By Yanis Varoufakis, Professor of Economics at the University of Athens. Cross posted from his blog.
The establishment view in Europe is that the problem is too much debt (by profligate countries like Greece) and, therefore, that the solution must involve (a) austerity and (b) structural reforms (which increase the competitiveness of the weaker states). The problem, however, is that the establishment view is profoundly mistaken and, as a result, the proposed treatment poisons the patient. If this is so, Europe (and the world) have a lot more to fear from the ‘reasonableness’ of political parties like Fine Gael et al than from the ‘ultra-leftists’ of Syriza.
The other day, the Irish voted in favour of a hideous impossibility: They voted in favour of the EU’s fiscal compact which specifies that which is both impossible to attain and catastrophic if it is attained. What was that? The pledge by member-states that “general government budgets shall be balanced or in surplus”, that “the annual structural deficit must not exceed 0.5 percent of GDP”, that if “government debt exceeds the 60% reference level” it will be reduced “at an average rate of one twentieth (5%) per year as a benchmark” and that, failing all this, “the EU’s highest court will be able to fine a country”; a penalty equivalent to up to 0.1% of GDP”.
Suppose that every European citizen adopts the fiscal compact as her or his guiding principle and puts its implementation above all else in life. If Spain, Italy, Portugal, Ireland, France, Greece, Germany etc. (i.e. countries with debt well above 60% of GDP) were to reduce their debt by the specified 5% per annum, this would mean that all these nations should turn an average 2.8% primary deficit to something akin to 6% primary surplus. Suppose we could do it (which, of course, we cannot). Were we to succeed in this endeavour, the result would be a very deep recession equal to at least -4.5% in terms of average Eurozone-wide ‘growth’. In a period when a banking crisis is in full swing, the Periphery is in free fall, US growth is tittering of the verge, China is slowing down etc., engineering such a recession via this piece of ‘legislation’ is the macroeconomic equivalent of committing suicide.
So, why did the Fine Gael-led Dublin government push so powerfully in favour of this piece of crippling idiocy? And why did the smart, decent Irish voters said Yes, despite their tradition of saying No to euro-silliness? The answer is simple: They were blackmailed. Ireland’s voters were told: Vote No and the flow of money from the troika will cease. And so they voted Yes, even though I suspect that no government minister, no rank and file Fine Gael or Labour Party member, no man or woman on the street believes that the Fiscal Compact they voted for makes sense.
Similarly in Greece today. Voters are being bombarded by the media with precisely the same dilemma: If you vote for Syriza, as opposed to one of the pro-bailout parties, the money flow from the troika will cease and then all hell will break loose. Indeed, the same scenario is played out all over the place. In Spain, the hapless government of Mr Rajoy speaks out against Eurobonds so as to stay on the ‘right’ side of Mrs Merkel in the hope that Spanish banks will be kept afloat without an ignominious inclusion in the EFSF-ESM fold. Italy’s Mr Monti is invoking the Greeks to vote for ‘reasonable’ parties even though he knows full well that this sort of ‘reasonableness’ involves policies that constitute cruel, unusual and ineffective punishment. And so on.
For two years now I have been arguing that Europe is being quickmarched, sequentially (one country after the next) off the cliff of competitive austerity – without any winners standing at the end of this gruesome process. Something must end this madness. There must be a circuit-breaker. Ireland could have been that circuit-breaker, with a resounding No to the idiotic Fiscal Pact. It did not happen. On the one hand, the fear that Ireland will be frozen out of the ESM and, on the other hand, the elevation of the troika’s ‘model prisoner’ image (for the Irish) onto the Pantheon of Irish virtues, saw to it that madness (in the form of a Yes vote to a Compact that everyone knows to be daft) prevailed. Greece is the next hope that Reason may manage to score a belated victory.
