprivilege the narrative of ‘debt crisis’ It also confirmed an impression that the scope forpolitical action in the EU, the euro area, and Member States was narrowing furthertowards vanishing point European states and institutions faced the simultaneousimpacts of three interconnected crises: banking crisis, sovereign debt crisis, andmacroeconomic crisis They were caught up in the potentially deadly embrace of thesovereign-debt and banking-crisis nexus Shaky bank balance sheets threatened thesolvency of their sovereigns, whilst banks risked being brought down by sovereigns, towhose debt they were overexposed Public finances became further impaired by bank bail-out costs and by contingent liabilities within the financial system In addition, fiscalbalances registered the negative effects of credit contraction and macroeconomic crisis.Sharply contracting tax revenues coincided with heightened pressures on public spendingfrom unemployment Political and electoral arguments abounded about theirresponsibility of banks, about growing economic and social inequality, and about threats

to social justice Nevertheless, the dominant policy discourse identified the crisis as one

of public debt It was seen as requiring massive deleverage by European states, includingthe institutionalization of fiscal austerity

The economic, social, and political consequences proved enormous, potentially alarming,for European states and for more recent, hard-won gains from European integration Theasphyxiation of political power was symbolized in the continuing benefits enjoyed byasset-rich, wealthy elites They benefitted from the impact of central bank quantitativeeasing on asset prices far more than the real economy Inequalities of wealth and incomegrew The crisis witnessed the further concentration of financial power in a fewsystemically significant mega-banks, the re-emergence of a weakly regulated world of

‘shadow’ banking, and the visible disciplinary role of volatile financial markets throughthe impact of sovereign bond yields on public finances

An early outcome of the crisis was the institutionalization of austerity The euro areafiscal compact treaty of 2012 embedded the balanced-budget rule in the higher domesticlaw of the Member States with the aim of making fiscal consolidation an automaticprocess The crisis of the ‘debt state’ found its political expression in a reframing of thenature and role of the European state, and of the EU and the euro area, on terms that leftcentre-Left discourse on the defensive (Streeck 2013) The state and the EUwere (p.3) redesigned around the twin principles of fiscal consolidation and structuralreform In contrast, there was little evidence of institutionalization of the concept of thedevelopmental or entrepreneurial state, mobilizing productive investment in publicinfrastructure The fiscal compact treaty was not matched by a European Social Stability

Pact, laying down basic numeric rules of social provision, like the percentage of GDPspent on education and child care, and basic standards in minimum wages.

Good Debt, Bad Debt: The Developmental State, the Self-Binding State

Historically, the problem of debt and its relationship to political power has beenrepresented in terms of opposed narratives of good and bad debt Narratives of good debtfocus on its functions in enabling the state to undertake productivity-enhancinginvestment, to provide collective insurance against risk, to build social integration andidentity, and to share burdens across generations Wisely-used public debt can be part of amodel of sustainable economic growth, creating a self-reinforcing capacity to finance debt

at low cost

In contrast, narratives of bad debt stress its encouragement of extravagant and wastefulpublic expenditure on current consumption, diverting otherwise productive resources; itsinducements to moral hazard and profligate rent-seeking behaviour; and its imposition ofburdens on future generations Reducing public debt is seen as a precondition forsustainable economic growth However, the narrative of bad debt can also be directed atthe financial sector The financial sector endangers debt sustainability when it grows at arate beyond GDP growth This danger arises from bank lending to property and otherasset markets rather than for the production of goods and services, for support to smallbusinesses that help create jobs, and for investment in long-term infrastructure

In these opposed narratives, images of debt and of the state are elided The narrative ofgood debt is associated with a positive image of the state; that of bad debt with a negativeimage of the state The first narrative celebrates the developmental and entrepreneurialrole of the state as an engine of innovation It is represented as possessing the superiorcapacity to take on the huge uncertainties, long time spans, and enormous costsassociated with fundamental innovations that the private sector does not have Mazzucato(2013) illustrates this role with respect to microelectronics, the Internet, globalpositioning systems, and energy technologies The narrative of bad debt emphasizes thecrowding-out of private investment by the state and the atrophy of privateentrepreneurship The state is represented as the source of ‘crony’ capitalism, whichnegates the vitality of free and open markets It is seen as the root cause of a dependency

culture, subordinating policies to the interests of rentiers and/or to recipients of state

benefits Public debt becomes symbolic of the state’s role as obstacle to economic andsocial progress This narrative advocates the self-binding state, imposing on itself clear,firm fiscal rules, independent monitoring mechanisms, and sanctions

