Yanis Varoufakis: Europe’s Modern Titanomachy – How Europe’s Future is Being Shaped by Large Battles on Seemingly Small Matters

Yves here. I’m taking the liberty of starting with the second post of a three post series by Yanis Varoufakis. This is the starting point:

They sound technical and minor when projected against the great scheme of Europe’s extraordinarily rich history. Will there be conditionality attached to the ECB’s bond purchases? Will the bonds that it purchases be treated on a pari passu basis in relation to bonds held by private institutions? Will the ECB supervise all banks or just the ‘systemic’ ones? These are questions that ought to be of no genuine interest to anyone other than those with a morbid interest in public finance. And yet, these questions (and the manner in which they are answered) will probably prove as important for the future of Europe as the Treaties of Westphalia, of Versailles, of Rome even. For these are the issues that will determine whether Europe holds together or succumbs to the vicious centrifugal forces that were unleashed by the events of 2008.

You can read the balance of the initial post here, which summarizes how some of the various constituencies stand on the question of what the best path forward for Europe was prior to the ECB stepping forward with its aggressive plan to tackle the high yields and limited market access of so-called periphery countries. The second looks at whether Draghi’s program and other initiatives underway are likely to prove sufficient.

By Yanis Varoufakis, Professor of Economics at the University of Athens. Cross posted from his blog

On 8th August 2012 the President of the ECB acknowledged that the Eurozone was at an advanced process of disintegration and, in the same breath, promised to do what it takes to put a stop to it. On September 6th came his OMT announcement that many commentators see as a game changer. While most acknowledge that it will not suffice as a weapon with which to win the war against the Crisis, it has given Euro-loyalists a chance to argue that, in the end, Europe has a way of resolving its crises. The fact that the OMT announcement overlapped, time wise, with the impressive document issued by the European Commission regarding the formation of a proper banking union and, also, the German Constitutional Court’s grudging acceptance of the right of the ESM to exist, gave rise to a collective Euro-loyalist sigh of relief.

For the purposes of, as they say, full disclosure, these lines are written by a Euro-critic, though definitely not a Euro-clast (see Part A for the distinction). I am saying this because one would be excused to think that, as a Euro-critic, I have a vested interest in seeing Mr Draghi, Mr Baroso and the rest of our European leaders fail in their quest for a solution predicated upon the basic assumptions and policies that have, so far, not been revised or amended. For my part, all I can do is try to look at the new situation without prejudice and with a fresh analytical eye. So, let’s take a fresh look at the situation the Eurozone is facing: Have Euro-loyalists been vindicated?

The Euro-loyalist position was that, in good time, Europe will rise to the occasion and will create the institutions necessary for overcoming the Crisis threatening the euro. What are the minimum institutions necessary to accomplish this? I think we all agree that there are three: First, a proper banking union. Secondly, a buffer between the national debt of different member-states that prevents a sequential run on their bonds. Thirdly, a strategy for dealing with a dearth of aggregate investment and with internal imbalances (of investment, capital flows and trade) – what I like to call a Surplus Recycling Mechanism. How much closer is the Eurozone to getting these three institutions up and running before the Crisis wrecks its foundations completely?

Starting from perhaps the last of the three missing institutions (the Surplus Recycling Mechanism), there is little to say, save for the observation that it is not even on the agenda. It is quite instructive, and sad, that in the case of the, say, Greece, the European Investment Bank, instead of being the pillar of all attempts to help the collapsing social economy grow, has been neutered by the unfolding fiscal and banking crisis. While Greece has 12 billion euros pending from Brussels (unspent structural funds for the 2007-2012 period), the European Commission is only channelling 1.44 billion to the EIB for investments in Greece. Without any plans for a pan-European investment strategy, centred around the EIB, Europe’s growth and rebalancing prospects are looking very dim.

Regarding the Banking Union, we have a clash of titans brewing. A new Titanomachy is raging, as these lines are written, between German bankers adamant against any serious supervision by the ECB and the Commission which has issued a splendid paper on what Europe’s banking system should look like within a few years. The Titanomachy in question is neither visible to the naked eye nor is its outcome predictable. As I have written elsewhere, the German Finance Ministry is adopting the language of a banking union in order to deny the substance. This does not augur well for a banking union that succeeds in its main task: to de-couple the banking crisis from the crisis of national debt in the Eurozone’s Periphery.

