Until recently, Yanis Varoufakis was the Greek Minister of Finance, who resigned after the Greek populace voted overwhelmingly against the imposition of more austerity measures against them in order to service the country’s crippling debt — resigned, because he believed that would give Alexis Tsipras, the prime minister, more negotiating space with the representatives of countries like Germany and France, who had made no secret of the fact that they disliked Varoufakis intensely.
I understand why they don’t like him — he is too clever for them, and too informed about the reasons for not addressing the financial crisis in Greece (and the rest of Europe) decisively; which could be done, as he argues. In the recent book by Varoufakis — a professor of economic theory at the University of Athens (after teaching for many years in Australian and British universities, including Cambridge) and author of several other advanced texts on economic theory, including The Global Minotaur: America, The True Origins of the Financial Crisis and the Future of the World Economy (Zed Books, 2011) — he sets out at length where the financial crisis comes from and how it should be addressed.
Most people know what the Minotaur was; the half-bull, half-human monster on King Minos’s Crete that was pacified by sacrificing Athenian youths and maidens to it, before Theseus of Athens finally slayed it. This explains Varoufakis’s choice of this mythical beast’s name, globally inscribed, for his book. Just as the mythical creature had to be fed with “food” from a polis that recognised Crete’s superior power, so, too, in a globalised world economy, America has played the role of the global Minotaur, which had to be “fed” with endless supplies of products from other countries consumed by American consumers, to keep the world economy more or less “pacified”. The 2008 financial crisis represents Theseus killing the beast; since then, the quasi-equilibrium inculcated by feeding it has disappeared.
I cannot summarise the whole, 236-page-long book here, so I’ll have to provide a thumbnail sketch, making liberal use of appropriate quotations from Varoufakis’s book. Buy it and read it; it is essential reading to people hungry for understanding.
The first quote comes from pages 22 to 23:
“I might have called this book The Global Vacuum Cleaner, a term that captures quite well the main feature of the second post-war phase that began in 1971 with an audacious strategic decision by the US authorities: instead of reducing the twin deficits that had been building up in the late 1960s (the budget deficit of the US government and the trade deficit of the American economy), America’s top policy makers decided to increase both deficits liberally and intentionally. And who would pay for the red ink? Simple: the rest of the world! How? By means of a permanent tsunami of capital that rushed ceaselessly across the two great oceans to finance America’s twin deficits.
“The twin deficits of the US economy thus operated for decades like a giant vacuum cleaner, absorbing other people’s surplus goods and capital. While that ‘arrangement’ was the embodiment of the grossest imbalance imaginable on a planetary scale, and required what Paul Volcker described vividly as ‘controlled disintegration in the world economy’, nonetheless it did give rise to something resembling global balance: an international system of rapidly accelerating asymmetrical financial and trade flows capable of creating a semblance of stability and steady growth.
“Powered by America’s twin deficits, the world’s leading surplus economies (e.g. Germany, Japan and, later, China) kept churning out goods that Americans gobbled up. Almost 70% of the profits made globally by these countries were then transferred back to the United States, in the form of capital flows to Wall Street. And what did Wall Street do with them? It instantly turned these capital inflows into direct investments, shares, new financial instruments, new and old forms of loans and, last but not least, a ‘nice little earner’ for the bankers themselves. Through this prism, everything seems to make more sense: the rise of financialisation, the triumph of greed, the retreat of regulators, the domination of the Anglo-Celtic growth model. All these phenomena that typified the era suddenly appear as mere by-products of the massive capital flows necessary to feed the twin deficits of the United States.”
The last two sentences are a summary of what Varoufakis reconstructs in the preceding and succeeding pages, and bears close scrutiny, given its crucial role as a mechanism that triggered the crisis in 2007-2008. Here, I have to jump to a much later section in the book, where Varoufakis, having painstakingly shown how the 2008 financial crisis has enveloped the globe, concentrates on the crisis within Europe and offers a solution, which European leaders will not, however, implement:
“I shall start by explaining how the twin crises facing the Eurozone — the one involving the indebted states and the other afflicting the banking sector — could be resolved without delay. Europe’s approach has failed because it has both ignored the way the debt crisis and the banking crisis reinforce one another and also turned a blind eye to the deeper cause of the crisis: the lack of a surplus recycling mechanism at the heart of the Eurozone. Here are three simple steps in which effective remedies could be put in place.
“The first step would be for the ECB (European Central Bank) to make the continuation of its generous assistance to the banks conditional on having the banks write off a significant portion of the deficit countries’ debts to them. (The ECB has ample bargaining power to affect this, as it is constantly keeping Europe’s effectively bankrupt banks liquid.)
“Step two would have the ECB take on its books, with immediate effect, a portion of the public debt of all member states, equal in face value to the debt that the Maastricht Treaty allows them to have (i.e. up to 60% of GDP). The transfer would be financed by ECB-issued bonds that are the ECB’s own liability, rather than being guaranteed by member states. Member states thus continue to service their debts, but, at least for the Maastricht-compliant part of the debt, they pay the lower interest rates secured by the ECB bond issue.
“Finally, the third step brings into play another venerable EU institution, the European Investment Bank (EIB). The EIB has double the capacity to invest in profitable projects than does the World Bank. Unfortunately, it is underutilized because, under existing rules, member states must advance a proportion of the investment. Given the awful state in which they find themselves, the Eurozone’s deficit states cannot afford to do this. But by granting member states the right to finance their contribution to the EIB-financed investment projects by means of bonds issued for this purpose by the ECB (see step two above), the EIB can become the surplus recycling mechanism that the Eurozone currently lacks. Its role would be to borrow, with the ECB’s assistance, surpluses from European and non-European surplus countries and invest them in Europe’s deficit regions.
“Summing up, the first two steps would make the debt crisis go away, and the third would underpin the Eurozone by providing its missing link – the mechanism that it never had and the lack of which caused the euro crisis in response to the Crash of 2008. But if I am right about all this, why does Europe not take up this suggestion, or something along these lines? The answer lies in the preceding pages, but it is perhaps time to spell it out. If the euro crisis were to be resolved quickly and painlessly, Germany (and the other surplus eurozone countries) would forfeit the immense bargaining power that the simmering crisis hands the German government vis-à-vis France and the deficit countries.” (Varoufakis, pp. 209-211)
I don’t have space to elaborate on the last sentence. This is just to whet the appetite of readers who would like to read the whole book. Follow this link to a wonderful recent interview with Varoufakis, where he talks about Greece today.
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