Yanis Varoufakis: Europe’s 15-Year Slump

Yves here. Varoufakis describes how the European response to the financial crisis inevitably resulted in a protracted period of lousy growth and rising inequality. This is consistent with our observation that status-quo bolstering crisis policies, as opposed to reforms, had the effect of moving the consequences of the crisis from the financial to the broader political arena.

Keep in mind that the sponsors of the Eurozone project were well aware of some of the shortcomings of its design, particularly the lack of sufficient economic integration. They believed, incorrectly, that the entirely predictable resulting crises would give the needed impetus to overcome national resistance and go further down the economic integration path.

The US, another common currency zone, has much larger federal spending which among other things reduces the differences in state/regional economic performance. And this approach is well accepted. Even in this era of demonizing deplorables in flyover states, you don’t see much whinging about how rich states provide net transfers to the likes of Mississippi.

By Yanis Varoufakis. Originally published at Project Syndicate; cross posted from his website

The European Union’s supporters celebrate the survival of the euro, the fact that public debt is no longer the threat it was, and, crucially, that their mercantilist business model remains intact. But it has come at a steep price: Europe’s permanent stagnation and continuing fragmentation.

ATHENS – Europe is languishing in a long-term economic slump whose origins lay in Wall Street’s near-death experience in 2008. There have, of course, been subsequent spurts of growth (and hope), but these tend to fizzle out soon after they appear.

Given the European Union’s policy choices, it could not have been otherwise. These policies reflected the eurozone’s faulty design and guaranteed chronically low investment at precisely the time massive investments were necessary to shift Europe’s aging industrial base from dirty energy, chemicals, and the internal combustion engine cloud capital and green technologies.

On both sides of the Atlantic, the policy response to the chain reaction triggered by the collapse of Lehman Brothers in 2008 was similar. The United States and the EU carried out history’s grandest and most cynical transfer of private losses from the books of quasi-criminal financiers onto public debt ledgers, combined with fiscal austerity to rein in burgeoning public debt. The result? A massive liquidity trap that increased public debt and led to the greatest disconnect ever between available liquidity and real capital investment.

The predictable long-term outcome was economic stagnation. In the event, the malaise was so deep and lasted so long that it poisoned politics in Europe and the US. But that’s where the similarities end and Europe’s growing disadvantage relative to the US begins, because, unlike the US, the eurozone lacked the federal institutions which, in times of crisis (like that of 1929 or 2008), can stabilize a monetary union and prevent it from falling into a lasting slump.

After 2008, the EU had two options for keeping its monetary union intact, only the first of which could avert the permanent slump. The first option was to federate de facto, even if not de jure, a strategy that would entail common debt, substantial federal-like taxes, and a five-year aggregate pan-European green investment plan.

To choose this option, however, Europe would have to ditch the neo-mercantilism central to the German and Dutch business models, which lay at the heart of the eurozone. One might have thought (as, admittedly, I did) that Europe’s elites would have considered the abandonment of neo-mercantilism a relatively small price to pay for avoiding a perma-slump.

But one would have been wrong. Europe’s most successful net exporters and their political agents cared far less for Europe’s dynamism than for maintaining their reliance on net exports sustained by the US trade deficit (a constant source of aggregate demand for their wares). They also ranked the importance of their net exports to China and the suppression of German wages well above the importance of giving Europe a chance to recover its elan.

The second option was to avoid the quasi-federal option by relying on massive austerity for the eurozone’s most depressed member states, accompanied by equally massive quantitative easing favoring the least depressed parts of the monetary union. This was the option that was adopted, with the cruel treatment of the eurozone’s most bankrupt member, Greece, intended to signal this choice to the other member states.

The result was that the euro was saved at the expense of a permanent stagnation in aggregate investment across Europe, along with deepening rifts between the EU’s north and south (with new east and west rifts developing, too). Meanwhile, the US is on a public investment spree that lures Europe’s industrial conglomerates stateside, thus deepening the EU’s investment gap. Unsurprisingly, the EU, despite itsGreen Deal pronouncements, cannot fund its own green transition, let alone Ukraine’s post-war recovery.

Today, the danger is not that Europe’s policymakers will double down with more fiscal austerity. Their preferred weapon of contraction nowadays is monetary policy. Having erred once in shunning a bold progressive monetary policy that would have averted the recent bout of inflation, they are now tightening too much and for too long. The result is that an already disjointed monetary union, on the verge of recession in the midst of stubborn inflation (despite the rapidly shrinking money supply), is falling behind China and the US.