The contrast comes out starkly in the narratives of public debt in the German historicaland institutional school of economics and in the British classical school of economics.Each offers not just a different conception of debt and state but also a keen insightinto (p.4) the practical challenges that debt poses On the one hand, there is Lorenz vonStein’s statement: ‘One has to judge as undeveloped every fiscal authority that does notknow how to make use of its credit’ (1885–1886, Volume 3: 2) In this view, the challenge

is to use public credit to undertake productivity-enhancing investment This type of debtfinancing enables the state to augment its future revenues, service its debts, and ensureits solvency; to build social solidarity; and to achieve intergenerational justice On the

other hand, as David Hume argued in Of Public Credit (1759), states need a substantial

fiscal buffer or safety margin to deal with emergencies In his view, governing elites aretoo myopic, short-sighted, and vain to be trusted to be sufficiently prudent in managingpublic finances

In the final analysis, judgements about debt are contingent on whether it is used tostrengthen the capability of the state, understood as the ability of those who represent it

to deliver outcomes valued by its citizens and to credibly embody principles of goodconduct There is no single ‘correct’ level of public investment Big variations in returnsare to be expected, depending on when, where, and on what money is spent, and on statecapacity to deliver Judgements about debt are also contingent on consistency with thevirtue of prudence in safeguarding against security threats and war, financial andeconomic shocks, and contingent liabilities that are associated with entrenched social andeconomic entitlements These judgements are path-dependent, bound up in experienceswith, and legacies of, previous choices

States need ‘fiscal space’ to ensure that they possess discretion to act in the publicinterest This space is contingent on their vulnerabilities The more exposed they are tosecurity threats, to financial shocks, and to long-term contingent liabilities in socialprovision, the bigger the fiscal buffer needs to be In this respect the attempt to apply auniversal rule—like the EU 60 per cent public debt/GDP rule—makes little sense.Prudence requires risk assessment For instance, a state with high structural dependence

on the financial sector is likely to need a bigger fiscal buffer to insure it against systemicrisks Similarly, designing fiscal rules has to pay attention to the value of infrastructuraland social investment The optimal value for public debt/GDP ratio could be higher ormuch lower than 60 per cent, depending on such factors as exposure to geo-strategic andfinancial shocks, the quality of public expenditure, and tax capacity

These different insights into public debt open a Pandora’s Box of questions which bedeviljudgement about the relationship of debt to political power The answers are highlycontext-specific, grounded in different constellations of vulnerability to shocks and indifferent conceptions of the state, and thus contestable When, and to what degree, is debtused to finance expenditure on current consumption rather than on investment? When isinvestment productivity-enhancing? What is the trade-off with ‘crowding out’ private-sector investment? What is an adequate fiscal safety margin? On which factors is thissafety margin most contingent—external security threats, risks from banking crisis,economic shocks, or adverse demographics of welfare-state development? In thinkingabout debt financing, how should we reconcile considerations of collective insurance,social integration, and identity-building with avoidance of moral hazard and rent-seeking?Just how prudent does one need to be? The answers to these questions highlight thecomplex and multifaceted character of debt They show why a single, coherent account of

a state is so difficult to sustain as credible.

