Yanis Varoufakis: The Euro Crisis as a Spectacular Political Failure

Yves here. This post is the text of a speech Yanis delivered in Melbourne at the CPA annual conference, as part of a debate with Norman Lamont, the UK’s former Chancellor of the Exchequer under John Major.

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

1. INTRODUCTION – Why am I here?

Thank you Robert. Thank you Ladies and Gentlemen.

It is a great honour to be in your midst today. Still, I cannot but wonder: Why am I here today? Is it because of my work on the philosophical foundations of game theory? Or for my book on the global crisis?

Let’s be honest. It is because the Euro Crisis has promoted me from a run of the mill academic to a… renowned Greek economist. A most dubious promotion. But such is this Crisis that the marginal, all of a sudden, acquires undeserved discursive power and is propelled into the centre of things.

Take my country, Greece. At the margins of Europe’s map and economy for centuries, Greece has been in the global headlines for three years. This is quite absurd.

If a crisis in the Northern Territory had the capacity to threaten with disintegration the Australian Commonwealth, the problem would not be with the Northern Territory. Something would have been profoundly remiss with Australian capitalism!

Catherine the Great once said that: “if you can’t be a good example, you will have to be a horrible warning.”

This is, ladies and gentlemen, my task this fine morning: a Greek bearing not gifts but a hideous warning.


When the GFC struck in 2008, we entered not some recession we had to have but our generation’s Global Winter of Discontent, our very own Postmodern Great Depression.

It may not feel like a Depression in the streets of Melbourne today but scratch the surface anywhere on the planet and what you will find is justified uncertainty, legitimate insecurity and potential insolvency.

Can we expect the combined quantitative easing of our Central Banks to help? At the very best it will provide palliative care to a world in need of a cure.

A cure for what? A cure for what I term the Twin Peaks Problem that follows large financial crashes like those of 1929 and 2008:

• The first peak that emerged is made up of massive unserviceable debts and irretrievable banking losses.
• A second peak consists of equally large idle savings, too terrified to fund productive medium term investments.
The solution requires the mobilization of the savings to produce the income that will pay the debts. Markets cannot do this once caught up in an equilibrium of fear which is only aggravated by universal austerity and merely cajoled by monetary easing.

Can we find such a solution? Of course we can. We did so twice since WW2. Once in 1944 and then again in the 1970s. Both involved a mechanism for recycling global surpluses in the form of productive investment into the deficit regions and sectors.

If our world is now in a state of pronounced bewilderment it is because no replacement has been found for the surplus recycling mechanism which died with the GFC in 2008, at the time the US lost its capacity to use its own deficits in order to recycle other people’s surpluses.


Which brings me to the Eurozone. It was built on the presumption that America’s recycling of others’ surpluses would continue to provide adequate demand for net exporters like Germany. Thus no endogenous surplus recycling mechanism was built into the Eurozone.

For 8 years the Eurozone resembled a fine riverboat on a calm Ocean. But when America’s recycling powers suddenly gave way, the seas turned stormy and the pretty European riverboat began to take water in. Thus our modern Greco-European tragedy began.

• Instead of treating our systemic Euro Crisis systematically, the Core started pointing moralising fingers at the Periphery
• Europe concentrated on lending more money to the insolvent states to lend to their insolvent banks on condition of harsh austerity that shrinks the national income from which the loans should be repaid
• Bailouts are being funded by CDO-like bonds that contain within them the domino dynamic which causes more European banks and states to fail sequentially.

In short, a dreadful monetary design was defended by toxic remedies. For three years now Europe’s response to the discovery that it had created a monster was an all-out assault on reason.


Almost in a bid to defy my hosts I have said nothing so far about Greece. The reason is that there is little to say. Greece was the flimsiest, most corrupt, least entrepreneurial part of the Eurozone. These are the reasons why the domino effect started there. But it is not the cause of the domino effect!

Nonetheless, Greece:

• Reminds us of how quickly a recession can turn into a depression
• Of Britain’s and Australia’s predicament between the world wars, when they sought to stay within the Gold Standard by imposing self-defeating austerity on themselves
• It also reminds us that when a financial crisis cripples an ill designed multinational currency union, the first thing that happens is a disintegration in the common currency; and very soon after that, we end up with real Nazis in Parliament.

Greece has already undergone the greatest fiscal squeeze ever attempted anywhere.

It is now being fiscally waterboarded to accept new measures that everyone knows will drive our economy further into the ground and guarantee that our partners will never get their money back.

