Yanis Varoufakis: Will the Real Economy Rebound, Following Wall Street’s Resuscitation? And What of Europe?

By Yanis Varoufakis, a professor of economics at the University of Athens. Cross posted from his blog

Another Spanish newspaper, El Confidencial, were kind enough to interview me on the global and European crisis, on the occasion of the Global Minotaur‘s Spanish translation-edition. Here is the interview, in English (the actual article will appear in Spanish, of course). Read on…

Before the crisis, Wall Street had grown so much, but the productive sector expanded more slowly. Now, after the financial crisis, are we going to see industry grow, instead of the financial sector? Or will we see just the opposite?

Rapid, unregulated growth is usually built on the back of a financial sector bubble; also known as irrational exuberance. Credit expands fast, increasingly risky bets are placed and a portion of this is channelled into productive investments in industry (the real economy, as you put it). Then the bubble bursts, liquidity disappears and the real economy entered a vicious cycle, of having to pay back unsustainable debts through austerity that causes investment to plummet, debt-to-income ratios to remain prohibitively high and, alas, growth to turn increasingly negative. In this sense, the answer to your question is bleak: No, there is no guarantee that industry will grow faster than the financial sector now. In fact, quite the opposite: Since governments and central banks are financing the banks, to refloat them, the financial sector is in the process to recovering, and growing again, while at the same time the real economy is continuing to shrink. Especially in the Periphery of the Eurozone where the impossibility of devaluation, coupled with the disproportionate burden of adjustment falling on the deficit countries, guarantees a depression. This is precisely what is meant by the trap of negative growth and high debt. It is a phenomenon that we first encountered in the 1930s, from which Europe seems to have learned almost nothing.

What has been the role played by economists in this crisis? Are they some kind of new priests?

Economics, as a discipline, is a paradox wrapped up in a contradiction. The more irrelevant its models the greater the profession’s discursive success and, thus, social power. From the 1970s onwards, economics departments were taken over by a particularly narrow-minded quest for ‘solved’ mathematical models of the economy – including of finance. But to ‘solve’ our mathematical models, economists had to impose (often without stating) hidden assumptions which guaranteed that these models had nothing whatsoever to do with really existing capitalism. Yet, these very mathematical models could be used by financiers and politicians to provide a veneer of respectability to their policies and derivative trades (since the models effectively assumed, in order to be solved, that financialised capitalism is immune to crises). Thus economists were popular (and well rewarded by the financial sector and neoliberal governments) for having produced models that were, by design, irrelevant. This is why I refer to economics as a major contradiction; a most peculiar failure: It is the only discipline whose power is proportional to its theoretical failure to illuminate capitalism. And yes, it is a priesthood of sorts, in the sense that young graduates do well in the economics profession if they learn how to set up and solve these mathematical models ritualistically, accepting in the process that they will never have anything useful to say about the real world.

Politicians and officials like Lagarde say that a USA economic problem would seriously affect everyone. Does it mean that the flow of money into Wall Street should keep coming and the international institutions are going to do everything to make sure it stays that way?

The political elites have already accomplished this. Wall Street, the City of London and Frankfurt are, once more, awash with money. The tragedy is that, unlike what was happening in the pre-2008 era, this capital is failing to bolster investment and consumer demand, the result being a major deficiency of effective demand worldwide. Thus the crisis of the real economy perseveres.

Have the national governments some chance to make policies against the mainstream global economic policies and the interests of investment funds?

Not our governments, not within the Eurozone. Once our states became insolvent, after the Crisis spread its wings to the Eurozone, national investment policies are severely restricted in scope. What we now need to do is focus on shaping a progressive rational investment strategy at the European level. The European Investment Bank and the European Investment Fund must play a major role here and Spain ought to lead in their conversion into the pillars of European growth and development.

Why was there so much consensus in implementing the economic policies that led us to the crisis? Why did no one object against them?

While financialisation was building up incredible pyramids of toxic money, it was almost impossible for our voices to be heard over the din of all this private money making. Those who did object were silenced. It took the catastrophe of 2008 for the voice of reason to be given a modicum of a chance.

Why, after the crisis, are the governments still implementing similar economic policies to what they did before the crisis?

Because they are co-opted to what I call Bankruptocracy; a new regime that emerged after 2008, where the power to exploit society’s surpluses has passed on to the bankrupt bankers, in direct proportion to the black hole they burnt into their banks!

What will be the medium-term future of Greece in the context of sovereign debt crisis? And the future of Spain? What kind of life can expect to live as southern European citizens?

