Europe Is Not “Coming Together” in Response to the Euro Crisis. Why?

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

In this article I ask a question on everyone’s lips: Almost everyone agrees that the Eurozone was a one-legged giant; a monetary union lacking a political ‘leg’ to stabilise it. If so, why has the Euro Crisis (which surely strengthened that view on the back of its ferocity and durability) not strengthen the hand of the federalists? Of those who were, supposedly, waiting to pounce upon any opportunity to create a United States of Europe? (This article was compiled from extracts of a keynote speech I have on 25th August 2014 at the University of Tampere, Finland, in the context of a conference entitled Power, Knowledge and Society.)

Monetary Union is an attempt to usher in Federation through the back door.” Margaret Thatcher, 1990

We now know that Mrs Thatcher was wrong. The Euro Crisis, that broke out in th aftermath of the 2008 global financial implosion, was a splendid opportunity for federalists in Berlin, Brussels and Paris to push for the federal moves that they, purportedly, always planned to make on the back on the common currency.

Just look at the so-called Banking Union that the EU has agreed. The unification of banking sectors across the Eurozone, which was and is absolutely essential for the survival of the Eurozone, was recently proclaimed in name to be denied in practice.

This raises a poignant question: The United States also had serious trouble consolidating its union, its federation. It took a century of deliberation, a bloody civil war, a series of banking crises and depressions and, of course, the Great Crash of 1929, not to mention the civil rights marches in the 1960s (which spawned Lyndon B. Johnson’s Great Society) for the United States to achieve proper political unity. But with every crisis, the United States pulled closer together.

Europe is doing the opposite. It is coming apart. Even though we came to the brink in 2012, when Mr Mario Draghi, the head of the ECB, admitted that the euro was about to collapse (famously invoking the ‘convertibility risk’), not only did we not come closer together but, indeed, we did precisely the opposite, if one looks at the reality behind the rhetoric.

The question is: Why was Mrs Thatcher wrong? Why was a genuine political union not on the cards? Why is this crisis causing the re-nationalisation of many areas of policymaking, including the link between banks and governments? Why is the crisis failing to produce an Alexander Hamilton or a Franklin Roosevelt but, instead, reinforces unendingly the centrifugal forces tearing the EU edifice down?

The Asymmetrical Political Economy of The Eurozone

Right from the beginning, the original signatories of the Treaty of Rome, the founding members of the European Economic Community, constituted an asymmetrical free trade zone. And when new member-states, like Greece, Portugal etc. entered, the free trade zone became even more asymmetrical.

To see the significance of this asymmetry, take as an example two countries, Germany and Greece today (or Italy back in the 1950s). Germany, features large oligopolistic manufacturing sectors that produce high-end consumption as well as capital goods, with significant economies of scale and large excess capacity which makes it hard for foreign competitors to enter its markets. The other, Greece for instance, produces next to no capital goods, is populated by a myriad tiny firms with low price-cost margins, and its industry has no capacity to deter competitors from entering.

By definition, a country like Germany can simply not generate enough domestic demand to absorb the products its capital intensive industry can produce and must, thus, export them to the country with the lower capital intensity that cannot produce these goods competitively. This causes a chronic trade surplus in Germany and a chronic trade deficit in Greece.

If the exchange rate is flexible, it will inevitably adjust, constantly devaluing the currency of the country with the lower price-cost margins and revaluing that of the more capital-intensive economy. But this is a problem for the elites of both nations. Germany’s industry is hampered by uncertainty regarding how many DMs it will receive for a BMW produced today and destined to be sold in Greece in, say, ten months. Similarly, the Greek elites are worried by the devaluation of the drachma because, every time the drachma devalues, their lovely homes in the Northern Suburbs of Athens, or indeed their yachts and other assets, lose value relative to similar assets in London and Paris (which is where they like to spend their excess cash). Additionally, Greek workers despise devaluation because it eats into every small pay rise they manage to extract from their employers. This explains the great lure of a common currency to Greeks and to Germans, to capitalists and labourers alike. It is why, despite the obvious pitfalls of the euro, whole nations are drawn to it like moths to the flame.

What Does It Take For an Asymmetrical Monetary Union to Survive?

The United States proves that an asymmetrical monetary union (e.g. between California and Missouri) can succeed. Nonetheless, most asymmetrical monetary unions, wherever and whenever tried in combination with free trade and deregulated capital movements, ended up in tears and retribution. The Gold Exchange Standard in the mid-war period, the various pegs between domestic currencies and the US dollar (in S.E. Asia, Argentina, Mexico etc.), the European Exchange Rate Mechanism, which crashed and burned in 1993, the Eurozone that followed the latter’s collapse etc. they all resembled invasions of Russia – that is, a brisk beginning full of enthusiasm and hope, rapid progress that seemed unstoppable, followed by a heart-wrenching slowdown as Cruel Winter took its toll, ending up with blood on the snow and infinite retributions thereafter.

What is the ingredient that allows an asymmetrical monetary union, involving free trade and free capital movements, to survive? An efficient Extra-market Surplus Recycling Mechanism is the answer. Mechanisms for recycling surpluses come in two different guises: Market-based ones, that rely on the financial system to channel surpluses, in the form of loans and credit, to the deficit countries and regions. And extra-market recycling mechanisms that rely on political institutions and some form of collective agency; e.g. fiscal transfers within a federation, the Marshall Plan etc.

Can Market-Based Recycling suffice, without Extra-Market Recycling? Under no circumstances. Here is why:

When asymmetrical national economies are bound together with politically engineered fixed exchange rates, as was the Gold Exchange Standard of the 1920s or the Eurozone today, there is a tendency for capital violently to migrate from the surplus to the deficit countries. From the Germanies to the Greeces of the monetary system. Why?

Because the German trade surpluses cause capital to accumulate in Germany, pushing real interest rates down there. At the same time, Greece is starved of capital and so the Greek real interest rate rises, attracting the money slushing around in the German banks. And if the exchange rate is fixed, German bankers labour under the self-reproducing illusion that they need not worry about a drachma devaluation, and so they lend to the Greeks as if there is no tomorrow.

These capital flows from the banks of the surplus country to the deficit country build bubbles in the deficit country which therefore experiences Ponzi-growth that, in turn, creates demand for more German exports, therefore reinforcing German surpluses while magnifying the deficits of the deficit areas.

Alas, the bubbles at some point burst. When they do, un-payable debts pile up in deficit countries like Greece. If the political response to this insolvency is to put all the burden of adjustment, and debt repayment, on the weak, insolvent shoulders of the deficit countries, the result is permanent depression there and a slow-burning recession in the surplus countries, as the deficit nations can no longer afford to import from them. Ponzi-growth thus gives rise to ponzi-austerity…

None of this is, of course, new. It is the story of the mid-war, Great Depression. That Europe saw it fit to repeat that piece of sorry economic history in the 21st Century is mindboggling.

What is most disturbing, however, is not that our leaders do not understand these simple facts of macroeconomics. What astounds and depresses the sober onlooker is that their incomprehension leaves them completely unashamed!

Looking For An Explanation In The European Union’s History

To understand why Europe has not been egged on by its Euro Crisis toward the adoption of a federal Extra-market Surplus Recycling, and why its leaders continue to dither, we need to delve into the EU’s history, its DNA so to speak.

As Europe was exiting the WW2 nightmare, the New Dealers that were in power in Washington at the time began to plan for a United Europe as part of a global design that would last for at least two decades.

