Transcribed from the 23 April 2016 episode of This is Hell! Radio (Chicago) and printed with permission. Edited for space and readability. Listen to the whole interview:
The worst aspect of it all is that we are losing the most precious capital: tens, hundreds of thousands of the most well-trained, well-educated youngsters, who emigrate—and whose loss is going to be permanent.
Chuck Mertz: The Eurozone crisis continues unchecked. Splits and fissures are being seen in a region that was supposed to be brought together under one currency; instead we see division. Could those fractures grow so large as to release some of the demons that have plagued Europe after economic crises in our not-too-distant past?
Here to explain how the Eurozone crisis really came to be, the US’s role in it, and what could happen if the whole European unity program collapses, the former finance minister of the Hellenic Republic, Yannis Varoufakis is the author of And the Weak Suffer What They Must? Europe’s Crisis and America’s Economic Future.
Welcome back to This is Hell!, Yannis.
Yanis Varoufakis: Thank you very much, it’s wonderful to be back.
CM: You write, “On February 25, I made my first official visit to Berlin as Greece’s finance minister. The Greek economy had collapsed beneath a mountain of debt, and Germany was its main creditor.”
You were there to discuss what to do about the debt, and as you put it, your “first port of call was of course the federal ministry of finance to meet its incumbent leader, the legendary Dr. Wolfgang Schäuble. To him and his minions, I was a nuisance. Our leftwing government had just been elected, defeating Dr. Schäuble’s and Chancellor Angela Merkel’s allies in Greece, the New Democracy Party. Our electoral platform was, to say the least, an inconvenience for their Christian Democratic administration and their plans for keeping the Eurozone in order.”
Was the feeling that he saw you as a nuisance—was that palpable? Was it an uncomfortable introduction and relationship with the other finance ministers of Europe?
YV: It was indeed, at the human level. As I say in the book, I stepped out of the elevator, and there he was, surrounded by his minders, and I had a couple of my own associates with me. I smiled and I walked straight toward him and extended my hand, and he refused to shake it. He turned his back towards me and signaled me to follow him to his office.
But I have to say that our personal relationship warmed up substantially over the months that followed. This was not a personal grudge. Greece is an inconvenience for Germany. It has been since the financial crisis that began on Wall Street and then very quickly was transmitted to Europe.
CM: Why was what the Germans considered Eurozone “order” not necessarily what Greece wanted? Why was that order not the best thing for Greece?
YV: This is a brilliant question. It’s the one trillion euro question, as I say. Because we should have a common interest. My line when I went to the finance ministers’ meetings, when I went to Berlin, was that we should establish common ground. Because we have a currency, a monetary union, and we’re all in it together. When one part of the monetary union is suffering, the rest are suffering too.
But the problem, Chuck, is this: in 2010, the Greek state became insolvent, and the great and the good in Europe—including the Greek government, the German government, and the International Monetary Fund—decided to do something very silly: to try to hide the bankruptcy of the Greek state. And how do you cover up a bankruptcy? By pretending the entity is not bankrupt, and the only way you can do that is by extending new loans to the bankrupt entity—which are added to the old, unsustainable loans.
The only reason they did that was to cover up the fact that the German and French banks needed a second bailout. After the 2008 bailouts that all banks around the world received, the French and German banks needed a second one. The loans to Greece were never a bailout for Greece. Never. They were a bailout of the French and the German banks. The money went to Greek government coffers and immediately flowed on to Deutschebank, Société Générale financial bank and so on.
The reason I’m saying we were an inconvenience to the German finance minister and the establishment in Europe is because we were speaking the truth about this. We were saying, Folks, we made a very big mistake—as Europe—in 2010. We tried to cover up a bankruptcy. We tried to pretend that a bailout for northern European banks was a bailout for the Greek state, when it wasn’t any such thing. The result is that we have huge, unsustainable debt in Greece.
This extending and pretending, this constant lending to the Greek government and pretending we have solved the insolvency (on the condition of austerity, moreover, that saps the incomes from which debts new and old would have to be paid) has to end.
They just didn’t want to hear that. A rogue banker who extends and pretends a corporate loan that has gone bad does not want to hear the truth. Europe’s leaders did not want to hear the truth. I was elected to speak the truth, thus I was a very major pain in the neck.
