European solidarity or national responsibility?

“The idea of Europe is in retreat and the European Union is at an advanced state of disintegration“. This is how the preliminary version of DiEM25‘s white paper on a new vision for Europe begins.

DiEM25 is an initiative of, amongst others, Yanis Varoufakis, who was finance minister in Greece for five months at the height of its economic crisis in 2015.

The white paper describes a socialist vision for Europe, and proposes short- and medium-term measures to cope with the economic and political crises which have afflicted Europe since 2008. It will be launched on 25th March 2017 to coincide with the 60th anniversary of the Treaty of Rome.

For anyone who regards the European project as essential and is dismayed by the events of recent years, the creation of a new and revitalised vision for Europe seems essential. Is this it? Is the analysis and prescription sound?

Last year Varoufakis produced a book “And the Weak Suffer What They Must”, partly a history of currencies. He points out that the Eurogroup’s bailouts were bailouts as much of German and French banks as of Greece, that the amount supposedly owing will never be repaid, and that the conditions imposed damaged and shrank the Greek economy and its capacity to repay. He makes many of the same criticisms of the technical and political construction of the Euro that Joseph Stiglitz makes in The Euro.

His main criticism of all the European currency schemes such as the currency snake, the ERM and finally the Euro is that they lacked or lack mechanisms for transfer payments and for recycling the surpluses which gravitate towards the stronger regions, principally Germany.

The banks in stronger regions have to find places to recycle the surpluses that flow to the centre, so in good times the weaker countries’ banks and exchequers are swamped with money and in bad times money flees to security in the central regions, raising interest rates for weaker regions to impossible levels.

This applied not just to Greece but also to (among others) Ireland: Varoufakis quotes the veteran Irish journalist Vincent Browne who asked the representative of the ECB to explain in terms a taxi driver would understand why local taxpayers should adopt the debt of private banks owed to other private (mostly German) banks. Clearly, the implication is that German (and French) liabilities were transferred to Irish taxpayers by the application of raw political and economic power. No clear ECB explanation was given to Browne.

The Irish example

Ireland is a country I lived in for ten years and have the greatest affection for: why should and why did the Irish government adopt the debt of private banks? Well, there were good moral and practical reasons.

Firstly, it was the job of the Irish government to regulate those banks, and for many reasons they did not do the job adequately. One reason was that Ireland built a major financial industry centred in the North Wall of Dublin in a very short time, predicated partly on regulation with an even ‘lighter touch’ than London’s. The Irish had insisted on their right to regulate as they thought fit in order to build up their financial industry. (Incidentally the SNP looked over to Ireland in the noughties and said: ‘If only we were as free as the Irish, how the Scottish banks would flourish!”) Another is possibly corruption. With billions flowing around did some of it land in politicians’ pockets? The question is rhetorical to anyone familiar with Irish political culture (and not just there).

A second moral reason is the enormous benefit which the floods of external money brought to the Irish economy and to individual taxpayers. Ireland was used to 20% unemployment and continual emigration, but in the decade before the crisis it was importing workers from Slovakia and Spain to do the jobs the Irish didn’t want. Many Dubliners saw the value of their houses increase from €50k to €500k over 25 years. Pensioners got massive cuts to their pensions when the crisis struck: but they had received even more massive increases in the decade before.

The practical reason was of course that the Irish kept their economic and thus political independence – though slightly limited for a few years. The Irish still have a financial industry, still have a GDP per head higher than the UK’s. They put bankers on trial, and promptly dismissed the government and part of the political class at the first post-crisis election. Political and financial reform is still unfinished business, but has received a considerable boost because of the self-criticism that came in the wake of the crisis.

And…. wasn’t the flood of (cheap German) money coming into Ireland and Greece exactly the surplus recycling mechanism which is Varoufakis’s central recommendation? Varoufakis charges that too much arrived in the good times, was unwisely used and then left overnight.

But weren’t the Greek and the Irish governments, institutions and private businesses free to have only borrowed the money they needed to develop the economy or their businesses? A motorway, school or factory financed on a 10-year bond cannot leave the country. The bond-holders cannot raise the rate on the coupon or demand their money back, they have to wait out the ten years.

Where it becomes problematic is if the money is used to fuel a bubble (such as the property bubble in Ireland), to bribe voters, if it simply disappears in corruption, or if – as the Bank of Scotland did – bankers borrow very short to get the lowest interest rates and then lend long at only slightly higher rates. If the economic tide turns and interest rates rise, then the banks are shackled to loans which they can no longer profitably refinance.

Calling the Greek bluff

In Ireland the worst of the hubris lasted a few years – maybe 2001 to 2008. In Greece corruption and dysfunctional politics, banks, currency and economy have been part of the DNA of the land since the creation of the modern Greek state. Varoufakis pleads that given another chance and a lot of money then he and premier Alexis Tsipras could have turned it around. That was always going to be a hard sell. When he approached his Europeans partners Varoufakis overplayed his hand and tried to make weakness a strength: “You must give us money or we will fall and the entire Euro house with us.”

This caused his negotiating partners to call his bluff. They saw an invitation to fill a barrel with no bottom: a failed state detached from reality and not willing to or possibly capable of reform. This goes to the heart of the practical difficulty in implementing debt relief for Greece or on a wider scale the vision described in the DiEM25 white paper.

Varoufakis’s main proposal both in this book, his “Modest Proposal” in 2013, and the DiEM25 white paper is communalisation and Europeanisation of most national debt, initially in the European Stability Mechanism ESM. The problem? When Germany looks at Greece, Italy and even to a lesser extent France, it does not see temporary difficulty which needs stabilized with debt forgiveness and investment, it sees polities which do not have their act together, and in which the forces for stasis will be strengthened by more money. The situation is different in say Ireland (for the reasons given above) or Slovakia (which though poorer is paying for Greece’s imprudence), both of which in recent decades have made massive and successful efforts to build up their economies.

Yanis Varoufakis’s book is highly readable, it offers insights and anecdotes, and many sensible prescriptions. I enjoyed it thoroughly and recommend it highly. But he fails to put his finger on the real causes of the Greek misère.

Photo Varoufakis: Marc Lozano via Flickr CC BY-SA 2.0

Photo Syntagma Square: Kotsolis at Wikipedia CC BY-SA 3.0

 

 

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