Having dealt with the Great Depression in the 1930s, and as WW2 was ending, the New Dealers’ most immediate grand fear was that the American economy would slip into another depression after 1949, as factories would begin to lay off workers once the war effort ended. With the dollar the only convertible currency, the new crisis would spread like a bushfire through the rest of the capitalist world.

Being the sole surplus nation globally, they understood that the only way of avoiding this calamity would be to recycle their own surpluses to Europe and to Japan in order to create the demand that would keep their own factories producing all the gleaming new products, washing machines, cars, television sets that American industry would switch to producing. Thus, the project of ‘dollarising Europe’ began. A most impressive hegemonic program that demonstrates vividly the sharp difference between hegemony and authoritarianism. And reminds us of how badly today’s Europe needs an hegemonic, as opposed to an authoritarian, Germany.

The New Dealers understood that their own industrialists, as well as business in Europe and in Asia, craved a fixed exchange regime that would afford them certainty. But they also understood that a fixed exchange rate regime, like the Gold Exchange Standard, would create bubbles that would then burst leaving nothing but tears and un-payable debts behind, and, possibly, a devastated global capitalism ready to fall prey to the emerging Soviet Union.

So, here is what they decided: They would re-create a fixed exchange rate regime (which came to be known as the Bretton Woods system) but equip it with an Extra-market Surplus Recycling Mechanism in order to stabilise it (with the Marshall Plan being only one of its, even if the most vivid, manifestations), to prevent imbalances between the deficit and the surplus nations from exceeding certain levels, to stop bubbles from forming (by introducing strict capital controls) and, in cases of recession, to inject capital as well as liquidity into the affected economies to prevent a depression that might spread throughout global capitalism.

To underpin the dollar-anchored fixed exchange rate system (also known as Bretton Woods) they selected the yen and the DM and set out to reinforce the industrial foundations on which these currencies sat. So Germany and Japan, the recently defeated nations, were to become the regional powerhouses east and west of the American Goliath.

However, powerhouses need ‘vital spaces’ – large markets around them capable of producing the demand for all the products that come off the production lines and which the German and the Japanese markets could simply never absorb. Thus the New Dealers had to answer the question: Where will demand come from for German and Japanese manufactures? In the case of Germany, the answer was: the rest of Europe – what we now know as the EU. In the case of Japan the original idea was to turn China into Japan’s vital space but when Mao wrecked that idea the United States did not hesitate to turn its own backyard into Japan’s vital space.

To implement this plan for Europe as part of America’s global planning, Washington had to overcome a major obstacle: the French demand that German industry be dismantled! Indeed, seven hundred German factories were destroyed by the allies and the agreement of Allied Command was that another thousand should follow. That had to change. To bring the French elites around to their idea of a German Powerhouse at the heart of a United Europe, the New Dealers offered Paris a simple deal: Accept the notion of a re-industrialised Germany dominating a Northern and Central European heavy industry cross-border cartel and we shall offer the graduates of the Grand Ecoles the opportunity to administer the cartel’s institutions and to the French bankers access to German surpluses.

The one Frenchman that put up the greatest resistance against this plan was none other than General De Gaulle. Eventually, and once elected President, he changed his mind and went along with America’s European Economic Community (EEC). “The EEC is a horse and carriage” de Gaulle once said to a journalist. “Germany is the horse and France is the coachman”. And when Henry Kissinger asked him how he would prevent German dominance of the EEC, de Gaul answered: Par la guerre! One wonders what Mr Hollande’s thoughts would be on this subject today…

Washington had to make one major concession for the EEC to be built along the Franco-German axis: European Unity would be built upon a cartel of heavy industry, rather than on the Americans’ preference for fairly competitive markets.

The process, once it began, was inexorable. First a German dominated cartel of coal and steel emerged, with a cross-border French-dominated administration. Once tariffs on coal and steel were removed, it was a natural next step to remove all tariffs. But to co-opt French farmers, a common agricultural policy was established the purpose of which was to extract the farmers’ consent to a free trade zone by handing over to them a chunk of the cartel’s monopoly profits. The Treaty of Rome was no more than a codification of that deal.

This fledgling European Economic Community created large surpluses that fuelled post-war prosperity in a stable world environment where the Bretton Woods system was constantly stabilised by the United States which took it upon themselves to recycle to Europe and to Asia almost 70% of their surpluses – but also to regulate ruthlessly all large financial flows. That was the Golden Age of low unemployment, low inflation which spawned the dream of Europe’s shared prosperity. It was (at the expense of treading on European sensibilities) an American triumph.

Alas, by the late 1960s it was dead in the water. Why? Because America lost its surpluses and could no longer stabilise the global system by recycling surpluses it no longer had. Never too slow to accept reality, the United States announced the end of that era. The calendar read: 15th August 1971. The dollar was de-coupled from gold, from the yen, and from Europe’s currencies. John Connally, Richard Nixon’s Treasury Secretary, visited Europe to tell our Europe’s smacked leaders: “The dollar is our currency but it is your problem”.

Europe had suddenly become unhinged!

Europe’s Monetary Experiment

All of a sudden, Germany was buffeted by a rising DM against the dollar while Italy and other countries that were crucial for northern European exporters were pegging their currency to the falling dollar. The post-war, American, design of a Central European heavy industry cartel, plus a common agricultural policy cutting the (mainly) French farmers into the deal, was in peril.

A fixed exchange rate regime was imperative to keep it going. Thus Europe set off on the road to creating its own Bretton Woods within the EU. Tragically, they ended up with something much more like the Gold Exchange Standard than a European Bretton Woods. Why? Because they never planned for an Extra-market Surplus Recycling Mechanism!

Did President Giscard ‘ Estaing and Chancellor Helmut Schmidt, who negotiated in secret the European Monetary System in the 1970s, not know this? Did Francois Mitterrand and Helmut Kohl not know what they were doing when putting together the Eurozone in the early 1990s? Were Europeans merely unschooled to this very simple economic principle? I think they did know. Their problem was that the political arithmetic on which they relied was not conducive to the idea of extra-market surplus recycling within the EU. And here is the rub. Therein lies our collective misfortune.

Three were the reasons why an Extra-market Surplus Recycling Mechanism was not included in the European monetary design. The first was that the strains within the European family were too great. Indeed, France, Germany, Spain and Italy got bogged down into monetary warfare that lasted from 1971 until the 1990s. The second was that such a mechanism requires a powerful hegemon to set it up. Neither Germany nor France had that power on their own, either in the 1970s or in the 1990s, and were incapable of acting in unison to create it. Third, and most importantly, the need for an intra-European Extra-market Surplus Recycling Mechanism subsided by the early 1980s because of the United States and its audacious new global role.

Let’s for a moment go back to 1971. As the American authorities were dismantling the Brettton Woods system they adopted an audacious strategic move: once the United States had lost its external surplus position, and could no longer be global capitalism’s surplus recycler, it would (in Paul Volcker’s inimitable words) have to recycle “other people’s surpluses”. How? Instead of tackling the nation’s burgeoning twin deficits, America’s top policy makers were to do the opposite: boost them!

And who would pay for these deficits? The rest of the world! How? By means of a permanent transfer of capital that rushed ceaselessly across the two great oceans to finance America’s deficits, attracted to Wall Street by the prospect of higher returns. The deficits of the US economy, thus, operated for decades like a giant vacuum cleaner, absorbing other people’s surplus goods and surplus capital. In turn, powered by America’s deficits, the world’s leading surplus economies, Germany, Japan and, later, China, kept churning out the goods that America absorbed. Almost 70% of European and Asian profits were being transferred back to the United States, in the form of capital flows to Wall Street. And what did Wall Street do with it? It financed the rise of financialisation; a process which the French and German banks joined in enthusiastically.