( p 5 ) The striking feature of late-twentieth-century and early-twenty-first centurynarratives of debt and public power was the intellectual dominance of eighteenth-centuryAnglo-centric views The insights of the late-nineteenth-century German historical andinstitutional school were marginalized (Dietzel 1855; Stein 1885–1886; Wagner 1863).Belief in the entrepreneurial state as an engine of innovation, undertaking risks that theprivate sector was reluctant to bear, suffered atrophy (Mazzucato 2013) In the UnitedStates the discourse of Thomas Jefferson on states and debt triumphed over that ofAlexander Hamilton’s developmental state In Europe German Ordo-liberal ideasinformed the foundational institutional arrangements and rules of Economic andMonetary Union (EMU) in the Maastricht Treaty of 1993 and in the Stability and GrowthPact (SGP) of 1997 (Dyson and Featherstone 1999) These ideas bore a closer affinity tothe thinking of Hume, Jefferson, Adam Smith, and David Ricardo than to any notion of adevelopmental state

The Key Arguments

Three arguments thread through this book They do so in a way that is sufficiently flexible

to encompass the enormous diversity of European experience across space and over time.The first is the centrality of creditor-debtor state relations for an understanding of thehistory of political rule in Europe Their importance needs to be contextualized Theinterests of states are far from unitary The framing of creditor and debtor state interests

is nested within larger political issues of state security in Europe, within theirconditioning by historical memory, with the extent to which past guilt and fear ofisolation play a role, and within more general perceptions of financial and economicvulnerability It is also conditioned by factors of political ideology, particularly the valuethat domestic actors place on the appropriate balance between encouraging self-responsibility and showing solidarity and between insisting on fundamental creditor-stateprinciples and practising reciprocity Hence neither creditor nor debtor state interests areexogenous and timeless givens

Nevertheless, the distinctive historically and ideologically coloured forms of debtor state relations should not obscure a fundamental pattern Creditor-debtor staterelations are asymmetric both in arguing and in bargaining power Power gravitatestowards creditor states, like Germany and the Netherlands in European monetary union.Despite their lack of numbers in comparison with debtor states, they possess an aura ofpower Power gravitates above all to creditor states with systemic significance, endowingthem with network capital Their arguing power stems from their capacity to frame howpolicy issues, like coordination and liquidity provision, are debated They set thenormative standards of policy evaluation They gain power over agenda-setting, bringingforward proposals around which other states negotiate

creditor-The bargaining power of creditor states derives primarily from their capacity to make orbreak efforts to construct new institutional arrangements and rules They have a lower

intensity of preference for an agreement compared to retaining the status quo (Moravcsik1998: 62) In short, they have the power to shape the outcomes of negotiated agreementsthrough the threat of exit.

( p 6 ) At the same time, creditor-state power varies with negotiating context(cf Aspinwall and Schneider 2001; Naurin 2009) It is greater during negotiations offoundational institutional arrangements and rules, like the Maastricht Treaty of 1993 andthe SGP of 1997, than during later negotiations about reforms to these arrangements Thethreat of exit by creditor states has greater credibility as a bargaining resource in theformer negotiating context than in the latter context (cf Dyson and Featherstone1999; Fuchs 2013) In particular, the combination of European monetary union with asingle market in financial services provided a powerful catalyst for creating—across bothcreditor and debtor states—a perception of shared risks from contagion and from adisorderly unravelling of the euro area This change of context had major implications forpower over negotiating outcomes on euro area reforms to manage banking and sovereigndebt crises

Creditor-state power also faces the persistent challenge of matching the assumption ofjoint liability with external control of debtor states Its exercise seems to follow a law ofexternal control: the more peripheral a debtor state, the greater the degree of interference

by creditor states The corollary of this law is the incentive for this type of debtor state

either to adapt ex ante to creditor states, leading to convergence; or to seek alternative

economic arguments and to find allies to renegotiate foundational arrangements; or toseek protection from its creditors through a variety of instruments These features ofcreditor-state and debtor-state power weave through the book

debtor state relations and political rule are associated in complex ways debtor state relations mirror changes in political rule and in the structures of socialinterests and cultural conceptions of entitlement that underpin political rule Attitudes todebt prove most problematic—most prone to foster illusion—in certain cultural contexts:those that prize elite magnificence and display, that celebrate hedonistic consumption,and that emphasize welfare protection through patronage These contexts sustain forms

Creditor-of political rule that exploit state resources for partisan interests, that generate ‘crony’capitalism, and that intensify inequality In thinking about attitudes to, and practices of,debt one needs to be alert to underlying structures of social interests As Chapter 9 shows,each structure of social interests, and its associated economic culture and ideology ofdebt, breeds its own illusions about debt sustainability

At the same time, creditor-debtor state relations challenge and expose deficiencies indomestic political will and state capacity to act They trigger often polarizing debate aboutdomestic reforms within debtor states The parameters of their domestic politicalinteraction are changed by how creditor-state elites define appropriate fiscal andmonetary policies and by how they use their own policy instruments In turn, the smartuse of domestic policies to strengthen domestic growth trajectory can help shift thedynamics of creditor-debtor state relations The German historical and institutional

school emphasized how important the state can be in mobilizing and directing credit intoproductive investment States can reshape their context.

