By Yanis Varoufakis, a professor of economics at the University of Athens. Cross posted from his blog
Dimitris Polymenopoulos interviewed me recently on behalf of Greek-American newspaper The Greek Star. Click here for the original source or read on…
How did the EU profit from Greek indebtedness all these years?
The implicit contract between Greece and the European Common Market, as the European Union was called back in 1980, was simple: Greece would open up its borders to northern European imports and Northern Europe would transfer surpluses to Greece. The hope was that, in the process, investment funds would also flow into Greece to support local industries thus “balancing” out Greece’s trade and capital flows vis-à-vis Europe. However, the reality was that the funds that flowed in simply inflated asset prices while, catastrophically, they came hand-in-hand with the collapse of Greek industrial facilities which were quickly purchased by northern European companies, closed down, and turned into warehouses for their imports (e.g. the white goods industry that was purchased by Siemens which then used “badge engineering” tactics to sell imported refrigerators in Greece, under Greek labels). When in the 1990s the Eurozone was being concocted, and interest rates collapsed Euroland-wide, the process sped up massively and Greece’s hitherto risk averse and debt-hating households began to borrow more, purchasing German and other northern European goods as if there was no tomorrow; funded by the flow of northern European cash that was actively seeking higher returns in the European Periphery, often resorting to predatory lending of households and governments alike.
Do the German financial sector and the German industrial sector have competing interests as a result of the crisis?
Absolutely. German banks would benefit massively from a breakup (real or rumoured) of the euro, as the inflow of capital will flood them with liquidity that, in turn, allows them to cover up their gargantuan hidden losses. On the other hand, German exporters will, naturally, suffer badly from the exchange rate appreciation that a euro breakup will bring.
The average German now thinks that they are bailing out Greece, while the average Greek thinks that the said German is trying to snuff out Greece – but this isn’t the case, is it?
No, it is not. Our very European tragedy is this dual misperception that political leaders have effected both in Greece and in Germany. The Greek bailout, just like the Irish, the Portuguese etc., was always about misleading the Athens and the Berlin Parliaments into thinking that the issue was German loans to Greece, to be justified in the context of European solidarity. The reality was, alas, quite different: The Greek bailout was all about transferring banking losses from the books of the French and German banks onto the shoulders of the Greek, French, German etc. taxpayers, under conditions that will ensure that the Greek taxpayers’ shoulders will, eventually, buckle under the inordinate pressure. Once that happens, our politicians will be celebrating the so-called OSI (“official sector involvement”; a euphemism for German taxpayer losses, supposedly in aid of Greece but in reality, a cover-up for Deutsche Bank’s and BNP-Paribas’ losses).
Has austerity ever been successful? If yes, what is the EU doing wrong?
Yes, when it is implemented in one country featuring an export-oriented private sector and in a global and regional environment of growth. E.g. Canada in the mid-1990s. Europe’s idiocy becomes apparent when it is pointed out that it is trying to impose austerity on everyone, at once, and in a recessionary global environment.
In October of 2012, the IMF’s chief economist, Olivier Blanchard, admitted that two pillars of austerity, tax hikes and spending cuts, cause more economic damage than previously thought. What does that mean for both the IMF and the IMF/EU relationship?
It means that the strains that were always there, in the relationship between Berlin-Brussels-Frankfurt, on the one hand, and Washington, on the other, are boiling up to the surface as the tremendous human and political costs of the economically idiotic policies imposed by the troika, first on Greece, and then on the rest of Europe, are becoming irrepressible. The IMF, being increasingly answerable to non-Europeans, is being forced, by circumstances, to differentiate its position and to be seen as siding with logic against the madness that is so vigorously pursued by the Berlin-Brussels-Frankfurt axis.
Are some of the IMF’s creditors starting to balk at the idea of further financing for the Greek bailout program?