This was the reason why Europe, despite having introduced an unsustainable Gold Standard in its midst, seemed to be prospering: the necessary intra-European surplus recycling was provided by the Franco-German banks on the back of the global recycling generated by America’s twin deficits and completed by the flow of global capital to New York. Wall Street’s bubbles financed Europe’s internal bubbles (especially in the Periphery) as well as the importation of Europe’s, and of course, Asia’s, net exports to the United States.

Europeans, like the Bourbons who remembered everything and learned nothing, assumed that America’s recycling role would survive ad infinitum. On the basis of this foolhardy assumption, they imagined that Europe does not need an Exta-market Surplus Recycling Mechanism of its own. That, once again, it would rely on the Americans for all the surplus recycling Europe needed. Thus, European leaders set out to recreate the Gold Exchange Standard within the European Union, demonstrating a grandiose failure of perception of what they were about to do. Keynes had described the Gold Standard as “a dangerous and barbarous relic of a bygone era”. Little did he know that Europe would recreate it in the late 1990s and defend it to the hilt after our 1929 hit in 2008.

Quite naturally, when following Wall Street’s collapse in 2008, America lost its capacity to recycle the world’s surpluses, it immediately ceased generating the aggregate demand that had hitherto stablised the European Union. At the very same time, Wall Street’s toxic money, that had hitherto ‘lubricated’ intra-European surplus recycling via the preposterously badly managed Franco-German banks, turned to ashes.

The rest is history. The Eurozone’s architecture was incapable of sustaining such shockwaves and it has been unraveling every since. Once Europe’s leaders barricaded themselves in the iron cage of radical denial that the Eurozone was in a systemic crisis, the European Union’s foundations began to crumble. The European Parliament elections of 2014, and the rise of organised misanthropy from Denmark to Greece and from France to Hungary, offer generous evidence to that effect.

Why Is Europe Incapable Of Moving In A Federal Direction Now?

Many Europeans, deep down, hoped that Mrs Thatcher was right. That monetary union was an ‘underhanded’ move toward federation. That, perhaps, President Mitterrand and Chancellor Kohl knew that the euro, once created, would sooner or later cause a crisis which would then place their successors in a dilemma between (a) allowing the common currency to collapse or (b) moving toward political union. Even if this were true, it now turns out that Mitterand’s and Kohl’s successors, our current leaders, are incapable of (or unwilling to) proceed in a federal direction, preferring to allow the Eurozone to continue along a path of fragmentation which causes the fault lines between surplus and deficit countries to deepen irreversibly. The question, however, remains: Why?

Despite its numerous faults and toxic politics, the American Constitution evolved through an unabashedly political process of conflict between vested interests, between federal and states authorities, between capitalists and labour unions. The United States has been a political process from its inception, well before turning into a fully-fledged fiscal union. Economic and financial power was, of course, always at the heart of that political process and played a substantive role in the outcome of the ongoing political struggle. Nevertheless, economic power in the United States, while highly concentrated, was of a relatively fluid type. The dominant corporations came and went, their power being fairly widely dispersed. The mighty corporations of the 1900s are no longer central to the political game in Washington today, having been displaced long ago by ‘upstarts’. There were even instances when the federal government would attack and destroy large cartels, even confine for decades the financial genie into a tight, proverbial, bottle (e.g. Standard Oil, the Glass-Steagall Act).

In contrast, the European Union’s bureaucracy was always built as a democracy-free, even a politics-free, zone. Its founding fathers, men like Jean Monnet, harboured a deep distaste for democratic politics and aspired to creating a technocracy in Brussels that would direct Europe’s macro-economy in a corporatist manner in the interests of the Central European heavy industry cartel. Many of the Central European corporations that were dominant inside that cartel in the 1950s are still dominant within it today. In contrast to the fluidity of the United States spectrum of corporate power, the Central European industrial terrain is remarkably stable and in a stable relationship of co-dependence with Brussels; i.e. with the European Union institutions that were created to administer the legal and institutional framework functional to the interests of the ubiquitous Central European cartel. In this context, it seems natural that the European Common Market was an attempt at de-politicising the European integration project and subjecting it to the guidance and administration of unelected technocrats who would consistently reduce politics to management and democracy to consultation.

Mrs Thatcher’s error was to mistake the Central European, traditionalist, corporatist, and highly conservative notion of a ‘Europe of Nations’ for a penchant for a Federal Europe. There was never any political project, backed by powerful European interests, to create a federal, democratically elected government. The idea was always to erect a mighty bureaucracy that would work together with, and on behalf of national governments, in a manner that makes democratic accountability utterly impossible. How? Whenever an elected minister, or Prime Minister for that matter, returns home with a European deal that her or his own Members of Parliament find unfathomable, the retort is simple: “It was the best I could achieve.” Clearly, the ‘Europe of Nations’ is a super-state decision-making process lacking any mechanism by which electorates, and their elected representatives, can scrutinise its decisions.[1]

The ‘Europe of Nations’, seen from this perspective, was utterly consistent with and functional to the dominance of the capital goods, heavy industry cartel that was the foundation and motivating force of our, supposedly, United Europe. The notion of a Federal Republic where the sans culottes of France, of Spain, heavens forbid of Greece, would elect a common, a federal government on a one-person-one-vote basis, and have real influence on how United Europe would be administered, was and remains anathema to our elites and leaders. It simply did not, and does not, compute.

Thus, the EU’s radical reluctance to move in a federal direction following the Euro Crisis is not a mystery, after all. No cartel that controls the administration of its vital space directly wants to concede this exorbitant privilege to some democratically elected central government. Especially when a huge, expensive bureaucracy has been set up in Brussels precisely to preclude this. A bureaucracy that includes some very skilled technocrats who harbour a deep, Platonic, contempt for both history and democracy.


Well meaning Europeanists, who dream of that which Mrs Thatcher feared (i.e. a Federal Europe) fail to understand that it is not a simple matter to graft a federal democracy upon a Brussels-based technocracy representing the unholy alliance between run-of-the-mill apparatchiks, a powerful Central European cartel of heavy industry, national politicians who have their own cosy relationship with bankrupt local bankers, and large international banks.

They need to grasp what a Herculean task it would be to inject genuine representative democracy into the institutional mélange representing this unholy alliance, which has evolved into a European Union atavistically inimical both to democracy and to any form of extra-market surplus recycling.

If anything, the Euro Crisis has made this titanic task even harder. It is for this reason that, faced with a stark choice between fragmentation and federation, the European Union is currently drifting toward the former.


In the next article I shall be proposing, along the lines of the Modest Proposal, ways in which the European Union can be stabilised in a manner that makes possible a clean break from its undemocratic posture and from an ignominious future.

[1] Anyone who argues that the European Parliament fills, or can potentially fill, that role is clearly innocent of any understanding regarding what a real Parliament does.