The cause of all this is structural. Contractionary, and thus debilitating, austerity remains hard-wired into Europe’s current institutional framework – a fact that stops governments of all political shades from trying out different policy agendas. Europe’s unfinished architecture of integration prohibits experimentation with the kind of industrial policy the US is now pursuing (under the Inflation Reduction Act and the CHIPS and Science Act) or with other agendas.

Sure enough, the German government is departing from EU orthodoxy, by channeling vast public funds into aiding its floundering industrial model. But it does so at the cost of wrecking the single market and the commitment (more theoretical than actual) to a pan-European level playing field. Expect a backlash soon from EU member states that cannot match German subsidies, especially those that cannot protect their industries by devaluation.

EU cheerleaders celebrate the survival of the euro, the fact that public debt is no longer the threat it was, and, crucially, that their mercantilist business model remains intact. Deep down, they understand that they owe this small miracle to those who worked hard at the European Central Bank (despite the Bundesbank’s fierce opposition) to crank up the ECB’s printing presses and unleash torrents of euros to prevent a Greece-style outcome in Italy.

But it has come at a steep price: Europe’s permanent stagnation and continuing fragmentation. Europe’s monetary union remains disastrously incomplete, lacking the political and fiscal union necessary to make it work; worse, 15 years of malaise have deepened the impasse. We Europeans must either brace ourselves for secular decline, forced upon us by our problematic currency, or do something about it. A structural problem demands a political solution.

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  1. Fernando

    “quasi-criminal financiers”…
    Isn’t Varoufakis so generous to the corrupt elite that destroys the world!
    It’s more like “totally criminal financiers”.
    Varoufakis, you shouldn’t be so generous, the banksters don’t deserve generosity, they deserve something else…

  2. The Rev Kev

    Yanis Varoufakis talks about Europe’s permanent stagnation and continuing fragmentation but it will be worse than that. The boys at The Duran are both saying that the entirety of the EU is moving into a deep, long recession and I believe them. There are so many fracture points in the EU and the Ukraine may be only the most obvious one. They will not be able to afford to keep them on life support as they will have enough trouble supporting their own economies. Imposing austerity in the middle of a recession while cutting back the social security net is not going to go down well when it is seen that all that ‘saved’ money will be squandered on high tech weapons and the consultants & contracts that go along with them. I think that going forward that we will be seeing intense civil disorder within the EU States who will reply by sending in the riot police to crack heads which will work – until it doesn’t.

    1. Skip Intro

      And then imagine their dreams come true, and a fiscal black hole is added to the EU in the form of a devastated Ukrainian rump state. I guess the refugees in other EU countries become legal residents at that moment. That is bound to go over well as the fight for crumbs from the vestigial welfare state intensifies.

  3. Isla White

    Southern ex-Maghreb, ex-Ottoman, ex-Arab EU still doesn’t comprehend how essentially contra the European project it is.

    It is still governed by a sheikhs, friends and families clan based system of decision making in which routinely 4 out of 5 of its less well connected citizens claim they are disadvantaged. Most obviously in not trusting their countries judiciary to differentiate between right and wrong; legal and illegal.
    As they have done for centuries – so many southern EU citizens of lower status need to head to the mercantilist north just to better themselves.

    Remind ourselves that the EU Fundamental Rights as with all ‘Equal’ Rights theoretically offered us by Brussels are meaningless in the southern EU!
    Claiming a local or an organisation has breached an EU mandated Right; seen as a lower status civil claim, can trigger the far more serious criminal counter claim of Defamation.
    Even if complaining to a professionals regulatory body it can offend the locals honour! With the plaintiff now just a witness as the State itself prosecutes the complainant!

    We need more talk of the mercantilist, richer, better governed, northern EU, that ‘should’ break away now and reconstruct the historic Hanseatic league.

    Southern EU understands itself so much better; after all Varoufakis and his kind would have no problem comprehending “blind Greek taxi drivers”!

    Greek disability claims run amok — ‘blind’ taxi drivers?


    1. DJG, Reality Czar

      Isla White: Indeed. To quote you: “We need more talk of the mercantilist, richer, better governed, northern EU, that ‘should’ break away now and reconstruct the historic Hanseatic league.”

      Truly the world will be a better place when the gaily festooned ships leave the Cinque Portes and Lubeck and Visby bearing demijohns of lutefisk, barrels of bangers ‘n’ mash, smoked puffins, and caskets of precious cadbury creme eggs to trade with the tawny Lithuanians.

      As to Yanis Varourakis, who has fewer fantasies, I’d venture only that his fantasy that the bills recently passed by the U.S. congress ostensibly to rebuild infrastructure and stimulate industry will somehow cause a renaissance of the U.S. economy is misguided. Like everything else in the U.S. of A. these days, the money will be looted or misused, something like Obamacare.