Let us now turn to the other institution which is sine qua non for ending the Crisis: how to finance the stricken nations, Italy and Spain more significantly, that are caught in the clutches of a postmodern Gold Standard, unable to finance themselves, at a time of vicious recession. What would take to end this? Whatever institution is created, it must be centred upon the ECB and must find a way of bypassing the no bailout clause that was the ECB’s foundation stone. In our Modest Proposal, Stuart Holland and I have outlined a simple way of doing this: the ECB acts as a go-between member-states and financial markets, borrowing on their behalf at attractive rates and organising a credible repayment mechanism which would see to it that the new loans are repaid by the national governments, thus ensuring that the ECB need not monetise their debt (either at the primary or at the secondary markets). The only serious argument against this proposal, that I encountered amongst policy makers, was that this would give the ECB a role that no other Central Bank has ever had. Germany, apparently, is eager to ensure that the ECB abstains from ‘innovative’ Central Banking. Our proposal struck them as too innovative at a time when minimum innovation was a political imperative.

The only other serious alternative being discussed at the time was to give the ESM-EFSF a banking licence, allowing it to lever up its loans to the stricken member-states using the ECB’s balance sheet. I opposed this idea because I considered the very structure of the ESM-EFSF toxic (especially when bank recapitalisations add new debt to the sovereigns that fund the ESM-EFSF, and which may need funding from the latter). Levering up a toxic fund was not our idea of good policy. Still, the US Federal Reserve, the French government, and possibly a majority of the Eurozone’s Periphery secretly hoped that the ESM-EFSF could get its banking licence. Well, it did not. Yet, Mr Draghi’s eventual ‘solution’, his OMT, comes pretty close to this.

Under an ECB-turbocharged (or leveraged) ESM-EFSF, the Eurozone’s bailout fund would borrow say 5 euros for each euro that it was funded with by governments in order to lend to countries like Italy and Spain, under strict IMF-troika-like conditionalities of course. This was deemed politically, even morally, unacceptable by Mrs Merkel, by the German constitutional court, by German public opinion etc. So, what will the OMT do differently? Not much, according to Gavyn Davies. Here is Davies’ argument:

Under Mr Draghi’s OMT, Spain will have to submit to a strict IMF-troika-supervised fiscal adjustment program. Once the program is approved, the ESM-EFSF will lend monies to Spain directly (i.e. purchase Spanish bonds in the primary market) while the ECB fires up its digital presses to create the money with which it will purchase many more ‘second hand’ Spanish bonds (of a maturity that does not exceed 3 years) in the secondary markets.

While Gavyn Davies has a point, I think there is an important difference between the ECB-leveraged ESM-EFSF idea and OMT. Under OMT, the ESM-EFSF will be more limited in how many fresh bonds it can buy (as its funding is severely circumscribed). This means that Mr Draghi will have to print a lot more money so as to direct it to the secondary market so as to keep Spanish interest rates low. In reality, his OMT is a less efficient version of the ECB-turbocharged ESM-EFSF model. The political significance of this is that the ECB will face more flak than necessary from the Bundesbank for achieving the same compression of interest rate spreads within the Eurozone (as it will have to print more money to achieve the same effect that an ECB-leverage ESM-EFSF would have). Still, to be fair to Mr Draghi, he may well reply that the OMT’s merit is that, unlike the ECB-leveraged ESM-EFSF plan, it was possible to sell it to the German polity now. In essence, short term political acceptance in Germany was bought at the cost of greater long term German opposition to the ECB’s operations; a point that resonates with Wolfgang Munchau’s analysis.