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About Lambert Strether

Readers, I have had a correspondent characterize my views as realistic cynical. Let me briefly explain them. I believe in universal programs that provide concrete material benefits, especially to the working class. Medicare for All is the prime example, but tuition-free college and a Post Office Bank also fall under this heading. So do a Jobs Guarantee and a Debt Jubilee. Clearly, neither liberal Democrats nor conservative Republicans can deliver on such programs, because the two are different flavors of neoliberalism (“Because markets”). I don’t much care about the “ism” that delivers the benefits, although whichever one does have to put common humanity first, as opposed to markets. Could be a second FDR saving capitalism, democratic socialism leashing and collaring it, or communism razing it. I don’t much care, as long as the benefits are delivered. To me, the key issue — and this is why Medicare for All is always first with me — is the tens of thousands of excess “deaths from despair,” as described by the Case-Deaton study, and other recent studies. That enormous body count makes Medicare for All, at the very least, a moral and strategic imperative. And that level of suffering and organic damage makes the concerns of identity politics — even the worthy fight to help the refugees Bush, Obama, and Clinton’s wars created — bright shiny objects by comparison. Hence my frustration with the news flow — currently in my view the swirling intersection of two, separate Shock Doctrine campaigns, one by the Administration, and the other by out-of-power liberals and their allies in the State and in the press — a news flow that constantly forces me to focus on matters that I regard as of secondary importance to the excess deaths. What kind of political economy is it that halts or even reverses the increases in life expectancy that civilized societies have achieved? I am also very hopeful that the continuing destruction of both party establishments will open the space for voices supporting programs similar to those I have listed; let’s call such voices “the left.” Volatility creates opportunity, especially if the Democrat establishment, which puts markets first and opposes all such programs, isn’t allowed to get back into the saddle. Eyes on the prize! I love the tactical level, and secretly love even the horse race, since I’ve been blogging about it daily for fourteen years, but everything I write has this perspective at the back of it.


  1. mmckinl

    The EU was always designed as a banksters union. Just look as every country has submitted to austerity and some even to technocratic governments hand picked by the banksters. Even the so-called Socialists just rolled over to the ECB. And we have a Goldman Sachs men in important positions including Draghi as chairman of the ECB.

  2. John

    We had our chance to throw the bums out in May but we settled for more of the same. The Commission & Parliament are busy putting in place, at their discretion, their own partners. The sad truth is we’ve got 5-more years of bad leadership. At the national level, we’re content with righties leading the charge, giving away public assets to the highest bidder.

    Coming together? Forget about it.

    1. abynormal

      double vision set in at… “with every crisis, the United States pulled closer together.”
      subhuman culture never swelled. evidence is the Global Present.

      “give a dog a bone…this old man came rolling home”

  3. David Lentini

    Excellent piece. But I also wonder if part of the difference between the US and Europe is that while Americans started with some, albeit imperfect, sense of “Americanness” with a common culture, the Europeans have always been fragmented by very different societies. Americans came together more, because there was a commonality to begin with.

    On top of that, American culture has largely been an almost “anti-culture” that embraced the industrial, scientific, and economic revolutions of the 19th and 20th Centuries that emphasized the “new” over preserving the “old”, and the primacy of economic over political activity. Much of that reflects the immigration to America of many different Protestant groups from England and Europe, who wanted as much freedom of expression as possible. The result is that America is a largely anti-intellectual culture that disdains politics, and our own democratic republican institutions are suffering as a result.

    Conversely, Europe never had such a basis for creating strong federation. From what I recall reading, the Truman and Eisenhower administrations were very cognizant of this in creating the post-war institutions to deal with the desperate political, economic, and humanitarian crises after the War. In short, they probably did the best the could have hoped for. Of course, no system can last forever. Sadly, it was left to Nixon and Kissinger to handle the inevitable collapse; and they acted in the most selfish way possible.

    1. Banger

      I don’t agree that Nixon/Kissinger acted “selfishly”–they acted on the basis of that historical moment. It was the Europeans who dropped the ball–on themselves.

      1. Carolinian

        Also isn’t it the President’s job to act “selfishly” in the US national interest, if that is in fact what Nixon did? Some might argue that the result following events of the early seventies was a hollowing out of the American economy to the benefit of Europe and particularly Asia.

        And following Varoufakis’ admirably clear explanation we were also acting selfishly with the Marshall Plan. We neded customers for our then surpluses.

        1. wbgonne

          It is indeed the American president’s job to act for the interests of the American people. And what does that say about our succession of so-called leaders who have sold out the American people on behalf of globalism and transnational corporations? Who killed the American Middle Class? America’s political leaders.

        2. Yves Smith

          Actually, those “US surpluses” that were recycled in the Marshall Plan were anything but.

          It was largely European flight capital in US institutions. Anyone with money and a brain wasn’t keeping it in Europe. Even Fortress Switzerland looked less safe than the US.

          1. Fiver

            Does that mean the Marshall Plan was actually forced repatriation of European investors’ funds via some form of financial disincentive that changed European investors’ behaviour, or actual appropriation of the money by US authorities on behalf of foreign Governments and returned to those Governments? Would certainly put the Marshall Plan into a different light.

      2. David Lentini

        Nixon dumped Bretton Woods in order to avoid the recession that would have made his re-election more difficult. In fact, his economic advisers were stricken when he told them of his decision. The result of dumping Bretton Woods the way we did was the result Varoufakas explained we have today—A global financial monster that is destroying civilization. That seems pretty selfish to me, and not in the “good” national interest way.

    2. MtnLife

      I just had a blurry eyed misreading of your second sentence that actually made it more truthful.

      …is that while white Americans started with some, albeit imperfect, sense of “Americanness” with a common culture

      I would add one caveat/clarification to your statement about the Protestant quest for freedom of expression. It wasn’t so much some utopian vision of all religions living harmoniously in one place but more of a cluster of self-determining religious fiefdoms that weren’t set on persecuting anyone else so long as they weren’t causing disruption in their community.
      Europe also made the US seem like peaceniks from US inception to the two World Wars. It’s hard to create a federation when you have multi-generational dyed-in-the-wool memories of international bellicosity. Hell, the Crips and the Bloods had less hatred to negotiate in their quest for peace, much less cooperation.

  4. steviefinn

    Brilliant stuff – It seems to me that the post war US was big on common sense in as much as realising that if you make stuff you need someone to buy it. Now we have the whole world basically impoverishing through austerity measures the people that buy most of that stuff. Now if maserati’s, yachts & mansions sustained the world economy we would be flying – Perhaps I am missing something but isn’t this just some sort of collective madness which can only go down towards a bitter end ? A lunacy which is mirrored by the ever worsening geo-political situation. The rats in high places are being driven into corners & historically that means only one thing – Most of them can expect to survive & they can look forward to crawling out of their hidey holes to start yet another wash cycle.

    Is there no way round the fact that we will keep repeating the same old mistakes with the same power junkie assholes at the wheel until we finally completely f**k it up.

    1. Carla

      It seems that the environment (what used to be called the “natural world”) is proving your point, steviefinn. And yes, of course, the head rats always survive in the nooks and crannies of the high places, as the sea levels rise and wash away the riffraff.

  5. david battabong

    I think I will re-read this excellent piece several times. It is the best explanation of ‘recent’ European economic and geo-political history that I have seen. Thank you, Yanis Varoufakis.

    1. Larry

      I completely agree with this sentiment. The article concisely sums up a lot of economic history in an easy to follow narrative. I have been exposed to these ideas through the excellent Doug Henwood podcast with Sam. You can watch it on You Tube:

      Or download the podcast/stream (better audio):

      And better yet, buy their excellent book:

  6. Banger

    And who would pay for these deficits? The rest of the world! How? By means of a permanent transfer of capital that rushed ceaselessly across the two great oceans to finance America’s deficits, attracted to Wall Street by the prospect of higher returns. The deficits of the US economy, thus, operated for decades like a giant vacuum cleaner, absorbing other people’s surplus goods and surplus capital. In turn, powered by America’s deficits, the world’s leading surplus economies, Germany, Japan and, later, China, kept churning out the goods that America absorbed. Almost 70% of European and Asian profits were being transferred back to the United States, in the form of capital flows to Wall Street. And what did Wall Street do with it? It financed the rise of financialisation; a process which the French and German banks joined in enthusiastically.

