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Fiscal Waterboarding & Ponzi Austerity

Last week I read Yanis Varoufakis’s book, And The Weak Suffer What They Must? Europe’s Crisis and American’s Economic FutureWe were expecting Yanis to join us on Slate Money, which he did not end up doing, but I wanted to report on the highlights of the book anyway.

1. “A debt may be a debt but an unpayable debt does not get paid unless it is sensibly restructured.” 

Unsurprisingly, Yanis spends a lot of the book talking about debt and debt forgiveness. In particular, he goes into the history of the post-World War II period when Germany’s debt were forgiven, and how critical that was to its growth.

He makes the point that, given that the countries in the Eurozone have no ability to set their currency exchange rates, the deficit countries like Greece, Portugal, Spain, and Italy have very little power to pay back their debts without either debt forgiveness or a “political union,” which is to say something more like the way the U.S. federal government redistributes money from Massachusetts to Mississippi.

Or, as Yanis put it, “Debt was a symptom of Europe’s awful institutional design, not its problem.”

2. “That monetary union is good for Europe’s economy and consistent with European democracy ought to be a theorem. Europe, however, decided to treat it as an axiom”

Yanis spends the bulk of the book talking about the history of modern monetary policy in Continental Europe, staring with the 1971 “Nixon Shock,” when the US kicked the European currencies off their peg to the dollar and kicked the dollar off the gold standard. This is interesting history which I personally had never learned, and after a few sputters and starts it resulted in the creation of the European Union and the Eurozone.

An interesting point that Yanis makes repeatedly (the book could do with some editing) is that the underlying structures of the European Union and the Eurozone are deeply undemocratic. This maybe seems ok when things are going well and economies seem to be humming along, but in moments of crisis, like we’ve had since 2008, the technocrats basically have all the power, and their decisions regularly and efficiently override the will of the people.

Said another way, the Eurozone was an attempt by Europeans – mostly Germans and French – to make money “apolitical” in the name of the unification of Europe. This was never going to work, according to economists, but the romance of the image was irresistible to many countries.

The one European leader who Yanis credits as seeing this basic problem beforehand is Margaret Thatcher, who was unwilling to join in an earlier version of the Eurozone because of the obvious loss of sovereignty and the lack of democratic influence.

3. “the Bundesbank ensured the European Central Bank would be created in its image, that it would be located in Frankfurt and that it would be designed so as to impose periodic, variable austerity upon weaker economies, including France.”

Yanis spends a lot of time talking about the extent to which Germany is actually in charge of everything going on in the Eurozone, and how rigid and self-interested German bankers are. The first 6 times he mentions this it’s convincing, but after 10 references I started wanting to hear what they’d say.

4. “the Troika is the oligarchs’ and the tax evaders’ best friend”

This wasn’t in the book, but Yanis made an effort while he was Greek’s Finance Minister, to datamine Greek tax returns in order to find tax evaders. He claims this effort, which would have allowed Greece to pay back some of its debt to the rest of Europe, was foiled by the Troika itself.

5. Fiscal Waterboarding & Ponzi Austerity

Yanis is a wordsmith, and he comes up, or at least uses, evocative and memorable phrases to explain complicated political situations. Specifically, he talks about the way the Greeks have been repeatedly bailed out at gunpoint as “fiscal waterboarding,” and the way that the imposed austerity is not only not creating the abundance it was supposedly intended to, but is instead sucking up resources and laying waste to communities, as “Ponzi austerity.”

Speaking of bailouts, Yanis convincingly describes most if not all of the bailouts imposed on Greece as a combination of 1) sending money to German and French banks via Greek taxpayers (and for that matter Irish taxpayers) and 2) kicking the can down the road of the inherent flaws of the Eurozone itself.

The question is, what’s going to happen next? The concept of a political union a la the United States is increasingly unlikely, and the Greek economy is in terrible shape, as we might expect after all this crazy and destined-to-fail austerity.

My guess: the debt is eventually going to be defaulted on, and the Eurozone is going to fall apart, or at the very least lose Greece. My time scale is the next 3 years. The thing I’m worried about is how bad it’s going to get, especially if China also goes bust around the same time.

Categories: Uncategorized
  1. Gordon.
    May 2, 2016 at 10:21 am

    “Yanis spends a lot of time talking about … how rigid and self-interested German bankers are. The first 6 times he mentions this it’s convincing, but after 10 references I started wanting to hear what they’d say.”

    I’ve heard from more than one German banker that they’d say exactly the same thing: (some) Germans view debt through a moral lens, and this entails a certain degree of rigidity.

    Failure to repay a debt is a moral failure, in this analysis, and it’s incumbent on both the borrower and the lender to ensure that this doesn’t take place. You know, for moral reasons. So, to be flexible would also be a moral failure, and (some) Germans are proud of their unwillingness to allow the easy way out.

    What that analysis doesn’t touch on is that Germany has benefited from having an exchange rate that’s too cheap for its economy by virtue of its association with the weaker members of the Euro – Greece, for example. And that Greece has had a currency that’s too expensive for it, because of the link to Germany. The benefits that the German economy has enjoyed have come, at least in part, at the expense of its weaker partners, and one might view this trade as having a necessary moral pay-off. You know, like debt forgiveness.


    • ScentOfViolets
      May 2, 2016 at 1:33 pm

      ISTM that by invoking ‘moral failure’, German bankers are implicitly recusing themselves from doing due diligence, the sin qua non of their supposed expertise. IOW, just another referent that really means they deserve to never lose money on _any_ investment, no matter how risky.


  2. May 2, 2016 at 11:16 am

    Obviously, Yanis is SOOO shy and timid that you probably scared him off the show by saying you had a crush on him, Cathy!…
    Anyway, to some of us the entire world economy always seems like one giant Ponzi scheme anyway, doomed to fail, with only the timetable in doubt, dependent on the ‘kicking-the-can-down-the-road’ phenomena.
    I am intrigued though by recent talk of an eventual digital-and-roboticized world requiring few human workers, and an economy no longer based upon work ( http://tinyurl.com/j7xdwsq ), even though it probably won’t come about ’til readers of this blog have long passed on!


  3. Hendi
    May 2, 2016 at 12:05 pm

    The one thing I was wondering when you discussed the book on the show this week: does Varoufakis tell a convincing story in the book for why Greece joined the Euro in the first place? It seems like a lot of Greece’s problems stem from that initial decision, but its one that many EU countries with both strong and weak economies went the other way on. And Greece is geographically isolated from the main Euro block, so its never been obvious to me why they wanted to join in the first place.


    • May 2, 2016 at 12:06 pm

      I think it has to do with access to the unified market and a burning desire to be European. But maybe he said more.


      • none
        May 2, 2016 at 12:24 pm

        Up until the collapse in 2008, Greece had prospered fabulously in the EU (see the chart here: http://www.tradingeconomics.com/greece/gdp — click “max” to see the long term trend). It was an explicit, specific, aspirational model for many countries like its neighbor Bulgaria (boy has that changed!) who hoped the EU would be as good for them as it seemed to have been (and perhaps was?!) for Greece. Many people didn’t realize how precarious those marvellous economic achievements were until after the collapse.


  4. Auros
    May 2, 2016 at 9:21 pm

    Oh, I’m sorry he didn’t join you guys… Any chance of getting him at a later date?


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