So, why is Europe doing this? Because the alternative would be for its elites to admit that the Eurozone was built upon flimsy foundations.

5. WHAT SHOULD WE DO WITH THE EURO: It’s the politics stupid

In her final Parliamentary speech as Prime Minister, Mrs Thatcher famously said about the Eurozone:

“It’s all politics. Who controls interest rates is political. A single currency is about the politics of Europe.”

Hear, hear, I say. (You know that a crisis is deep when a leftwing Greek economist is missing Margaret Thatcher!)

Where Mrs Thatcher was wrong was in her belief that Europe’s elites had federation on some secret agenda.

Exhibit A that they do not have such an agenda is the current banking union debacle: Everyone knows a banking union is a prerequisite for stopping Italy’s and Spain’s quick march into the Grecian Vortex. And yet Germany is single-mindedly working to wreck in practice the banking union which it agreed to in June.

No, ladies and gentlemen, all talk of a federal agenda is bogus. As the Cambridge economist Nicholas Kaldor had predicted in the 1970s, an attempt to create a flimsy currency union would be a first step not toward a Federal Europe but toward Europe’s deconstruction.


So, what should we do?

Europe is now the laboratory of our global future. We should never have created this Euro. But given that we have, Europe has a moral responsibility to itself, and to the rest of the world, to fix it. Without the Treaty changes, fiscal pacts, or Ponzi Austerity programs that defy basic economic logic.

Technically we can achieve this in weeks. But, as Mrs Thatcher, might have said today, “It’s the politics stupid!”

If we fail, Europe will have inflicted mass pain on the rest of the planet for a third time in a century. And then you will all become Greeks too – and not in the benign sense of sharing a love for Homer, Sophocles and Thucydides.

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  1. donna

    goodmorning ..
    well all this is not new .TOO is not new in GR transperence doesn’t have jet.they continue to keep hide many many cases..to much money from public sector GV did not take back ..fish smell from head ..
    europe is not laboratory (gr ) yes and if you wanted my personal opinion WE needed ..(is imposible with one bill’s )to have 4 houses ,4 cars for 2 persons ) so if we don’t find where is problem we can not fix (we are responisbility)for our selfs not others.GER allways was strong economic contry (DMARK ) WAS STRONG this people working very strick without coruption economic
    NOW eur is in political (close street) THIS IS problem of EU
    thank you

  2. Middle Seaman

    A marvelous piece of writing in succinctness, language and logic. Greece does have a tradition. True, the ideas are known. Chores lines always repeat themselves; that their structure, role and function. Mind you, Merkel did react to the previous line; let do it again.

    The leftwing Greek economist refers to us as well. Soon we are facing an election whose financial outcome is guaranteed to resemble that the Euro zone. Romney plans on taking a sledge hammer to the economy to make Bain-like owners plantation owners. Obama will dive into the mindless and endlessly mean Simpson/Bowles austerity with certainty of making us Greece West.

    1. Jim

      The US fundamentally differs from the EZ in that it is a democracy, while the EZ is not.

      Voters throughout the EZ want LESS, not MORE, Euorpe. Yet, the “small group of far sighted statesmen” in Brussels are committed to imposing a US of Europe, regardless of voters’ desires.

      I’m surprised that so many “left-wing” economists continue to support the EZ. I don’t think you can reconcile progressive political beliefs with an authoritarian government in the EZ. But that’s just me.

  3. Max424

    Comprehensive yet concise, fact filled and jargon free, just the way I like it. What a great piece.

    I also liked … “fiscal waterboarding.” Perfect metaphor.

    Waterboarding, the crème de la crème of tortures, it allows you to inflict maximum physical and psychological torment –all while following a loose schedule, or a tight one, proceeding rapidly, or slowly, doing it 5 times a day, or 50 times a day, or going at it all damn day, every day.

    It’s so perfect, it’s whatever you prefer, and best of all, if you are even, somewhat careful, you can keep your bound and drowned victim, indefinitely alive.

    The torturer’s motto fulfilled: The More Sessions the Merrier.

    Note: If it works such wonders on abject human subjects, why can’t we try it on entire subject nations, must be the thinking … of those who do the thinking.

    1. Jim

      Fiscal waterboarding is what the Eurocrats in Brussels are doing to the German voter, after the ECB announced that it would begin to monetize non-core debt.

  4. surfwalker

    A nicely composed speech. But wrong on a fundamental point. Of course the agenda is transfer of sovereignty to the EU. Give me a break.