    Yannis’ point is, I believe, that the European establishment of the 70s did not grasp this simple and inevitable result. Why? Because Western Europe was doing very well. Their social democracies had matured and European nations had washed their hands of the Great Power games (more or less) and were interested, chiefly, in maintaining the status quo. There was no need towards greater union and no need, it appeared, to rock the boat. Change comes from crisis–no crisis, no change.

    By the early 2000s, Europe was very different–it had expanded, it had major cultural issues with legal and illegal immigration that had put pressure on identity issues to an extent that was unprecedented in European history. 2008 changed everything–the world had really shifted unlike the fake shift that occurred in 2001. Now, societies disunited internally and disunited with its fellow countries was literally, from a political POV, unable to act rationally. Thus the bureaucracies kept churning out policies day-to-day that seemed to make sense and bureaucrats went home and had a good dinner.

    In the end, to play on the world stage, it is all about having some sense of a higher purpose to life other than filling your belly. To me that is the great fault of the Europeans–they, other than in Eastern parts of Europe where religion plays a greater part in life, seem to live without purpose. Americans, in contrast, are always hyping up American Exceptionalism–yes, it is an illusion, a convenient propaganda ploy, but it allows the U.S. to have some political basis for national action. To be sure, the Big Lie, is wearing a bit thin but it still has many years of service left if the American oligarchy remains fairly united because there is no independent national media in the U.S. Still, in the U.S. most people have some sense of a “higher” purpose no matter how ridiculous which is what makes America a more dynamic society–mind you, this too is in decline as Americans become increasingly obsessed with selfishness and self-indulgence.

    Having said that, I think Yannis has provided us with an excellent overview of the European situation but I think the way he contrasts the U.S. with Europe is definitely apples and meteorites (not oranges)–there is no similarity between U.S. and European history and any comparison makes no sense to me at any rate.

    1. wbgonne

      Agreed. The countries of Europe have centuries of nationalist history beneath them, while the American colonies were isolated backwaters faced with an existential threat from abroad when they agreed to merge. Hyper-nationalism seems far more likely for Europe than further integration.

    2. Brooklin Bridge

      Don’t agree. Varoufakis contrasts America (US) and Europe to examine how their differences relate to their approaches to federalism. But even then, he devotes more time and emphasis on describing the self interested interactions between them than comparisons; particularly as those interactions relate to recent economic history and to his notion of an Extra-market Surplus Recycling Mechanism that he seems to argue is somehow intrinsic, or perhaps “fertile soil” to American federalism but not to the European weak-tea counterpart of a centralized administrative bureaucracy. That American civilization, institutions, and history are deeply rooted in European counterparts, and more recently the reverse, is of course undeniable, as is the fact that we have not been a backwater for well over a century – the century he is interested in – so I don’t see, or quite possibly I misunderstand, the critique of apples and meteorites, but even granting that (say that our federalism has nothing to do with European centralized administrative bureaucracy), the contrasts don’t seem to me to be the main thread of his argument.

      I do agree with you and others here that this is an exceptional piece of writing in its clarity if nothing else though it seems to me his arguments are remarkably compelling.

    3. Tsigantes

      Agreed. The US was an immigrant society in a vast tabula rasa. Whereas European countries had spawned 7 empires over more than 2 millenia. So the surprise is that putting the US together took so much effort.

      The EU deliberately reconfigures Europe as a Europapark* of “quaint little countries” whose rank and importance is produced by an absurdly narrow sum of 1. economic trade volume, 2. geographic size and 3. population size within an arbitrary European club. This narrow definition thus devalues ‘civilisational value’ by deliberately ignoring cultural, historical, philosophic and political impact (not only in the world but in the formation of Western Europe itself). It also ignores and demotes countries’ geo-strategic importance, spheres of influence and historic alliances outside the EU – the British Commonwealth, Latin America in relation to Spain and Portugal, Francophonie, for example. Europe’s countries produced 7 global empires, yet within the EU they stand “equal” – UK = Estonia, Spain = Slovenia – as various trembling Missouris, Tennessees, Oregons, yet ruthlessly ranked. Is it any surprise that under this narrow definition, Germany, of all countries, comes out on top? a country that didn’t exist 150 years ago. The one country in Europe that no other country trusts.

      Whereas it is clear why the USA chose to reinforce and invest in Japan, it has never been entirely clear or convincing why it chose to focus on Germany as the engine of Europe, at the expense of the rest.

      *Europapark = a kitsch miniature village of European monuments – the Acropolis next to a cuckoo clock next to the Eiffel Tower – in Brussels’ Heysel.

      1. Ames Gilbert

        It was either Germany or the U.K.
        The U.S. came too late to the realization that the U.K. was no longer much threat to them commercially, and very little militarily. The pomp and trappings of Empire drowned out the reality. So, they chose to make a new Germany that could stand as a wall against the dreaded Slavs, and invested only in the German part of the Marshall plan (originally intended to include both Germany and the U.K., which was in reality on it’s knees economically). If that failed, they reasoned that they still had their unsinkable aircraft carrier to fall back on.

  7. EoinW

    Wasn’t European Union always some bizarre fantasy dream? Seventy years ago these people were killing each other. Plus some of the national hatreds go back centuries. If the model was to become an US of E, well the background of the 13 colonies was not one of intense conflict. Union in America was very easy and natural. One simply needed to get the power brokers in each colony to agree on a power sharing formula. Even north of the border, union between Upper and Lower Canada did not occur until after more than a century of peace.

    I can’t help but think the EU was meant to be an economic union forced upon Europeans for the benefit of Europe’s elites. That explains why the EU is so anti-democratic. I have to conclude it was another successful con played on a spoiled and apathetic public. Now we await the tipping point and to see if, or when, Europeans(westerners?) will take their societies back.

  8. Ulysses

    “there is no similarity between U.S. and European history and any comparison makes no sense to me at any rate.”

    At one level I completely agree with this sentiment. Every particular time and place is radically different from all other times and places. Yet the point of comparative history is to tease out strands of historical development that shed light on universal human characteristics. For example, you have done a great job of highlighting the role of propaganda here in the U.S. to manage the population in favor of kleptocratic interests. It only strengthens our understanding of the present to see how someone else, in a very different time and place, also deployed propaganda. What chords that Thucydides struck, when trying to persuade elite Athenians of the inherent goodness of Athenian exceptionalism, would still resonate in today’s world? Why? What notes in his music would sound most jarring to 21st century ears? Again, why?

    I still think these questions are worth asking and attempting to answer.

  9. Gerldam

    Excellent analysis! Two remarks: Mrs Thatcher was not wrong: she said that the monetary union was an ATTEMPT to usher federalisme by the back door. IMHO, she was perfectly right in saying that it was an attempt. There is no doubt to many Europeans that this was indedd at the back of the mind of many decision makers.
    Second, another way of looking at what you said is that, wheras the federal government of the USA controls approx 23% of the GDP, Brussels controls less than 1%. Nothing can be done with only 1%. This is, to my mind, the main reason why the EU as such cannot recycle money from Germany to Spain or Greece.
    Finally, Two milleniums of history are not erased in a few decades. If you ask any European, whether he feels foremost say Italian or European, he will invariably answer: Italian. The same goes for any other European country.. Whereas any inhabitant of Califonia or Louisiana, will host an American flag and feel American BEFORE feeling Californian or Louisianian.

    1. Jim Haygood

      ‘It took a century of deliberation, a bloody civil war, a series of banking crises and depressions … for the United States to achieve proper political unity. But with every crisis, the United States pulled closer together.’