If on 17th June Greeks voted like the Irish did last week (that is, against their reasoning and guided by fear and blackmail), the Eurozone will become history, with terrible consequences for the global economy. This is not the case of the Philosopher Kings blackmailing the plebs to do what is right. This is the case of ‘madmen in authority’, to quote Keynes, who are not only steering the vessel toward the rocks but who are, in the process, punching holes in the life vests that may carry us to safety once the shipwreck is complete. Consider what they are telling the Greek people: They are saying that Greece, to remain in the Eurozone, must,
(a) carry on borrowing from the EFSF at 4% (and thus adding to Greece’s public debt) in order to pay the ECB (which will be making a 20% profit from these payments, courtesy of the fact that it had previously bought Greece’s bonds at a 20% to 30% discount)
(b) reduce public spending by 12 billion euros in order to be ‘allowed’ to borrow for the benefit of bolstering the ECB’s profits from these transactions involving bankrupt Greece.
If the Devil wanted to guarantee that Greece is pushed out of the Eurozone, he and his evil handmaidens could not make up the above, satanic, scenario. Meanwhile, the same happens in Spain, where the government is forced to borrow money (at nearly 7%) it can hardly raise in order to shore up banks that are borrowing from the ECB (at 1%) to lend to the Spanish government at (7%) so that the latter can… bail them out. Not even the sickest of minds could make this up!
To conclude, Europe’s peoples are being marched into a catastrophe. They know that this is their predicament. They can see their march is leading them off a mighty cliff. But they are too afraid to veer off, in case there are beaten back into line, in case they get lost in the woods, for reasons that sheep know best. However, the only way this hideous march can end is if someone summons up the courage and does it. And steps out, showing the others that this march can stop and must stop – for everyone’s benefit. Who is that someone? We, Europeans, do not have many options. As I wrote above, the Irish people had a chance but did not take it. In two weeks, the Greeks have their chance. Voting for Syriza would offer us (and by ‘us’ I mean all Europeans) a chance of this circuit-breaker. A chance to say: Enough! Time to change course in order to save the Eurozone, so as to prevent the Great Postmodern Depression which lurks once the euro-system fragments formally.
Should we be afraid of Syriza’s ‘ultra-leftism’? My answer is a resounding No. I recommend that (even those who have Greek amongst their languages) you do not read their manifesto. It is not worth the paper it is written on. While replete with good intentions, it is hort on detail, full of promises that cannot, and will not be fulfilled (the greatest one is that austerity will be cancelled), a hotchpotch of policies that are neither here nor there. Just ignore it. Syriza is a party that had to progress, within weeks, from a fringe political agglomeration struggling to get into Parliament (at around the 4% mark) to a major party that may have to form government in a few short weeks. It is, in important ways, a ‘work in progress’; and so is its unappetising Manifesto. No, the reason it is safe to take a gamble on Syriza is threefold:
First, because it is probably the only party that ‘gets it’; that understands (a) that Greece must stay in the Eurozone (despite the latter’s obvious failures), and (b) that the Eurozone will not survive unless someone forces Europe to put an immediate halt on this “march off the cliff of competitive austerity”.
Secondly, because the small team of political economists that will negotiate on Syriza’s behalf are good. moderate people with a decent grasp of the grim reality that Greece and the Eurozone are facing (and, no, I am not part of that team – but I know the ones I am referring to).
Thirdly, because, in any case, a vote for Syriza is not going to establish a purely Syriza government. No party, including Syriza, will be in a position to form a government outright. So, the question is whether Europe is better off with a government in Athens which includes Syriza as a pivot or one which is supported by discredited pro-bailout parties, with Syriza leading from the opposition benches. I have no doubt whatsoever that Europe’s interests are best served by the first option.
 On a humourful note, perhaps we can even enlist the Fiscal Compact as a reason to support a Syriza-based government! One of the Compact’s articles, after all, says that member-states agree to take the necessary actions and measures, which are essential to the good functioning of the euro area in pursuit of the objectives of fostering competitiveness, promoting employment, contributing further to the sustainability of public finances and reinforcing financial stability.” Well, all this, at least in my estimation, requires saying No to the ‘bailout’ logic and, thus, Yes to the Syriza’s line of argument…