The second argument centres on the importance of context It shows how changingdomestic representations of what constitutes appropriate or normal debt have beenbound up with the unstable European and international contexts that rulers andgoverning elites have faced External threats, war, and conquest, and their representationand use by ambitious and often insecure governing elites, were central to redefinitions ofappropriate debt and to the development of debt financing practices A discourse ofexternal ‘emergency’ changes attitudes to sustainable debt It is amenable toelite (p.7) manipulation and to fostering fiscal illusion At the same time the discourse ofsecurity threat and war proved to have an impact beyond its encouragement ofsleepwalking into debt crisis Once changes in technologies and scale led to ‘total’ war andreliance on mass mobilization, warfare acted as a political catalyst for development ofnew forms of social welfare provision by the state (Tilly 1975, 1990)

The rise of welfare states, and the social interests and structures of entitlement bound upwith this process, have played a major role in changing representations of appropriatedebt However, this phenomenon came much later in European history In the post-1945period, especially from the 1960s, welfare-state development was important in reframingdebates about sustainable debt It helped privilege social democratic politics and thedevelopment of the ‘tax state’ However, in the wake of the oil crises and exchange-ratecrises of the 1970s and early 1980s, and especially with the post-2007 crisis, newlyinfluential representations of acceptable debt began to reframe debates about the welfarestate They drew on projections of the costs of an ageing population and entrenched socialentitlements This reframing suggested that the illusion of the welfare state had been tomake decisions about individual policies without taking account of long-termimplications for fiscal deficits and public debt (Pierson 2001) States seemed to besleepwalking into fiscal crises as their commitments were not aligned with political willand state capacity to deliver The resulting ‘institutionalization of fiscal austerity’ placedsocial democratic politics on the defensive (Beckert and Streeck 2012) This discursiveshift highlighted the need for tough and controversial political choices in economic andsocial policies that would define the character of early-twenty-first-century politics Theyinvolved some combination of raising taxes, increasing contributions and payments,tightening eligibility requirements, cutting benefits, and expanding labour-marketparticipation, including immigration The nature of these choices will tell us much aboutpower in society, specifically how much inequality we are prepared to tolerate Thechoices promised to be tougher still if there was a further discursive shift towardsdefining external security threats

The third argument highlights the limitations of formal economic reasoning aboutsovereign creditworthiness and sustainable debt The book reveals the context-specificand constructed nature of debt Despite the claims made for formal modelling andprobabilistic reasoning, the relationship between debt and political rule remains pre-

eminently a realm of subjective knowledge, conveyed by storytelling Stories perform vitalfunctions They offer a compass in navigating radical economic and political uncertainty,

as well as a sanctuary for retreat in the face of sheer complexity and passionatecontestation Stories also have a moral function They distribute praise and blameamongst European states However, stories also serve as distorting prisms through whichresponsibility is evaded They function as prisons that screen out much of reality

The corollary of this context-specific and constructed nature of debt is that belief in asingle universal theory of optimal debt, from which precise and firm fiscal rules can bederived, is an illusion The limitations of formal economic reasoning are also manifest inthe representation of credit provision to households and companies as a series oftransactions, in which risks were securitized and sold on to investors The representation

of credit as a commitment to the welfare of the client, involving personal judgement andtrust by lenders, suffered atrophy The US sub-prime mortgage crisis testified to theillusion engendered by faith in impersonal, transaction-based financial engineering