Be that as it may, the question is how effective the OMT system will be in providing a proper “buffer between the national debt of different member-states that prevents a sequential run on their bonds”. It all depends on whether bond market participants take a look at it and decide that it will not pay them to bet against its integrity. Will speculators wager a few billions that ‘unspecified bond purchases’ means something different to ‘unlimited bond purchases’? Will they want to bet perhaps that, in the end, the Bundesbank will win the argument against Mr Draghi, thus pulling the rug from under his feet? It will also depend on what the OMT means for countries that are already in the clutches of troika programs. Will the ECB be purchasing Irish, Greek and Portuguese bonds in the secondary markets? Will the spreads that the ECB aims at for each member-state be the same? If not, who will determine, and on what basis, the difference between these target spreads? The ECB itself? Europe’s political leaders? Is it possible to imagine that a country like Greece is turned into a kind of Kosovo (a protectorate with the euro as its only currency but with no functioning state, a derelict banking sector and a disheartened mafia-ridden society whose only export is its people plus tourism) while the OMT successfully saves Spain and Italy?

Euro-loyalists will probably answer that it is too early to be negative about Mr Draghi’s OMT. That this is only one step in the direction of a fiscal union, a Federal Europe; as evidence by Mr Baroso’s recent bold statement. Their only worry is that the OMT’s success, even the ebullience that its announcement caused, will alleviate the pressure on governments that keeps them on the straight and narrow, thus raising the prospect of a negative troika report which, in turn, will force the ECB to withdraw its OMT assistance to the said member-state; at which point the latter will face a serious prospect of ejection from the Eurozone, therefore landing us back to the present mire of, in Mr Draghi’s words, “convertibility risk” (the euphemism he coined for Euzone disintegration). Still, Euro-loyalists hope that, before such a cul-de-sac is reached, Mr Baroso’s plans for the Eurozone’s federation will be so advanced that the centrifugal forces will be tamed.

In summary, Europe is currently in the clasps of a ruthless Titanomachy. In the red corner, the German banks are struggling with all the force they can muster to avoid a proper banking union. They are joined by a Bundesbank determined to stick to its guns, undermining Mr Draghi’s efforts to monetise part of Spain’s and Italy’s debts so as to compress the interest rate spreads between the core and the periphery which guarantee the common currency’s, and the single market’s, failure. Over at the blue corner we have Mrs Merkel, Mr Hollande and Mr Barosos who have formed an alliance of convenience backing Mr Draghi. For the time being they are keeping the German bankers (private banks plus the Bundesbank) at bay. But their greatest enemy is silent, sinister and is working away underground, eating into the Eurozone’s foundations. Who is that enemy? The unrelenting logic of disintegration buried deeply into the recessionary macrodynamics of today’s austerian Eurozone.

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  1. Jim

    I have another solution. Let’s have each country comprising the Eurozone revert to their legacy currency, thereby enabling the currency to adjust accordingly.

    Of course, my solution is premised on the primacy of the nation state and democracy, while the solution put forth by many “progressives” presupposes the death of democracy in the EZ and the belief that a “small group of far sighted statesmen” know more than the voters of each country.

    We’ve had other currency unions fall apart, and the individual components have prospered post-breakup.

    Why are so many afraid of the collapse of the EZ.

    As for Germany, who would have guessed one decade ago that Gemany’s decision to join the EZ would have ensured that the UK surpass it as the premier country in the continent of Europe.

    1. Lune


      Well, I’m a liberal, and I’m all for your plan. Although perhaps you meant European “progressives” which are more like American neoliberals, which I’m not. But enough with the labels :-)

      But be careful what you wish for. An EU breakup (with resulting default by the periphery) would cause immediate pain to the periphery, but over time, with devaluation, their economies might balance out. Conversely, an EU breakup might offer short-term gains for Germany, freed from any long-term obligation to fund the periphery, but it also means they’ll have to compete with newly devalued peripheral countries.

      If the Germans (and the rest of the EU) are okay with that outcome, then that’s fine. But if Germany has gotten used to their massive trade surpluses built by a rigid currency union (not to detract from German know-how or investment or productivity), then they will face difficulties as well. Perhaps not as bad as Greece, but it won’t be all roses.

      And as for your belief that the UK has displaced Germany as the power of the continent due to the Euro, I beg to differ.
      In 2002, Germany’s GDP was 21.4% of the EU. In 2011 it was 20.4%. UK’s numbers: 17.1% and 13.8% respectively. (Source: Eurostat http://epp.eurostat.ec.europa.eu/portal/page/portal/national_accounts/data/main_tables)

      1. Roland

        Count me a Euroclast.