    1. The Dork of Cork

      Yes of course ,
      Yanis does not care for the concept of Sovereignty (in a world without this you cannot hope to measure or control anything)

      This is the final stage of bank control from Kings to nation states post 1648 to the ninth circle of hell today.

      The modern market state.
      The European construct is the heart of darkness.

      1. The Dork of Cork

        Yanis wants to break up a 400~ year nation state model , I have no problem with that.
        But lets not create a 9th circle of banking hell shall we…..
        Divorce banks from state fiat and let them share a private currency in Europe if the devils wish.
        But this idea of free banks with the ability to produce credit of the Euro relam without any political control is the darkest idea I have ever heard
        Have we learned anything from this free banking crisis with our supposed protectors of money – the central banks at the heart of this extraction entropy economics.
        No – goverment fiat needs to become base money again and as it is almost impossible to stop banks producing private credit fiat
        state units of account needs to divorce itself from the banks and thus
        their direct control & subsidy for malinvestment schemes.

        Fat chance this side of the dark ages though

  5. Robert Asher

    A new role for the Boy Scouts. Train the youth in waterboarding, w junior waterboarding certificates, senior waterboarding certificates etc. Can anyone check to see if either Romney or Obama have an advisor for waterboarding? It they each have a team, we know we are headed for trouble.

    1. Max424

      Obama doesn’t waterboard. He extraordinarily removes enemy combatants from Point A, flies them shackled to Point B, has them gagged and drowned by surrogates, then receives the confession of the enemy soldier in memo form.

      But he does not waterboard, nor does he know any waterboarders personally, and frankly, he finds the whole subject distasteful, and not worth discussing.

      At least this is what I seem to recall reading in the Liberal Media Establishment paper, the New York Times (aka: The Shady Lady).

      1. Max424

        Mitt, on the other hand? I don’t know his position on waterboarding, possibly because no Town Haller thought to ask him.

        I guess that’s why we have journalists. I’m quite sure an inquisitive reporter has already put the question to him?

        “Governor Romney, if you are President, will your administration us the unconstitutional, treaty smashing, highly immoral intelligence gathering technique know as waterboarding?”

        Note: I do know one thing, a Romney administration will be filled with, at minimum, ex-waterboarders that the President knows personally.

  6. Susan the other

    Varoufakis is right. Something is amiss with capitalism. There isn’t any capital. Just debt. Why exactly did the US stop recycling its deficit for Europe’s and China’s surpluses in 2008? No, Mrs. Thatcher, it wasn’t politics, it was pillage. Politics implies there is a political consensus. There was not. The grim reapers of capital, the Mitt Romneys, took all the capital and replaced it with debt. The Angelo Mozillos took all the houses and replaced them with debt. A consortium of corporations, politicians and bankers took all the jobs and replaced them with credit cards. We are left wondering what capital even is. Is it money itself or Is it people? Clearly it isn’t debt because we are rich with debt. Even the Gulfstream of deficits and surpluses that prevailed once has been so diluted with debt there soon will be no surpluses. The answer is to renounce the debt. Keep the euro but renounce all the debt. If the debt is not written off and GIPS leave the EZ it will be very expensive. An article today on CNBC quotes $22Tr – I assume this is debt going parabolic off into space. Where it belongs.

    1. Jim

      Greece would thrive, as Argentina did after it abandoned the dollar.

      But the Greek pols would drown, as they would no longer have a reason to travel, first class on the taxpayers’ dime, to Brussels.

      The truth is that the Greek pols have betrayed their people.

    2. different clue

      Do the Greek people ( the people, not the rulers), consider Euro membership a matter of personal ethnic national pride? Did getting the Euro mean they were recognized as a Real Western Democracy Country? Would leaving the Eurozone and restoring the Drachma mean that Greece returns to being just another Gypsy Balkan Nation? Is the shame of it all what keeps so many Greeks determined to “stay the Euro course” no matter the cost?

      1. postmodernprimate

        Because they’re being told that nothing less than widespread ebola outbreaks, total crop failure, armies of zombies, mothers eating babies to stay alive, the living will envy the dead, etc… will befall them if they leave the Euro. Greece might never be spoken of again after restoring the Drachma, but only if they do it successfully.

        1. different clue

          If I were Greek, I would want revenge. I would want Greece to leave the Euro in the most chaotic way possible so as to cause the destruction and vaporisation of several trillion “notional Euros” on whoever’s books or vaults they might be.

          I would want to turn all the banks of Euro Zoneistan into a series of gray smoking holes.

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