(p.8) These three arguments point to the central theme of the book—illusion, themismatch of appearance and reality in representations of debt, and the transience ofcreditor-state power Illusion does not mean that beliefs about sovereign creditworthinessand optimal debt cease to be real for governing elites and participants in financialmarkets It refers to commitment to beliefs that combine wish-fulfilment as a prominentmotivation in holding them with their insusceptibility to proof (Freud 1927: 31) Illusionsare valued and retained for various reasons, even when they are shown to rest on faultyassumptions that collide with reality They economize in dealing with radical complexityand uncertainty They offer the promise of intellectual control Not least, they provide aconvenient way to attribute praise and blame to states Holding certain beliefs aboutsovereign creditworthiness and optimal debt promotes the interests of particular financialand governing elites It plays to their self-esteem and vanity However, narrativeconstructions of sovereign creditworthiness and optimal debt are not necessarily accurate

or consistent They are imperfect models of reality They contain unconscious biases.They filter information, typically endowing specific financial variables with moresignificance than environmental, social, and governance standards They induce myopicbehaviour

Moreover, narrative constructions of sovereign creditworthiness and optimal debtattribute blame to individual states or rulers in ways that, however cognitivelyconvenient, neglect the deeper social and cultural contexts that condition the form andcontent of these narratives They foster the illusion that the state is, or can become,master of its own creditworthiness The illusory nature of this belief becomes evident inthe face of the ongoing mismatch between liability and control Narrative constructions ofsovereign creditworthiness are predominantly shaped by forces and actors external togoverning elites

The book contextualizes economic modelling and formal economic reasoning by stressingthe complex interplay between the moral, imaginative, and rational faculties in discourses

and practices of debt At its heart is a critique of the dangers of intellectual entrapmentwithin formal economic reasoning about sustainable public debt This type of reasoningassumes that sustainable debt is amenable to scientific method, calculation, andprobabilistic reasoning The book argues that sovereign creditworthiness is a realm ofsubjective and highly imperfect knowledge, one that is more properly amenable tonarrative reasoning Formal economic reasoning has an important part to play inexposing errors and fallacies in narrative reasoning about debt However, it also gives rise

to small, artificial worlds of modelling that have an ambiguous relationship to economicinstitutions and behaviour (Morgan 2012) Modelling generates its own illusions ofcontrol Moreover, constructing persuasive narratives requires an engagement withcultural, social, and political issues that transcend narrow economic reasoning One of thedominant issues is the political and policy dangers of entrapment within ‘crony’capitalism as financial and banking elites capture politics and policy With it comes theerosion of standards of governance, deepening of economic and social inequality, anddegradation of environmental standards

The long-term historical relationship between states and debt exposes the pervasiveness

of illusion and the negative qualities to which it gives rise—complacency, hubris, andvanity Their pervasiveness serves to subvert simple faith in the objective quality ofofficial data; in statistically-grounded technocratic formulae for assessing long-term debtsustainability; in regulatory reliance on banks’ own models of risk and what they tell

us (p.9)about the health of their balance sheets; and, more generally, in the idea of animpartial, neutral arbiter of sustainable debt

However, pervasiveness is not inevitability Governing elites can prove enlightened andreflective in debt financing They can use public debt to support bold structural reformsthat enhance economic and fiscal capacity and to promote science-based innovationthrough both research and development spending and an active entrepreneurial role intaking risks As key figures in the late-nineteenth-century German school of historicaland institutional economics argued, debt can be employed to finance productiveinvestment in public infrastructure and in building social solidarity and politicalinclusivity (Dietzel 1855; Stein 1885–1886; Wagner 1863) This insight retains acontemporary resonance Mazzucato (2013) argues for the importance of thedevelopmental or entrepreneurial state as fundamental science and innovation becomeever more expensive and risky in fields like energy Modern theories of endogenousgrowth show how debt can strengthen long-term growth potential and debt sustainability(Aizenman, Kletzer, and Pinto 2007; Vandenbroucke 2012) By taking on a boldentrepreneurial role, allied with good fortune in avoiding too many costly failures, somestates succeed in climbing the ladder from debtor state to creditor state

Much depends on whether governing elites believe that the state can make a positivedifference Belief that the state is an obstacle deprives the state of the will and capacity totake entrepreneurial risks Correspondingly, fiscal consolidation that leads todeterioration in productive investment in infrastructure, environmental quality,

governance standards, and social cohesion has serious, negative long-term implicationsfor public debt/GDP ratio and debt sustainability.