      Nevertheless, I await the great galleys from Hamburg, laden with artefacts from the melanin-deprived.

  4. Pym of Nantucket

    Unfortunately the problem of energy abundance seems to be left out in getting to the source of the problem. Tim Watkins can be tediously cynical but is good at focusing on the nub of the problem. Humans being humans means they tends to view big problems as a manifestation of their own experience. Varoufakis always circles back to his own humiliation as the archetypal insight to Europe’s problems.

  5. Susan the other

    Germany has been mercantilist, using the euro to keep its own productivity high, for the last few decades. For the Germans, to deindustrialize means cutting back on social spending, as usual, when the best thing would be to reprioritize spending into the environment. To begin to repair the environment is going to be expensive but as the benefits accrue that come with a reclaimed natural environment and the economy settles into new habits of consumption the economy will balance out – if it is really in balance and functioning within the necessary limits. And, critically, if the rest of the world also prioritizes the environment and new habits of consumption. But I don’t think that’s why we want to deindustrialize Germany. I think we want to absorb their high tech industries into our economy to prevent China from taking them. Maybe we are rationalizing our grab by thinking that at least the rest of The EU will no longer have the burden of German mercantilism to support.

  6. Mike Moschos

    I enjoy Yves’s writings as usual, but in regards to her perspective presented in her opening note to this article regarding the view on the benefits of economic integration, particularly in the context of the Eurozone and the United States, I would like to point out that there’s a counter-argument worth considering, especially when it comes to the implications of deep economic integration in the U.S. economy. Some analysts argue that this deep integration has not necessarily led to enhanced economic performance. Rather, it is believed by some that it has actually hampered aggregate economic performance and regional development within the United States.

    The argument hinges on the idea that while integration can streamline processes and create a more unified market, it can also lead to over-centralization, reduced local autonomy, and potentially stifle regional innovation and specialization. This, in turn, might lead to a scenario where certain regions become overly dependent on federal support or specific industries, limiting their economic diversification and resilience.

    Regarding the author’s point about fiscal transfers between states, it is indeed true that richer states often provide net transfers to less wealthy states like Mississippi. However, the argument here is more nuanced. While fiscal transfers are designed to help equalize economic disparities between states, there’s an argument to be made that, despite receiving these transfers, the beneficiary states might still be net capital exporters. This could be due to several factors, such as the outflow of human capital (brain drain), where skilled individuals leave for better opportunities in richer states, or the flow of funds back to wealthier states through various business and investment channels.
    it’s important to consider the effects of the centralization of finance over the decades, which have significantly influenced this dynamic. Key legislative and regulatory changes have played a pivotal role in shaping the current financial landscape, impacting the flow of capital across states (Interstate Banking Efficiency Act of 1994, neutering of the regional Federal Reserves in 1935, elimination of Glass-Steagall in the late 1990s, etc., etc.).

    Also, state and local government pension funds constitute another significant channel through which capital flows out of state. These funds, seeking diversified and high-return investments, often place a substantial portion of their assets in national and international markets. This means that the savings of public sector workers, instead of being invested locally to stimulate regional economies, are frequently channeled into investments in other states or even abroad, further contributing to the outflow of capital from less wealthy states.

    These factors collectively underscore how financial centralization and regulatory changes over the past decades have facilitated the movement of capital away from local economies to wealthier states, challenging the notion that fiscal transfers alone can address regional economic disparities. This complex financial ecosystem demands a nuanced understanding of how capital flows within the United States, especially in the context of economic integration and its impacts on regional development.

    In essence, while fiscal transfers are a tool to address economic imbalances, they might not fully compensate for the broader economic dynamics at play. This can lead to a situation where even after accounting for these transfers, less wealthy states end up contributing more to the economy than they receive in aid. This perspective challenges the conventional wisdom and invites a more detailed examination of the economic relationships between states in a highly integrated economy like the U.S.

    1. Yves Smith Post author

      This may narrowly be true but you miss the point of the introduction completely, to the degree it verges on straw manning. The EU has less economic integration and is suffering for that economically and politically. You can’t have a common currency with the low level of economic integration the EU has and not incur large costs.

      Also with your comment on public pension funds, they are actually under political pressure to invest in state and typically do a poor job when they do so (see CalPERS 301 Capitol Mall and its VC fund as examples). And you assume implicitly further assume that private investors would invest more in state with no evidence.

      1. Mike Moschos

        Hi, I appreciate your response and the opportunity to engage with you here. I would like to clarify that my intention was not to construct a straw man argument; rather, my goal was to delve into the nuances and complexities of economic integration, particularly in the context of the United States. I value the points you made and seek only to expand upon them with additional considerations.