I am tempted to reply using Thomas Hobbes’ expression; that our lives will be “brutish, nasty and short”. Only, they will not be short. Just brutish and nasty, as the vicious cycle of recession-austerity-debt-more austerity-depression unfolds. Until and unless, of course, our governments do the only thing they can: Stand up to our northern partners, in some EU Summit, and simply say ‘No!’

Without China’s growth, there wouldn’t have been growth in South America or Africa. What is going to be the role of China from now on?

Chinese growth is unsustainable without a recovery in the United States which, in turn, relies heavily on a European recovery. At the same time, Latin American, South African and Indian growth relies entirely on Chinese growth. This is why Europe’s silliness, which has created an unnecessary and utterly avoidable recession in the Eurozone, is so detrimental to the planet’s well being.

You say that the crisis is the laboratory of history, and conformity is the main driving force. I think conformity still prevails, despite all that has happened. Do you see any signs of change?

Only a few. I see some welcome change of heart and mind within the International Monetary Fund and a new sense of purpose in the US Treasury. But nothing, so far, that might signal a decisive U-turn.

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  1. psychohistorian

    I would like to read what the welcome change of heart is at the IMF and exactly what is the new purpose of the US Treasury that is in the best interest of the public?

    All I read from those folks is more propaganda in support of the existing financial system.

    1. okie farmer

      I’m not sure about the IMF as an institution, I think Yanis is referring to Lagarde’s warning against austerity and calling for more stimulus in both US and Europe. IMF, however is still staffed with vultures, plus several on their Board.

      As for US treasury, I think Yanis may be referring to Fed and Treasury ‘signaling’ that they will target unemployment. If there is more, I too, would like to know what he is referring to. “no decisive u turn” is his operative conclusion.

      1. Pelham

        I think you’re absolutely right about Lagarde and the US Treasury. Also, I believe this is precisely what Varoufakis was referring to; it’s part of my daily job to stay abreast of the utterances of these clowns and villains, and there is nothing more from those quarters to be hopeful about, at least as revealed publicly.

        I assign a great deal of weight to what Varoufakis says. I part from him (if I understand him correctly) only in the suggestion that the perpetual, annually compounded growth that is indispensable to the core functionality of capitalism is, in a broader sense, either sustainable or good for us. It would be better to have zero percent annual growth with the ability to channel existing resources in new directions as the need arises and as science and technology allow.

        Bowing to the supposed necessity of constant growth, on the other hand, seems to put most of us at the mercy of the sociopaths and economic occultists who inevitably end up in the financial/corporate/political drivers’ seats. This would be bad enough, but it also appears to place in jeopardy the ability of the planet to sustain intelligent life — such as it is.

        I’m no environmentalist. Human beings are part of the environment, and whatever we do, by definition, is natural. But that doesn’t by any means preclude the possibility of self-exterminating catastrophe, whether realized slowly or quickly.

        So growth, at least as commonly defined, is no longer a healthy option.

        1. Fiver

          Oddly, I find Varoufakis to be as irrelevant as those he dismisses precisely because of his own myopic fealty to the principle of “growth” at whatever cost, along with a total failure to recognize US-based corporate globalization as the arch villain in this accelerating global tragedy, not the hapless subordinate elite of “Northern Europe”.

          We have for more than a century been in a position organizationally and technologically to ensure all true needs are met for all, as well as satisfaction of as many “wants” as the imagination can conjure, with the latter determined by the principle that whatever “it” is, it does no harm.

          Yet this man, and indeed virtually all commentary from the traditional “left”, “liberal” or “right” cannot fathom improvement absent “more” and “faster” overall, in quantifiable terms, as in more activity, more consumption of resources, more “options” and “choices” to consume, etc., rather than re-ordering existing, or, as is certainly in our future, lower levels of purely consumptive activity while enhancing the prospects of full lives well-lived, with the best times, as we all know, not even appearing numerically in “the economy”.

    2. Mark P.

      ‘I would like to read what the welcome change of heart is at the IMF and exactly what is the new purpose of the US Treasury that is in the best interest of the public?’

      Bad as Obama-Bernanke are, they really do look slightly enlightened next to Cameron-Osborne and austerity in the UK, and the bloody-minded inflexibility of the Germans. So it’s relative.

      They’re all kleptocrats, of course.

      1. MEME401SUN

        That’s like saying Nixon and Kissinger look good next to Pinochet. The Euroausterians are little more than sock puppets of the Amerausterians, who haven’t quite softened up the Homeland enough to pull the full Cameron there just yet.

  2. jake chase

    YV writes,

    “From the 1970s onwards, economics departments were taken over by a particularly narrow-minded quest for ‘solved’ mathematical models of the economy – including of finance. But to ‘solve’ our mathematical models, economists had to impose (often without stating) hidden assumptions which guaranteed that these models had nothing whatsoever to do with really existing capitalism…..”.