CM: What would Greece be today, and what would the Eurozone be today if that second bailout in 2010 had not happened?
YV: It would have been better off. What we should have done is this: think of General Motors as a model. General Motors, in 2009, was insolvent. If the Obama Administration had made the awful mistake of pretending that this was not so, and just lent General Motors the money to repay its debts (at commercial rates), then General Motors would simply not exist today. It would have gone bankrupt, and all its debts—all of it, I mean one hundred percent—would have been effectively written off.
Instead, there was a debt restructuring—a very severe debt restructuring, initially—and the company itself was restructured to become more efficient, to produce new models, and this is why now General Motors is doing pretty well.
This is what we should have done with Greece. Its debt should have been restructured, the state should have been reformed very significantly (I never argued that Greece was not in need of reform), and now Greece would be going again. And the creditors would be getting back a substantial percentage of what they were owed.
Now, constantly—every quarter, quarter-in, quarter-out—Greece’s collective national income is shrinking; the banks remain bankrupt; the private sector is suffering under increasing taxation because this is the only way the state can pretend to be exacting sufficient resources from the Greek economy in order to pretend to be paying back its debts; serious investors look at this situation and stay away; and it’s a festering wound. It’s a great depression.
And the worst aspect of it all, Chuck, is that we are losing the most precious capital: we are losing tens, hundreds of thousands of the most well-trained, well-educated youngsters, who emigrate—and whose loss is going to be permanent.
CM: You tell the story of what a high official in the Federal Republic of Germany told you during your first official visit to Berlin: “A debt is a debt is a debt.”
That’s something you hear all the time in the United States. The sanctity of debt must be upheld, or our system is going to collapse. What does that idea (that a debt is a debt is a debt) tell you about the worldview of the German high official?
YV: If you want a cultural explanation, let me remind our audience that in German, the word for debt is exactly the same as the word for guilt.
But let me challenge the notion that in capitalism a debt is sacrosanct, should be sacrosanct, and must always be paid—and therefore debtors who cannot repay must be bailed out. Let me say that if that were the case, capitalism would collapse. Capitalism cannot survive this moralizing Old Testament view that debtors must always pay their debt, and if they can’t they should become bonded labor.
The reason is very simple. If a debt is always to be repaid, always, even if it was a silly debt, a silly loan that should never have been given, then why would bankers and financiers and lenders ever be careful about to whom they lend? They wouldn’t be. We would have highly irresponsible lending. Remember that for every irresponsible debtor there is an irresponsible lender. Remember the subprime market in the US, and the damage that they caused to the whole world. The fact that debt is sacred is inimical to the very idea of capitalism.
One final point. Capitalism took off in the eighteenth century only once we got rid of the idea of the sanctity of debt. It was called limited liability companies. Only when it introduced limited liability did capitalism manage to take off. So this smacks of a lack of comprehension of what makes capitalism tick.
Effectively, the German chancellor went to the Bundestag and lied to her MPs. She was asking them to pass money on to the Greeks, when in the end she was passing it on to Frankfurt.
CM: You give us a bit of historical context, and remind us that “when the Cold War ended, Germany was reuniting in the hope of losing itself, in important ways, within a uniting Europe. Central to this project of embedding the new united Germany into a new united Europe was the ambitious program of a monetary union that would put the same money—the same banknotes and even the same coins, one side of which would be identical no matter where it was issued—into every European’s pocket.”
Then you quote an optimistic Athenian taxi driver telling you once in the early 1990s of all Europeans: “Make them use the same money, and before they know it, a United States of Europe will creep up on them.”
Were Europeans, while optimistic about about a Eurozone project, also naively innocent? What explains the excitement about the idea of unity?
YV: It depends on where one stood. Volkswagen and the major German manufacturers wanted a common currency because they loathed the depreciation of the Italian currency or the Spanish currency; every time these depreciations happened, their competitiveness against local brands of cars was reduced. They wanted a common currency in order not to have to worry about depreciation.