        Over the past half-century, our economic trajectory has led to significant capital concentrations, both in terms of securities and geographical distribution. This trend has resulted in what could be termed as malinvestments, which, while appearing favorable on paper, may actually be contributing to a ‘super bubble.’ This phenomenon is evident in the inflated real estate values in select cities, among other indicators. These malinvestments are not just financial aberrations; they have tangible impacts on society and the economy, such as exacerbating wealth inequality and creating unsustainable economic conditions.

        Regarding the role of public pension funds, I believe that their investment in state projects could have potentially mitigated several critical issues we face today. These include the degradation of infrastructure, the flight of hard capital, and a scarcity of new capital infusions within states. Such investments, while not without their challenges, could have provided a more balanced and localized approach to economic development and stability.

        It’s true that we can’t definitively know the outcomes of a different economic path, especially over a long temporal scale. However, looking back at the previous system, characterized by a more diverse banking industry with numerous local and regional actors and effective capital controls between states, we can reasonably infer that there would have been more investment within states. This decentralization of finance likely would have fostered more localized economic growth and stability, countering some of the centralization issues we face today.

        While I understand and appreciate the original points made about the economic integration of the EU and the U.S., I believe it’s crucial to consider these additional dimensions. The discussion on economic integration, its benefits, and its drawbacks is multifaceted and deserves a thorough and nuanced exploration, which I hope to contribute to with my perspective.

  7. dunkey2830

    Yanis is a gifted orator – but his analysis remains firmly grounded in obsolete orthodox macroeconomics.
    He has never demonstrated a grasp of the macroeconomic realities (post Bretton Woods era) of fiat currency operation – described by (the now many) MMT academics.

    “Europe is languishing in a long-term economic slump whose origins lay in 2008…” … rather Europe is in a slump whose origins lie in 2000 with the introduction of the common currency – a system architecture purposefully designed to promote inequality, to be socially divisive and debilitating.
    Michael Hudson’s book “Superimperialism” describes very well US’s concerted efforts to keep Europe down.

    An article from 11 yrs ago by Greg Palast “Robert Mundell, evil genius of the euro”
    “The idea that the euro has “failed” is dangerously naive. The euro is doing exactly what its progenitor – and the wealthy 1%-ers who adopted it – predicted and planned for it to do…

    …”It’s very hard to fire workers in Europe,” he complained. His answer: the euro. The euro would really do its work when crises hit, Mundell explained. Removing a government’s control over currency would prevent nasty little elected officials from using Keynesian monetary and fiscal juice to pull a nation out of recession.
    “It puts monetary policy out of the reach of politicians,” he said. “[And] without fiscal policy, the only way nations can keep jobs is by the competitive reduction of rules on business.”

    Fundamental features of Euro architecture was the absence of financial federation prohibiting equalisation grants, allocation of industrial activity on a state needs basis, and a 3% limit on deficit spending of each member state. Such rules ensured the poor got poorer and the wealthy became yet wealthier.
    With travel restrictions lifted across the Eu it followed that low wage/unemployed labour from resource poor states travelled, undercutting the wage levels in resource wealthy/industrial states (utilisation of cheap migrant labour in Germany being a prime example).

    “…After 2008, the EU had two options for keeping its monetary union intact, only the first of which could avert the permanent slump. The first option was to federate de facto, even if not de jure, a strategy that would entail common debt, substantial federal-like taxes,…”
    Why the need to raise federal taxes? With EU economies already depressed the imposition of higher taxes just exacerbates recession. If the EU was properly financially federated the European CB does not need to collect ‘tax money’ before it can spend – Yanis again is locked to obsolete macroeconomic orthodoxy.

    Yanis concludes, “Europe’s monetary union remains disastrously incomplete, lacking the political and fiscal union necessary to make it work…”
    So in fact there is only one sustainable option for the Eu survival – complete and proper financial federation c/w horizontal equalisation grant capacity and Federal oversight of industry allocation/planning on a ‘state’ needs basis.

    Since no ‘state’ of the EU federation will ever concede such power to Brussels such arrangement will never be implemented.

    IMHO the Eurozone is therefore in terminal decline – tough times ahead – which may well force some ‘stronger’ states to abandon the Eu to reclaim their full monetary sovereignty.

  8. ChrisRUEcon

    A financial journalist once wrote that ” … the Eurozone is in reality a financial dictatorship run by bankers”. That is as accurate a description of the EZ’s reality as one will ever find. I will confess to not being sold on mercantilism as the main component or characteristic of the ongoing malaise, unless rabid financialization of the state is part of it. There is a great article that was posted here many years ago which I luckily found again. I’ve bookmarked it this time, but in finding it, I realize that the Links page on which it is found works well as a rear-view mirror – Links 5/12/12.