In addition, sovereign debt and banking crises and macroeconomic shocks can serve ascathartic moments when fiscal illusion, hubris, and complacency are exposed However,this promise of a new realism can be subverted by their perverse effect in strengtheningincentives to conceal and manipulate financial data and to resort to various forms of fiscalgimmickry Crisis management can, in short, foster new illusion, hubris, andcomplacency As this book shows, talk of European convergence around ‘sound’ moneyand ‘sound’ finances is overdone It ignores historical path dependencies, the powerfulforces of inertia in economic cultures, and the dynamics of opportunistic politicalbehaviour

The key to sovereign creditworthiness does not lie in placing simple faith in compliancewith the logic of macroeconomic debt sustainability models It resides in three factors:the quality of moral judgement of governing elites; their culturally and ideologicallyconditioned political will; and state capacity, including net household financial assets as apercentage of GDP (see Chapter 13) Much hangs on the ‘character’ of governing elitesand their publics This character is exemplified in their engagement with questions ofreciprocity and social justice and in their internalization of prudence as a moral virtue.The history of European states, debt, and power is testament to pervasive characterweakness, evasion of responsibility, and moral failure It is marked by hypocrisy There isthe hypocrisy of debtor-state elites who hide from their own policy mistakes bycultivating victimhood There is also the hypocrisy of ‘virtuous’ creditor-state elites whoharbour and protect banks which have lent recklessly and contributed to imprudentborrowing

Character weakness is exhibited in another form Sovereign creditworthiness is bound upwith fiscal and banking gimmickry (Morgenstern 1950) It is a story ofcreative (p.10) accounting and image management, using concealment, mendacity, andtrickery Examples include the misvaluation of their assets by banks, government use ofoff-balance-sheet budgeting, and window-dressing fiscal accounts by using complex,opaque derivatives These practices make financial and fiscal transparency andcompliance with bank capital adequacy requirements and with firm fiscal rules highlyproblematic The firmness of fiscal rules—like those in the EU SGP and the so-calledfiscal compact treaty—proves illusory for another reason They rest on slippery conceptslike structural fiscal balance that are open to varying interpretations and thus leavegoverning elites with considerable room for manoeuvre Placing reliance on official dataand on fiscal rules can add to the illusion, hubris, and complacency of financial andgoverning elites Sovereign debt crises are about reckless creditors, feckless borrowers,opacity, and statistical information of dubious quality

More tragically still, the history of European states, debt, and power testifies to pervasivemoral complacency about the innocent, the semi-innocent, and the financially illiterateand gullible Their experiences are extraneous to formal top-down models of sovereign

debt sustainability and to banks’ own risk models The poor and the deprived are reduced

to sullen silence as powerful, incestuous governing and banking elites evaderesponsibility for their excessive risk-taking Only when they engage in social protest or inpopulist forms of political mobilization do the poor gain media and political attention.Social and political reasoning about sustainable debt is much more amenable to bottom-

up models that stress inclusivity, reciprocity, and social justice

The moral sense of injustice felt by the innocent and the gullible expresses itself instrongly-held sentiments of resentment, humiliation, despair, and anger.Characteristically marginalized or silenced in dominant narratives of sovereign debtcrisis, they carry a disproportionate share of the harsh consequences of the activities ofreckless creditors and feckless borrowers The efforts of banks and states at deleverage,and to protect creditors, result in loss of real income and economic opportunity for thepoor and dispossessed Their sufferings are catalogued in unemployment, wage cuts,diminished savings, higher taxes, reduced benefits, housing eviction, family breakdown,mental health, and suicide Historically, sovereign creditworthiness is predominantly atop-down narrative However, this narrative poses serious political legitimacy problems.These problems relate to what sovereign debt policies tell us about the nature of socialcooperation and about distributive justice between various types of creditors, debtors,taxpayers, and those with pressing social needs (cf Sen 1993)

