A former economic adviser to George Papandreou, Yanis Varoufakis is a political economist whose analysis is revered, sometimes reviled, but rarely ignored.
He was born in Athens in 1961. He is a Professor of Economics (though readily admits that he never really trained as an economist), and taught at the University of Sydney between 1988 and 2000, after which he returned to Greece to teach political economics at the University of Athens.
Beloved of global TV news media for his strident, articulate vision of what brought the Greek economy to its knees, he advocates that the eurozone crisis was caused by a fundamental fault in the eurozone’s engineering in the face of a global downturn.
On the eve of his presentation in Victoria, a recent interview recorded with Varoufakis reveals the position of this controversial commentator – whose voice continues to ring out – on what he fears are just the opening salvoes in the disintegration of the eurozone, and a global economic catastrophe as disastrous as that of the 1930s.
The following are extracts from a recent interview published as a podcast The WasteLands of the Euro by Tom O’ Brien. First, Varoufakis was asked what caused the eurozone crisis and why Greece became its first victim. “It’s very simple. Between 2000 and 2008, Wall Street, the City of London and the Frankfurt banks, went printing oodles, tsunamis, of private money – through financialisation, CDOs (Collateralized Debt Obligations), through to the complex derivatives that were being produced at exponential rates, and which became a form of money.
“The private banks were given a printing press – to print as much toxic private money as they wanted,” says Varoufakis. “Money can’t stand still. It has to channel itself to areas where it can find slightly higher returns, and those areas were the periphery of Europe.
“In Ireland it went into bricks and mortar – real estate: it went from the German banks to the Irish banks and on to the developers. In Greece that money went again to the developers, but through the state – the state borrowed the money to build the 2004 Olympic Games and other kinds of expensive infrastructure.
“The fact of the matter is, that when – under the weight of its own hubris – the financial sector in Wall Street, the City of London and Frankfurt, [collapsed], the result was all this money burnt, it simply turned to ashes.
“This privately-minted money disappeared and there was a massive liquidity crisis. The result was the Irish and Spanish banks collapsed. Investors panicked and said ‘who has a very high public debt and is in danger? And they looked at Greece, which had a 120 to 130 per cent debt against GDP and they started withdrawing money.”
For Varoufakis the eurozone crisis is the product of the collapse of a system built upon the creation of huge quantities of private money, and then the ‘official sector’ – the EU, the IMF and the European Central Bank – rushing in “to ensure that those private banks who had created all this mess, would lose as little as possible.”
As someone who studies the detailed engineering of the global economy and its complex political designs, Varoufakis believes that the EU’s monetary union was created with a basic and fatal design flaw. “The problem with the euro is similar to the problem with the gold standard in the 1920s,” he says. “When regions are locked in together by a common currency, and one region is constantly in deficit and one is in surplus, something has to give.
“You have to have a transfer from the surplus region to the deficit region, otherwise the whole thing is going to break down.”
Varoufakis believes that unless the EU introduces a mechanism for such transfers, that can take a number of forms – such as commercial investments by surplus countries in deficit countries through job creation projects – crises and instability are inevitable.
“In the EU there are 17 disparate economies without such a mechanism. When everything was going swimmingly during the profligate era of 2000 to 2008, when capital was oozing everywhere and money was cheap, until there was a financial sector collapse, and then suddenly the faulty architecture, the lack of that surplus-recycling mechanism was revealed.
“That’s the reason why we’re having such a huge structural crisis in the eurozone now.” Part of the problem maintains Varoufakis, is the role and remit of the European Central Bank.
“The ECB is a very weird beast. It was created to mirror the Bundesbank – the central bank of Germany. It has a single-track mind. In it’s charter it’s only task is price stability – to keep inflation down, which it has done successfully.
“It’s like a giant with one leg. But in order to preserve the integrity of a currency area you need both fiscal policy – which involves taxation and debt – and monetary policy. The ECB only has monetary policy. There’s no second leg to stabilise that giant.
“The whole logic of the eurozone is to have a single currency but perfectly separate debts – there’s no common debt. The problem is, as the solvency of each member state of the EU differs, interest rates in each country are different, depending on the confidence of investors in that country.
“It’s natural that when investors become choosy about where they’re going to put their money, the first place they’ll remove it from, are the countries that they consider to be most prone to bankruptcy. The problem with the eurozone says Varoufakis is that “it’s a federation that is not federated – it’s an institution it has been given none of the tools necessary to sustain the shocks of a financial crisis.” “It’s simple, let’s say that you and I are constantly engaging in trade, and I am selling more to you than you are selling to me, and I have a surplus over you. And at some point I turn round and blame you for having a deficit.
It makes no sense, but this is the eurozone.” Varoufakis says that the disintegration of the eurozone has already begun, and that the collapse of Italy and/or Spain will be the catalyst for Germany to leave the eurozone as it stands, and set up a different eurozone system with member states who aren’t in deficit. “When the financial system buckles under, disintegration follows.
When that happens the serpent’s egg hatches, and the only people who benefit are not the capitalists and the bankers, they are the neo-nazis, the xenophobes and the misanthropes. This is exactly what’s happening again. History warned us,” says Varoufakis.
“We’ve seen Golden Dawn, a gang of thugs grow from 3000 people to being a major party, just like [Germany] in the 1930s. “Look at what Goebbels and Himmler and Hiltler were saying in the 1920s. Take their speeches and you will find a combination of populist rhetoric, a great deal of interesting arguments against bankers, mixed up with misanthropic, anti-Semitic, disgusting talk about a final solution.
“I hope what Marx said is true, that history repeats itself as farce, but it doesn’t look very farcical to me, it looks tragic.”
Yanis Varoufakis will give his Melbourne presentation at the headquarters of the Greek Orthodox Community of Melbourne and Victoria, 168 Lonsdale Street, on Monday 15 October at 7.00pm. Admission is free. Interview extracts courtesy of The Waste-Lands of the Euro – From Alpha to Omega podcast blog.