    The article I like to reference on EZ madness is “The Momentum Of Lies” (via golemxiv.co.uk), and the money quote is this:

    “The sovereigns could have gone to the ECB themselves and borrowed money themselves from the ECB for 1%. Instead the sovereigns let the private banks borrow from the ECB at 1% and then the sovereign borrowed from the private banks (remember when a sovereign sells bonds/debt the buyers of that debt are lending to the sovereign) at 5%-6%. Why? Answer – so they could say, ‘We’re not having to get bailed out by the ECB. No, we are selling our debt successfully to the market, who love us.’ It was a lie but it made it sound as if the ‘reovery plan’ and the unpopular austerity policies must be working. And at the same time it allowed the sovereigns to bail out the private banks without having to tell the people they were doing so. Two lies for the price of one.”

    You can talk about federalization of the EZ, or about the ECB being a true lender of last resort and all that, but articles like the one above show that the neoliberal overlords are adept at finding ways to usurp the public good for private gain.

  9. Karl

    I suspect we are running into constraints on raising employment via private capital formation for reasons well described by Picketty and others.

    Public works projects used to be expensed by Priests, Pharoahs, and Kings, directing resources from State owned/controlled sources to workers. The “State” did not have to worry about borrowing from a private rentier class for the capital needed. This system enabled pyramids, then temples, ships, war, roads, cities, sewers, acqueducts and baths, all paid from State resources. Crucially, under this system, the State never lacked for projects to maintain full employment. And, these projects were actually well executed. We can observe how well by their remains today. Some of these ancient systems continue in operation.

    With a large landed aristocracy came a large pool of private capital that could be lent at interest (along with banks and other supporting systems). Eventually, due to constraints on the tax base, even Kings could hit credit limits. Keeping up with interest payments became a problem. To lend more, the rentiers could demand more and more control over State finance decisions and prior approval to taxes on the wealthy for debt repayment. This put the tax burden increasingly on the lower classes. No longer could Pharoah or King build a pyramid or Castle unless that project, when finished, could deliver a revenue stream to pay back the debt. And, pressure to keep reducing taxes meant Kings, Prime Ministers and Presidents, had to borrow more and more. This gave the rentier class more and more power over State Financing decisions.

    Eventually, specie could not keep up with economic growth, and as Polanyi (one of many) explained, economies of necessity went off the gold standard and adopted fiat currency systems. This turned a problem of deflation, low interest and full employment (with austerity and inequality) into a problem of inflation, high interest and structural unemployment (with more austerity and more inequality). The traditional State solution to unemployment–massive public works projects–is no longer possible because the revenue streams don’t exist, because wages are suppressed to contain inflation.

    We have now entered an era when massive infrastructure projects are more necessary than ever to keep economies sustainable, but the State lacks the credit space necessary due to accumulated past indebtedness. Interest on the Federal debt has now exploded to fight inflation. We need new roads, sewers, electrified transportation, new power plants, you name it; and, we have a surplus of labor (U6 and many who’ve dropped out). We even have a lot of private capital, but it’s effectively dormant for public infrastructure without future revenue streams and suppressed wages. Instead, it is being directed to tradable financial assets.

    MMT says there is no requirement for the State to pay interest on its debts. Imagine the State being able to build, not Pyramids as before, but bullet trains, non-polluting power plants, etc. and soak up all of that labor at much higher wages, all from taxation and borrowing at no interest. There would be no credit limit, except up to the pointing of rising inflation in actual public and private goods and services produced, accurately measured.

    There would be fewer super-yachts and private jets, and more public infrastructure that actually works in the public interest. No public debts and no interest on that debt. As Michael Hudson (and I believe Sam Keen) have advocated, a Jubilee on all public debts would be required.

    As Pharoahs and Kings discovered long ago, people –and civilization– require steady full employment. Capitalism used to deliver this, and increasingly with AI, it promises an era of steady high unemployment. We need a system of State finance like that which Pharoah, Caesar, and other sovereigns used in times past.

    Pipe dream?

    1. Yves Smith Post author

      No, capitalism never delivered full employment save in the US during WWII where we ran above capacity and in the peak era of social democracy in the US, the 1950s, where among other things, we built an interstate highway system, and the 1960s, where we sent a man to the moon and fought a ground war in Asia.

      See the classic article by Polyani as to why capitalism inherently does not produce full employment: Kalecki on the Political Obstacles to Achieving Full Employment

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