The problem of sovereign creditworthiness is institutional as well as moral The historicalexamination of states and their debts highlights the issue of state capacity The proneness

of governing elites to illusion, hubris, and complacency is exposed—and sovereigncreditworthiness compromised—by the mismatch between liability and control Mismatchbetween the ease with which liability can be assumed and control over capacity to meetobligations shows how tough moral judgements are inextricably bound up with questionsabout institutional feasibility These questions plagued the European Union and the euroarea, as well as modern democracies in general They also figured as a constant, ifcontextually varying, feature of European history

A series of other questions arise as soon as we attempt an answer to this question aboutthe relationship between states, debt, and power In what ways are creditor-debtorrelations important? Are creditor-debtor relations essentially a materialphenomenon? (p.11) Or, are they politically constituted? Which interests and principlesinform the behaviour of creditor states and debtor states? To what extent are the effects

of creditor-debtor relations shaped by domestic and European governing structures ofrule and the opportunities that they offer to statecraft? Or, are they grounded in

‘mentalities’, in economic cultures and prevailing ideologies of debt, at elite and publiclevels? Do creditor-debtor relations vary over time with whether the negotiating context

is one of ‘good’ or ‘bad’ times at international level? Do they alter synchronically with thesize and systemic significance of states? Do they vary with institutional and legalcontexts? How do states contend with the fundamental political problem of matchingliability with control?

There are libraries of books, journal articles, and working papers about sovereign debtdefaults and restructurings, mostly grounded in economics However, the concepts andframeworks of analysis that they employ touch on only some aspects of the questionsthat I wish to address, and then only partially They are, on the whole, averse to thinkingabout creditor-debtor relations as politically constituted They are also, on the whole,disposed to underplay historical contexts Their reliance on very short historical timeframes of analysis relegates key variables to the shadows.

This book opts for a wide historic canvas and a broad-brush, cross-disciplinary approach,using selective historical examples to illustrate how ‘mentalities’ of debt have changed.The chapters are thematically structured around the different interconnected questionshighlighted previously At the same time, each chapter is informed by an historicalapproach, which helps to bring out the dynamics of the complex relationship of states,debt, and power It is important to understand what the book is not It is not a narrativeeconomic history It is not an analysis grounded in a particular theory of politicaleconomy It is not another history of the post-2007 crisis The book is for those who like

to reflect on the bigger historical picture, who are interested in the contextual variability

of behaviour, and who are fascinated by the complexity of the human

The Euro Area Sovereign Debt Crises: The Shrinking Creditor-State Club

The contemporary relevance and value of a more historically informed debate is enhanced

by the shift of sovereign debt crisis from its association with developing economies andemerging markets to EU and euro area Member States In 2005 eight euro area MemberStates held the coveted triple-A credit rating from all three leading credit rating agencies.They represented 75.5 per cent of euro area GDP By the end of 2012 this informalcreditor-state club had shrunk to just four—Finland, Germany, Luxembourg, and theNetherlands, accounting for 36.4 per cent of euro area GDP Caught up in a home-grownhouse-price bubble, even the virtuous Netherlands began to look vulnerable Euro areaMember States figured in the top five biggest credit rating downgrades between 2007 and2012: Greece, Cyprus, Spain, Portugal, and Ireland They occupied seven of the top tenplaces Only Turkey figured in the top ten credit rating upgrades The rest were LatinAmerican and Asian states In consequence, the value of euro area sovereign bonds ascollateral had significantly diminished The share of euros in the reserves of central banks

in developing states fell from 31 per cent in 2009 to 24 per cent in 2012 Theshare (p.12) of the US dollar held steady at about 60 per cent Also, the shrinkage of theinformal creditor-state club in the euro area had significant implications for relative statepower, the visibility of that power, and creditor-debtor state relations within the currencyarea

From 2007 public debate about the sources, the nature, and the implications of thefinancial and economic crisis pushed the problem of debt to the centre of Europe’spolitical agenda It posed the question of how this problem should be represented Was it

a crisis of debt? Was it a crisis of growth? Was it a moral crisis? Should it be defined oncreditor terms or debtor terms? Was there an independent standard by which it could be