    This is among the best one paragraph explanations of economic charlatanism I have seen. People should be encouraged to paste it up next to the television screen, and reread it daily instead of watching the programs.

  3. Myshkin

    “I am tempted to reply using Thomas Hobbes’ expression; that our lives will be “brutish, nasty and short”. Only, they will not be short. Just brutish and nasty,”

    -I would adjust that to nasty, brutish and shorter.

    I have no idea what exigencies the economic modelings have been forced to conform to but I suspect the premise that Europe and the West must recover for China, India, Brazil and all the other vibrant and labor exploitative economies to regain momentum is a fallacy.

    The question advanced by the article, will, “The real economy rebound,” is accompanied by its own fallacious assumption, that there is a recoverable real economy in the advanced industrial world beyond the financial sector and the various bubbles it inflates.

    While noting also that the financial elite have set, “Wall Street, the City of London and Frankfurt…once more, awash with money.” and that, “governments and central banks are financing the banks, to refloat them,” and that, “the financial sector is in the process to recovering,” the author fails to acknowledge that the real economy to a large extent has moved to economic zones where regulations allow extreme exploitation of labor, the environment and all the externalities that the advanced economies regulate.

    This is the central tenet that the elites refuse to admit or confront, through their Neo Liberal treaties they have encouraged a good chunk of the so called ‘real economy’ to relocate to developing nations and it is not coming back until they deal with the disparities. The result is the connundrum that despite their efforts to refloat economies through monetization, “the real economy is continuing to shrink.”

    1. Fiver

      Agree, but would take it to its dismal conclusion should we stay on this trajectory. US-based(“hosted” is now the more appropriate word versus the corporate mega-parasite)corporate globalization has been a first-rate disaster across the board. The grotesque imbalances simply multiply – the sheer speed of development, the huge vulnerabilities created by interdependence on that scale, the lack of coherent planning anywhere in the global public interest, the mega-bubble centred in China the mirror image of a prostrate public in the “First” world, the carving-up of Africa, the mad scramble for resources even as we know full well the ecosphere simply can not support the fantasy of a global middle class living like pre-busts US middle class. By pursuing global power in this way, harnessed to the US military as global enforcer, the enormity of the problems this mushrooming corporate behemoth has spawned dwarfs the fleeting benefits of a series of increasingly large bubbles with a clear plot to the point of final explosion on the horizon.

  4. Philip Dunn

    Why don’t Spain, Portugal, Ireland, Greece and Cyprus each decide to issue euros themselves? They are sovereign nations after all. Or get together and threaten to issue euros in order to persuade the ECB to buy their debt.

  5. Fiver

    Regardless of what the politicians on all sides do, having each betrayed their respective peoples, the citizens of Southern Europe, North Africa, and rest of the Mediterranean must return to economic development based on local and regional self-sufficiency to the greatest extent possible, because the outcome we’re most likely to see is some further aggressive bubble-blowing near-term based on bloated, rigged asset values. The smart thing to do will be to get a job, but immediately then plan seriously for a new way of living when the last bubble blows.

  6. David

    Professor Yanis is a breath of fresh air. His “metaphor” (actually Meta-History/Geschichte) of the Global Minotaur – is a magnificent short-hand for the Mediterranean based end of the bronze and beginning (and dormition) of the iron age economy! It speaks volumes of the reality – and need for devouring the youth of Athens (read, New York, Calcutta, LA, Cairo, Hyderbad, and Peijing); however, I would add – the necessity of human sacrifice, suicide as expressions of “honour code” (necessitated by the illusion of competition as a valid function of human existence).

    Metaphor – as long as the US turns the arable land of South Georgia into “paper production” rather than beans, corn and wheat the world will provide starvation as a viable fare for those for whom daily meals were sacrificed to provide paper for computer print-outs/or currency certificates.

    No one will pay any attention to v\Varoufakis. He’s a spiritual man speaking to the unspiritual in the matrix of the gods they adore. He believes none of it. He speaks to those who live in the world of shadows in the perception of the shadows they see as Real. His motives are simply unavailable to those to whom he speaks. This “shade” thinks he’s real cool.

  7. TC

    Sobering. But I’m not buying “a change of heart and mind within the International Monetary Fund.” I see one step back, two steps forward with the push for a debt write down. The London-NY Axis of Fraud is paving the way for chaos and hiding devious intentions behind a benevolent face. As per “a new sense of purpose in the US Treasury,” is he referring to LIBOR fraud and Treasury showing no willingness to stop the bleeding of hundreds of municipalities across the nation?

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