      One gathers that Varoufakis (whose European narrative is most insightful) is an admirer of the accelerating centralization of power in the U.S., in which federal spending went from a pre-Depression 5% of GDP to about 24% today. Some of us beg to differ.

      With gigantism has come naked tyranny: a bulging Gulag; Stasi-like domestic spying; permanent foreign wars which suck away our economic surplus from being invested domestically. A better, more democratic way of life is possible:

      ‘The Second Vermont Republic is a nonviolent citizens’ network and think tank committed to: (1) the peaceful breakup of meganations such as the United States.’

      Don’t feed the fedgov trolls.

        1. bh2

          All governments are inevitably and proportionately corrupted by their monopoly powers. Smaller government is inherently less dangerous only because it has relatively limited capacity to inflict pain on behalf of its public and private cronies.

      1. Brooklin Bridge

        Is it really the Federal government or is it not historically as well as in the present the ever tightening grip of the industrialists and financiers over the Federal government that is so objectionable? What ever the answer, the two seem inextricably entwined by the 1870’s when America hoisted its own version of the portrait of Dorian Grey (the beginning, before the cracks started showing in the beast underneath and the portrait started taking on the ever more youthful veneer of motherhood, apple pie and a flag on one’s lapel) on the mast of it’s Clipper ships, among other places, in its own Faustian bargain with progress. Curiously, you seem very aware of this in your general comments, but then your barbs at the ever growing beast separate the two and leave the Federal government very dubiously -particularly given it’s sporadic but remarkable attempts at correction- holding the whole bag, contrary to your common sense elsewhere.

    2. BruceK

      ‘If you ask any European, whether he feels foremost say Italian or European, he will invariably answer: Italian. ‘

      But would he have said Italian in 1860? Or would he have said Milanese, Venetian or whatever?

      Similarly Germany in 1870, whose component parts had an impressive record of internecine strife. Yet these are now undisputed countries.

    3. Tsigantes

      It helps that the Louisianan and the Californian both speak English and watch the same television shows.

      It was logical that Europe’s New World colonies eventually became countries. But the states and provinces of Canada, the US, Australia, Brazil etc. are functionally akin to the departements, counties and prefectures in European countries – only the scale is different. They are self-governing within certain parameters, but do not have rights over the whole.

      My point is that these are states / provinces / departements – NOT separate countries, civilisations, languages, histories, cultures.

      Where was the logic in imposing this on Europe? Why does Europe need to be a country? At present it is a random, arbitrary grouping. Where do the borders stop? Azerbaijan? the Sea of Japan? Europe is a civilisation, not a nation – that is its value. And lest we forget, all but the most recent members signed up to a TRADE BLOC. They had no intention of ceasing to be sovereign nations. Nor was federalisation under discussion until after 1989 and the re-invention of NATO.

  10. hemeantwell

    I was going to say that “This is the best overview of the crisis and the international political economy that constitutes it that I’ve seen since 2007. With each revision, Varoufakis’ argument becomes more powerful”, etc, etc. But more to the point is that events are proving him right.

    I would like to see a confrontation of his views with those of Krugman. Krugman’s anti-austerian line is very thin stuff compared to this.

  11. beene

    Someone should tell the author we would gladly give up Hamilton (debt based currency), as he was the beginning of the down fall of the USA.

    1. Yves Smith

      The origin is older. The current system was more or less created with the establishment of the Bank of England in 1694.

      Please read Graeber’s Debt: The First 5000 Years. Credit is the foundation of economic activity. It considerably predates official currencies. To say you don’t like debt-based currencies is like saying fat is bad because it makes people fat, so you should never consume it. You need some fat to function and you’ll die if you eliminate it from your diet.

      1. Jim Haygood

        Credit existed under metallic currency standards too. Debt-based currency isn’t a prerequisite of credit.

        1. Calgacus

          Credit existed under metallic currency standards too. Debt-based currency isn’t a prerequisite of credit.

          Credit/debt is the fundamental concept. Of course, credit existed under metallic currency standards – because “metallic currency standards” have credit as a prerequisite, not vice versa.

          Our currency isn’t “debt-based”. Like every other currency ever, it is debt. “Debt-based currency” is gibberish. Using Yves comparison, it is like calling fats, “lipid-based fats”; it just indicates not understanding the accepted meaning of the terms. The value of dollar bills, reserves are not, can not and have never been “based on” bond debt. For the umptrillionth time: “Government credit and government currency are one and the same thing” (FDR). Everybody used to half-understand that = MMT. The value of these identical things are based on the same thing – what you can get for them. What you can get for them is based on whatever you can buy with them from the issuer, the government. In the modern period predominantly “not suffering the consequences of not paying taxes”.

      2. bh2

        “Debt-based currencies” are not essential for issuing credit.

        Credit has been available under all monetary systems (including monetary metal standards) based on lending of accumulated capital. The Medici Bank was lending and investing capital in the 15th Century. Before them, the Greeks and Romans lent money in the ordinary course of trade and enterprise. And they weren’t using “debt-based” currencies (though steady debasement of the coinage by government was eventually, predictably certain).

        Debt-based currencies represent only an unsecured promise by government to repay from presumed future taxing power on the people. An assumption which eventually isn’t believed by anyone but academics when the math becomes obviously impossible.

        Some people therefore regard government “promises to pay” considerably less credible (based on history) than coin-in-hand. Other opinions vary.

  12. Lexington

    The EEC was created by American New Dealers? Really? This is -to say the absolute least- a deeply revisionist approach to the history of postwar Europe. I think intellectual honesty demands that Varoufakis produce some documentary evidence to support his deeply heterodox interpretation.

    I’m not holding my breath however, since I suspect he’s much more interested in spinning a good yarn than in troubling himself with small matters of historical accuracy. It’s pretty much a given than in order to produce a clean narrative in which everything fits together neatly and which is unencumbered by ambiguity, contradiction or complexity you’re more or less compelled to take creative license with the historical record.

    1. Tsigantes

      True in that Truman was not a New Dealer. But apparently it was first put forward under Truman.

    2. Fiver

      The “New Dealers” had already given much away to the permanent war machine by the time Truman lit up Japan. The recovery of Europe was keyed on a Germany conceived by the US as its core Empire military, economic and political asset in Europe, which automatically gave Germany the edge in US spending and MIC-related spending. Many of the owners of these German firms were sketchy, let’s say, but no matter, the bombing of German industry had not been as totally devastating as believed, and this industrial class got the trains back up and running and making money while much of and they became the foundation of the US’s model for the management of Europe.

  13. thom prentice phd

    Reading this article is a breakthrough for me — clear, concise, complete, uncluttered evocative research, thinking and writing which, to use a totally overused cliche, “connected the cots”. Finally I understand what has been happening through the decades which I did not comprehend. (Like the Nixon/Connally gold/banker/Bretton Woods thing — I knew of it when it went on but had no clue but figgered it was all crooked somehow.) It was not I that did not comprehend, it was the media and the education system which did not illuminate me. I have had to remain satisfied with the shadows in “Plato’s Cave”. At last I finally understand what the Bretton Woods and postwar era was all about.

    All pundits, commentators, columnists, politicians, economists, black belt bureaucrats and other history, democracy and conscience-free people should be required to read this and submit to a fierce examination — standardized short answer, true false AND MAJOR BIG ESSAYS based on multiple, randomized writing prompts as a requirement to achieve BEFORE engaging in any further blather and blabber. The author of this article gets to set the bar and do the “thumbs up or thumbs down”.

    I look forward to the “Modest Proposal”.

  14. Gerard Pierce

    The problem I have with this whole article is that most of what passes for economic theory seems to be intended to confuse rather than to explain.