        If I were a European, by this time I would be well and truly fed up with the scumbags who keep trying to force a tighter political union upon Europe. That is not what most Europeans signed up for.

        Fiscal union? Hell, no! Europe is not one country. It should never be one country.

        Let the Eurozone bust apart. So what? It’s just a currency.

        For the PIIGS, the correct answer has always been to default on the unpayable debts. Contrariwise, the Germans have been perfectly correct to refuse a fiscal union.

        Puking up the Euro would be pretty miserable, but Europeans would feel much better afterwards to get that stupid crap out of their system.

        1. Joe

          Couple of points:

          Europe as a concept is not dissimilar to nations, and any cursory look at maps of Europe at different times in history will show you that countries like Germany, for example, are a fairly novel idea.

          There are even good historical arguments for Europe being united and not being a patchwork family of nation states.

          The other point is that Germany has not had to `get used to’ trade surpluses. Germany has had trade surpluses for a long time, there is no reason to assume that the end of the Euro would mean the end of German trade surpluses– at least not in the madium or long term.

          Look, we’re in a post-capitalist society. The size of the finanz sector in terms of the real economy is all the evidence you need. Too bad that people are still talking about capitalism, when it already “smells funny,” and has done so for quite some time. The next big bubble to pop is tech.

        2. Pelham

          I generally agree. So I wonder why Varoufakis is a self-described Euro-critic rather than a Euro-clast.

          I lived in Europe for a number of years awhile back, just before the euro, and the quite ordinary Europeans I got to know were universally Euro-clasts and greatly disturbed by the prospect of closer union in any form.

          They gave various reasons but underlying them all seemed to be a suspicion that democracy itself was at stake, that the institutions with real power in the EU were opaque, inaccessible and unaccountable. I came away with the impression that the drive toward union was powered by elites who longed to be free of the demands of their people, freely operating within the impenetrable walls of secrecy surround the European Commission and Council of Ministers.

          In other words, power centers much like those of the Pentagon, powerful congressional committees, Cabinet departments and key agencies and intelligence organizations in Washington.

    2. Random Lurker

      “Of course, my solution is premised on the primacy of the nation state and democracy, while the solution put forth by many “progressives” presupposes the death of democracy in the EZ and the belief that a “small group of far sighted statesmen” know more than the voters of each country.”

      This whole idea that the EU is a undemocratic burocratic nightmare, while European nation states are paragon of democracy is a red herring IMHO.

      I’m Italian, and I can vote for the Italian parliament. I can also vote for the European parliament, which is quite powerless, because most powers reside in the national parliaments. If powers go from the Italian parliament to the European parliament, it’s hard to say that there is a “loss of democracy”.

      I can’t vote for the “premier of Europe”, but then I can’t either vote for the premier of Italy (who is selected from the parliament under Italian law). The role of the “president of Europe” is held by the council of premiers of EU nations, so if you think that those premiers are elected democratically you should agree that this council is still formed in a democratic fashion.

      I can’t vote for the head of the ECB, but I can’t vote for the head of the Bank of Italy either.

      One could make the point that EU elited used the EU to force anti-labor policy on the various nation states, but then the UK is not in the eurozone and is still applying anti-labor policies.

      The present premier of Italy has been (supposedly) “imposed” by the EU, but every law he makes is signed by the parlamentarians (democratically elected) who then blame the EU for the policies they sign. Monti could do nothing without the vote of the democratically elected parlamentarians.

      The policy that the EU is sticking to are very stupid and very “pro capital”, but I don’t think this happens because of a lack of democracy at the european level; for example there are a lot of Italians who own Italian bonds who would not like a bankruptcy nor a devaluation of the lira.

  2. kevinearick

    Counting conditional pennies, holding up a dollar…

    they just can’t help themselves, trying to fix exponentially growing symptoms of past errors, and paying themselves to do so, with tax on monetary expansion, with the middle class adhearing to the certified process the hole way down.

    1. kevinearick

      If you measure the symptom commons, you can see how each is reduced to a gravitational event horizon. Swap currency accordingly to create an implicit currency as required fpr your development needs.