Of course. Countries, in particular, with bitter experience of the inanity of austerity at a time when the need for sharp devaluation and debt write-offs was being resisted by their creditors (e.g. Brazil, Argentina, S. Korea) are rubbing their eyes in disbelief at what they are seeing in Europe. They’re telling Mrs. Lagarde in no uncertain terms that they are decreasingly prepared to fund this sort of organized madness.
In 1929, the stock market crash showed how important it is to save banks from failing. Isn’t that what the EU has been trying to do?
No. It is one thing to ensure that the banks do not buckle under the weight of the Crash and that their ATMs carry on working. It is quite another to hand over wads of taxpayers’ cash to the same bankers, under whose watch the banks collapsed, so as to keep them in control of the banks but in a manner that condemns these banks to a living-dead existence; unable to provide credit because they are unable to borrow themselves. The EU should have done what Sweden did with its banks in 1992: take them over, cleanse them properly and then re-sell them to fresh owners (recouping taxpayers’ money in the process). The EU is simply subsidizing the bankrupt bankers in a manner that turns them into zombies, which in turn, condemn our economies to decades of a credit crunch.
Weren’t banks checked by organizations assigned to keep them from creating toxic financial products?
As in the case of Wall Street, so too in Europe the capture of regulators by the bankers was complete.
The farther back you go, the better economists understood capitalism?
Unfortunately you have a point. But this is not just a failure of cognition. The self-inflicted lobotomy of the economics profession coincided with the liberalization of the financial sector. The exponential rise in the power of finance over the rest of society required a kind of economic analysis that had forfeited any pretense to understanding really-existing capitalism. At least two generations of highly skilled analytical economists were schooled in this type of toxic economics, making a great deal of money in the process (chiefly as financial economists).
With economic globalization having made national economies interdependent, are there signs of forthcoming isolationism and protectiveness by major superpowers, who still have control over their own currency?
I do not see this, at least not yet. What we have observed is a de-coupling of economies controlling their own currencies from the rest. E.g. the different recovery paths of the US and the UK from Euro-land. Whether the failure of global capitalism to extract itself from the mire of the post-2008 crisis will give rise to protectionism and isolationism is uncertain. Perhaps the increasing energy independence of the United States, due to shale gas discoveries, will combine with Europe’s commitment to its self-inflicted stagnation to occasion a greater de-coupling. Then again, it may not as the interdependencies are cast in stone these days.
How has the European ideal suffered because of this policy? Is the Eurozone close to collapse?
Survey after survey shows that Europeans are seeing the EU as the problem, rather than as the solution to their problems. As for the Eurozone, the present policies will lead to its fragmentation with the probability tending to one.
Can/should Greece return to the Drachma?
Such a “conversion” back to the national currency would be disastrous. Alas, the way things are panning out, it is as if Europe is engineering the end of the euro, which would force countries like Greece to return to their original national currencies, or to forge new regional ones. This will, make no mistake, be a catastrophe for the global economy as it will bring about a deflationary Germany and a stagflationary periphery; a lethal combination for a United States and a China clinging on for dear life.
What can save Greece and the Eurozone to bring back development?
Something along the lines of what Stuart Holland, James Galbraith and I refer to as our “Modest Proposal for Resolving the Euro Crisis”. Our Modest Proposal comprises four policies for addressing the Eurozone’s four intertwined crises: the banking crisis, the crisis of public debt, the dearth of investment and, of course, the humanitarian crisis that is the result of four years of dithering. Each of the four policies involves existing institutions and requires no Treaty changes, no German guarantees of other nations’ debts, no tax-funded stimuli, no Central Bank monetisation, indeed none of the commitments that Europe’s “family” is so clearly unready for.
What’s the worst case scenario?
The worst case scenario for Greece, Spain, Ireland, Portugal, Italy etc. is what I refer to as Kossovisation: the limiting case of generalized austerity that can be described as a protectorate using the euro as its currency, ruled effectively by a European commissar, terrorized by a local cleptocracy, and with its young people as the only significant export.