    The theme seems to be that a country like Germany which is very efficient economically will run trade surpluses. Because other countries cannot earn enough to pay for German products there has to be a mechanism where they can borrow the money.

    To me, this doesn’t seem to be a whole lot different than United States citizens borrowing against their houses to maintain a standard of living that they can no longer afford.

    Leaving out all the fancy terminology about recycling surpluses, what this means is that United States citizens work long hours trying to pay a bill that they can not afford to pay. Once the system has milked them out of every buck possible, the system now adjusts, steals the house and steals back all the other toys that the borrowed money was used to purchase.

    Extra-market recycling seems to mean that the political system gives a little bit back to the peasants in exchange for them putting the ropes and pitchforks back in the barn.

    And all of this proves that I obviously do not understand economics.

      1. Gerard Pierce

        I was sort of hoping for another answer. The macro-fraud in the US does not seem to me to depend on monetary theory. Recycling here did seem to me to be a way to put a lot of people in macro-debt.

        I was kind of serious when I tried to draw a parallel between recycling and borrowing money you can’t afford to pay back. (As an aside: it used to be said: “The owners get the mine and the workers get the shaft”).

        To me, there does seem to be a lot of similarity between what they did here, and what they are trying to do in Europe. It’s pretty much what Chinese bankers used to do 3 or 4 thousand years ago. They didn’t know much about economic theory back then, but they knew how to make a buck.

  15. craazyman

    We’ve read this kind of commentary for years and we’ll be reading it for years. it is thoughtful, intelligent, well ritton and very convincing. But completely useless. You can’t even get rich quick reading it. The sky will fall at some point but it’s not helpful unless you know when. 10 years from now there’ll be aother well composed essay on the problem of the moment, and it will be equally beside the point

    it’s too much work to get rid of the euro. I’ve done some research and know on good authority that kids in Spain are out partying and working off the books. The rich people work off the books — that’s where all the money is you read about when you read some dude has 40 million euros from political bribes. Nobody seems surprised. The economy over there is not accurately measured. So why shouldn’t kids work off the books, live at home, party it up and sleep late. There’s a few more years they can manage this before they hit 30 and have a crisis. By that time, they’ll figure it out among themselves. Same in Italy and Greece. Maybe they’ll start lira and pesetas and drachmas in limited quantitites, convertible to euros. Just to give people something to use when they’re working off the books. That should help a little.

    Sure there”s hard luck cases, no doubt about it. But my research has revealed that things were pretty bad for a long long time and nobody wants to go back there. They’d rather party and sleep at this point. Maybe it’ll get so bad they riot, or take up arms, but that’s a long way from here.

    It wasn’t so bad in Italy, in fact I have a cookbook from 1960 that shows quite a few restaurants in Rome and everybody has suits and ties on. I think this was a time when James Bond was riding trains arouond Europe, also quite well dressed and debonair. Then they went skiing. It must have been pretty good at times.

    They have to figure out a way to use the euro with just a small limited edition lira and peseta ad drachma print run — like a vinters special production of a wine from a remarkable harvest, ad then they’ll figure it out.

    They’ll have to figure out what to do with themselves though. Not everybody can be “competitive” since in a competition most people lose. You can run a soccer league that way but not an economy. It’s all a mental disorder — economics that is — so anytime you see it written down it’s a symptom not a cure. The only cure is politics and the only cure for that is consciousness and the only cure for that is red red wine. It’s no wonder they grow lots of grapes over there. It’s time to use them.

    1. craazyman

      also, ad I can’t restrain it, I can’t hold it back — money isn’t like flocks of birds flying over the ocean back and forth from country to country, flying swarms of birds directed by a magician and wizard. Where do these birds come from? They fly out of a bag by thousands and millions? A bag one or two men or women hold? Then they show up on radar as “capital” and end up sitting in a bank. Ha! Is that the vision of a madman? It must be. If money flies around from place to place like a Newtonian particle and piles up in heaps then where does it go when it dies and why can’t you dig up its bones. it does’t die. It just disappears and reappears like a phantom that strides across dimensions and lives many lives simultaneously. It’s something like a photon not a bird. But you need a light source and not a bag of birds to make money fly. So yore bak to politics ad consciousness, that’s where it comes from and it’s not Newtonian at all. not even as a model. not even as an equation

  16. Jesper

    Not sure if this claim was ever true:
    “Similarly, the Greek elites are worried by the devaluation of the drachma ”

    The elite has always had access to hard-currency and has always, even when there were capital controls, been able to maintain the value of their ill-gotten gains. There are plenty of people in the finance industry helping elites with just that (see examples in Africa, Asia, South America etc). The elite benefited from the devaluation, they moved their capital in and out to benefit from devaluation.

    & this:
    “An efficient Extra-market Surplus Recycling Mechanism is the answer. ”
    Who can be trusted to manage this wonderful mechanism?
    One elected person? An appointed committee? An elected parliament to manage the mechanism? Pork-barrelling wouldn’t happen?

    This kind of spending:
    How could that be avoided?

    1. Jim Haygood

      ‘Europeans … imagined that Europe does not need an Extra-market Surplus Recycling Mechanism of its own.’

      They might not have planned on it, but an ad hoc recycling mechanism (TARGET2) ended up performing the function:

      ‘Since the beginning of the financial crisis in August 2007, claims of the Deutsche Bundesbank on the Eurosystem through the TARGET2 system have gone from basically zero to more than €700 billion [in 2012].’


      According to the Bundesbank, Germany’s current TARGET2 claims at 31 July 2014 have declined to €444 billion. And the eurozone is sliding back into recession. What to do, what to do?

  17. financial matters

    In her recent public bank book Ellen Brown includes some interesting history on early American banking. One of the first acts of the Continental Congress was to issue paper script, the Continental. This helped allow the colonists to finance a war against a major power with virtually no ‘hard’ currency.

    William Penn had used this method successfully previously in Pennsylvanian and found a somewhat amazed supporter in Benjamin Franklin who stated ‘the riches of a country are to be valued by the quantity of labor its inhabitants are able to purchase and not by the quantity of gold or silver they possess.’

    The Continental was subsequently ruined by counterfeiting and disagreement between the states without a strong central authority. When Hamilton created the First U.S. Bank he had the memories of this to deal with. But I think Hamilton had the right idea in that he stated ‘such a bank is not a mere matter of private property, but a political machine of the greatest importance to the State.’ ibid


    I think Polanyi would also be in agreement with Varoufakis in that the economy should be under the control of democratic institutions rather than technocrats.

  18. Oregoncharles

    Mr. Varoufakis seems oddly naive about the US “monetary union.”
    Of course, national unions are not really comparable with those across national boundaries.

  19. afisher

    I’m in the thank you camp. Look forward to the next “chapter’. As a non-econ. it directs people to start connecting threads from long ago, sort of like knitting to make a whole cloth. Piece by piece, stitch by stitch, reminding us of how we got to where we are and where we may be headed and why.

  20. Paul Tioxon

    “Having dealt with the Great Depression in the 1930s, and as WW2 was ending, the New Dealers’ most immediate grand fear was that the American economy would slip into another depression after 1949, as factories would begin to lay off workers once the war effort ended. With the dollar the only convertible currency, the new crisis would spread like a bushfire through the rest of the capitalist world.

    Being the sole surplus nation globally, they understood that the only way of avoiding this calamity would be to recycle their own surpluses to Europe and to Japan in order to create the demand that would keep their own factories producing all the gleaming new products, washing machines, cars, television sets that American industry would switch to producing. Thus, the project of ‘dollarising Europe’ began. A most impressive hegemonic program that demonstrates vividly the sharp difference between hegemony and authoritarianism. And reminds us of how badly today’s Europe needs an hegemonic, as opposed to an authoritarian, Germany.”