      1. kevinearick

        A stick with scratches will not work for trading surplus because you need an elastic stack, unless you want to spend all your time wondering what the idiots at the central banks are going to do next. as you now know, the central authority is always at max acceleration, just when you get out of the way.

  3. Susan the other

    It isn’t surprising that the the private German banks do not want politics messing up their party. But the Bundesbank seems to have considered the alternatives: eventually Germany could be dragged down too. Varoufakis says the same thing once again about European Investment Bank funds being a necessity – funds which haven’t reached Greece yet. Without investment, low interest rates alone can’t dig the EZ out of their depression. Austerity will destroy any new politics before it can get started. I think that is true. But I don’t think Draghi is planning on defeating himself.

    1. okie farmer

      Susan, those EIB funds will never reach Greece. The EIB is central to Varafoukis’ “surplus recycling mechanism” which would both reduce going rates of interest on periphery country bonds and stimulate employment and their broader economies. If the ECB were interested in helping Greece (or the other in-trouble countries) there is nothing stopping them from rendering that help – the ECB has the tools. Its a toss-up whether Europe’s ‘masters of the universe’ actually believe in austerity economics as Varafoukis states, or whether their intention is to destroy democracy and the very idea of independant nation states, along with crushing labor into total submission.

  4. psychohistorian

    Isn’t funding austerity budgets a bit like an oxymoron?

    It is more like structuring pressure for the global wage race to the bottom and justifying elimination of government social safety nets while siphoning off ongoing rents from all for the global inherited rich.

    1. kevinearick

      German mBS; wasn’t canada saying the same thing just the other day. let’s watch how this german dc control technology works out under backlash conditions…

  5. kevinearick

    Capital is crushing the middle class as extortion, all it knows how to do, but from the perspective of labor it is shooting itself in the head. it’s like that spoiled rich kid in school with a billion dollar bazooka tennis racket. you rarely play tennis, so he challenges you to a game. When you beat him with a $2 racket, he throws a temper tantrum and destroys his own racket, attracting everyone’s attention.

    well, the central bankers have attenuation…


  6. craazyman

    Even Einstein couldn’t figure this one out, but here it is:

    EU + ECB + IMF + ESM + EFSF + EIB + OMT = OPM

    where social wealth goes to zero as OPM goes to infinity and private wealth = f(OPM)2, where 2 = squared.

    this is a corrololary of the breakthrough equation

    e=mc2, where e = economic activity, m = money and c = cooperation.

    as OPM goes to infinity, c goes to zero


    It may be a bold prediction, but I bet there will be even more acronyms created before all variables finally go to zero.

  7. Synopticist

    Part of the plan is to make the whole thing drag on for so long, to make it all seem so BORING, that people will accept being screwed just because they’re not paying attention any longer.

  8. TC

    “Starting from perhaps the last of the three missing institutions (the Surplus Recycling Mechanism), there is little to say, save for the observation that it is not even on the agenda. It is quite instructive…”

    Indeed it is. The Brussels Reichsbank is a den of hardcore fascists whose material, imperial sponsorship from the financial capital of the world sadly reveals millions dead during WWII hasn’t changed a thing on the European scene. Funny how FDR saw it coming, warning of it in his 1944 State of the Union speech.

  9. Hugh

    I often write that the Eurozone has 6 fundamental problems which must be solved together. The alternative is the current slow march to collapse.

    1) A democratic fiscal and debt union
    2) An effective central bank
    3) An insolvent predatory banking system
    4) Mercantilist trade patterns within the zone
    5) Completely corrupt political classes
    6) A ruling kleptocratic class of the rich

    Varoufakis is still trying to figure out ways to get a system to work which manifestly and repeatedly has shown that it does not work. We have seen now some 20-30 solutions and deals which were supposed to fix Europe. None of them have because none have even acknowledged, let alone addressed, the problems I listed above. This has been completely predictable because it is the rich and the elites who have put together these deals and they are not interested in fixing anything. They are only interested in looting.

  10. Ignacio

    I that if someone tries to write Wolfgang Schäuble or Munchau correctly, he or she should also make a similar effort to write Barroso (Jose Manuel) correctly, not just as an approximate transcription of how it sounds in english (Baroso).

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