    Buried in Yanis’ piece, is one of the key analytical frameworks mostly bypassed in geopolitical discussions. When Yanis bemoans the lack of authentic Hegemony vs Authoritarianism he is alluding to dependency theory, mostly known as neo-colonialism in the political science sense, the fullest theoretical political economy depiction of the entire world at the moment. Europe, although wealthy and prosperous falls squarely into the subservient, dependency of core nations lead by the American Hegemon. If they were to achieve the political and economic integration required to not need the USA as the marketplace allowing capital surplus and productive surplus to be absorbed, the hegemonic system would be dissolved. Whereas the chaos we leave in the aftermath of military slaughter in Viet Nam or Iraq slows down the rightful economic development of not only the nation directly affected but the entire region destabilized by the outcomes, the invitation to go along with hegemonic world order must produce a net surplus of benefits for the subservient core states of G-7.

    Without getting into each and every nattering detail of give and take before there is a concerted policy produced, the process is not one of national defenestration and iron fisted coercion within a hegemony. That was the whole point of the post WWII Pax Americana: A United Nations, HQ in the USA. A UN Security Council with Core Nations as permanent veto power wielding members. A World Bank and the IMF. NATO and SEATO and The Tri-Lateral Commission to recognized the ascendency of Japan Inc. But Federal Government of Europe? Again, not without a break up the hegemonic system and placing Europe as peer in population and GNP. A direct competitor without the military bases, the Ramstein Air Base in Germany and so on. For Europe to even aspire to this would be an overt shaking off America’s leading role in the world crafted so carefully in the aftermath of WWII. Europe must remain dependent, if not impoverished and prostrate. The last last thread of dependency would be severed if the Eurozone and European Union became a United States of Europe, an integrated political economy, as coherent as the USA is when it moves in the world beyond its borders, and as integrated as a domestic governing body, with all of its nation-states equal before the law of the union.

    1. Fiver

      A European State centred on Germany was the US project for managing Europe as a key ‘Western’ stronghold. It was only after the collapse of the Soviet regime and re-unification of West and East Germany that Europe began to look like a potential competitor. Note, however, that is all it takes for top practitioners of US strategic doctrine to begin an automatic recalibration of ‘interests’. Prior to 2008, Europe had put in a good enough performance that serious people spoke of the Euro as a potential reserve currency based on the size and presumed stability of its combine economies, it appeared to embrace the future re energy and some other matters, and was ‘confident’. Their downfall was to not consider the possibility mortgage financing fraud could amass risk on such a scale as to destabilize the entire global financial system would knock them over as if nuked. Financial WMD. No more talk about an ascendant Europe.

  21. Pelham

    I’ve never encountered an ordinary European who thinks much of the EU, much less the eurozone. While they may lack the perceptive analysis that Yannis favors us with here, they get the general drift that the EU is a set of powerful and opaque institutions utterly inimical to democracy. It’s somewhat surprising that the anti-EU parties across Europe don’t have more support than they do.

  22. EmilianoZ

    Throughout this very long post Varoufakis is constantly ranting about what he calls an all-powerful “central European cartel of heavy industry”. Yet he never provides any names of corporations or individuals. This cartel is even more nebulous than Banger’s “Deep State”.

  23. gordon

    It’s a good piece by Yanis Varoufakis and I enjoyed it. I think he should have mentioned the defeat of democratic institutions in Italy, Spain and Germany in the 1920s and 1930s (and the near-collapse in France) as a major turning point, however. Those episodes represented the abandonment of democracy as a political form by European elites. Varoufakis gets close to making the link in the paragraph beginning “In contrast, the European Union’s bureaucracy was always built as a democracy-free, even a politics-free, zone.” However, he doesn’t quite get there.

    The cartelisation of industry and capital with bureaucratic assistance and management by the State which he describes in that paragraph is a profoundly Nazi idea – check out the economic history of Germany after 1933. And Hitler and the Nazis were widely admired by European elites up to the beginning of the War; in many cases afterwards, too. Shirer’s “Collapse of the Third Republic” is a good account of how French elites were largely content to see France’s communists and jews cleaned out for them by the Germans: “Better Hitler than Blum!”

    1. financial matters

      Polanyi traces a lot of these problems to the ‘relentless’ pressures of the gold standard which today I think are reflected in the ‘relentless’ pressures of austerity.

      This constrictive viewpoint of productive use of currency is what gives us things such as thousands of unemployed lawyers and thousands of people needing basic legal services to help make a more cohesive society.

      He saw the period between the two world wars as nations tragically being ‘forced’ to choose between protecting the exchange rate and protecting their citizens. What he called the fascist impulse – to protect society from the market by sacrificing human freedom – he thought was universal at this time and local contingencies determined where fascist regimes were successful in taking power. It doesn’t seem to take much of a leap to see similar forces at work now in the EU and US.

  24. Irrational

    A very thought-provoking peace, thank you for posting that.
    The view of US post-war policy including the Marshall Plan as a means of creating markets for US goods is, I think, fairly mainstream among economists. I am slightly more dubious when it comes to presenting the US twin deficits as a conscious policy choice. That would imply exceptional insight and knowledge among policy-makers. What are the odds that they were just being steam-rollered by the dynamics they had previously said in motion?
    The same goes for Europe’s woes, which I regard as resulting from a spectacular lack of vision rather than a surfeit of it.
    But maybe it is all a charade indeed.

  25. Fiver

    I, for one, am not at all comfortable with the ‘friendly hegemon’, and much prefer multi-polar, diverse paths forward.

    I do not regard the history of establishment of the USA as in many respects, if any, comparable to that of the EU.

    US post-War policy was overwhelmingly dominated by strategic concerns, which as noted included large-scale economic planning during and immediately after the War. Germany and Japan each occupied a key geostrategic location, making each central to US conduct of the Cold War that started the minute the Russians prevailed at Stalingrad. Had either or both been out in the global boonies, I very much doubt they’d have received the same treatment. The permanent war economy was the solution to the post-War return to ‘normal’. That included massive bases and support complexes in Germany and Japan, and lots of US money sloshing around. The Marshall Plan itself would not have accomplished as much as it did, but for the fact their (especially Germany’s) industrial bases were modern and still operational. Also, the management stayed more or less in place.

    The US surplus-distribution mechanism may have worked (though I hazard US business and banking made a pile of money on the investments) as stated in the ’50’s, but by 1973 the ‘surplus’ being managed was becoming the $ surplus of Saudi Arabia/OPEC. Japan was cut down to size by the US in the latter ’80’s, and Germany has since the completion of re-unification been somewhat problematic from a US elite perspective on two capital counts: monetary policy and trade with Russia.

    In any event, the US has been ‘recycling other people’s surpluses’ with friendly hegemonic abandon for so long as to have placed us all on permanent financial alert. Again, a multi-polar arrangement keeps all on their toes, and able to make noise when the cards are suspect. Much of our trouble now is about just how easily hegemony becomes Empire.

    As the European Union project never was a democratic project (it being of US and local elite origin) and the US has long hosted the anti-democratic, corporate globalization project – actually, as both entities are now engaged in classic adventurism gone awry on behalf of their National global business giants rather than addressing any of the critical matters before the world today suggests to me we need to think in more realistic terms, as in we are almost into the next crisis and have not yet taken in the seriousness of all the things the first crisis meant, and still means. Corporate globalization works against the small and weak and poses the larger threat.

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