From the perspective of the elites in places like Greece and Italy, in the deficit southern countries: they have their mansions, they have their assets in the leafy suburbs of Rome or Athens or Milano, and they also loathe the depreciation of their currencies, because every time their currencies depreciate, their home, in dollar terms or in deutschmark terms, was devalued.
Workers who struggled to make ends meet and often went on strike in order to increase their pay by three, four, five percent—after a long strike and huge costs and emotional turmoil, they would succeed in getting that wage rise, and two days later the currency would devalue and imported goods would increase in price and those wage gains would be eliminated overnight.
So there were many different motives for creating a common currency, for doing away with exchange rate fluctuations and the systematic devaluation of the weakest currencies. But it’s one thing to say that many different social classes were lured into the benefits of a common currency, and quite another to say that the common currency would in the end be beneficial.
It was so terribly designed. It was designed exactly like the gold standard of the 1920s, and we know how that ended.
CM: What explains why it was so terribly designed?
YV: The answer lies in a combination of the self interest of those who designed it, and ideologically-driven theory that ended up being really toxic theory. The self interest is clear; I mentioned the interests of the manufacturers, of the ruling classes in the deficit countries, and so on. Also, the European Commission, the European Union apparatchiks, the bureaucrats—they loved the idea of managing the money of Europe. Nothing enthuses bureaucrats more than such immense power that is afforded when they suddenly control the levers of the monetary system.
But there was a failure of judgment at the theoretical level as well. Similar to what happened after the First World War, there was this idea that if we simply fix exchange rates between different countries and we have rules that prevent governments from spending more gold—or some fixed in-supply currency that cannot be politically manipulated—that suddenly capitalism is going to flourish.
It didn’t happen in the twenties. When you create such a fixed exchange rate regime, you have a flourishing of capital flows from the surplus to the deficit countries; all sorts of Ponzi growth takes place. Remember the roaring twenties? In the literature of the time—the newspapers of the time, the Wall Street Journal of the time—people were talking about a new paradigm, that the world is never going to know poverty again, or recession or depression. And then of course 1929 came.
That was an inevitable outcome of the bubbles that are built when you create a monetary system without having a way of checking the flow of capital and of redistributing surpluses and deficits through political mechanisms that only a genuine federation like the United States can provide.
CM: You write that “a debt may be a debt, but an unpayable debt does not get paid unless it is sensibly restructured. Neither German teenagers in 1953 (when the United States convened a conference in London to write down—meaning simply to reduce without payment—Germany’s public war debt to, among other nations, Greece) nor Greek teenagers in 2010 deserved a life of misery because of unpayable debts amassed by a previous generation.
“My argument in response was that restructuring Greece’s public debt was essential for creating the growth spurt necessary to help us repay our debts, otherwise Greece would have nothing with which to pay. The proposal went down like a lead balloon.”
So the United States understood in 1953 that for Europe’s economy to grow, they needed to write down Germany’s war debt to countries like Greece. But today, the powers that be don’t know they have to write down some of Greece’s debt in order for their economy to grow? To you, what explains why the same writing down of debt that Germany enjoyed after World War II is not being employed with Greece today?
Why hasn’t the Eurozone learned that lesson from 1953?
YV: Isn’t that a good question. In 1953, the war debts of Germany were written off, and there was no discussion based on moralizing, that Germany did not “deserve” this. Germany bloodied the whole world in the 1940s, and yet the American administration, in 1953, moved not only to write down, substantially, the prewar and war debts of Germany, but they also wrote down the loans that they, America itself, had afforded Germany after the war.
The only reason the American administration did that was because they were pragmatic. The prerequisite for a growing Germany—which was, in their eyes, a prerequisite for a strong European pillar of NATO, for American influence in Europe, for capitalism—was that the debt should be sustainable. All the ethical and moralizing debates were simply set aside—and they were set aside brutally—by the American administration.
The British, the French, the Italians, the Greeks were not happy with the idea of writing down Germany’s debt. But Washington imposed this condition upon them for continuing the process of building up the European Union.
Now why is it not happening today in Europe? Because we don’t have Washington, or something like Washington in 1953, imposing rationality upon Europeans. But there’s also a second, more sinister reason. In 2010—remember when we said at the beginning of our conversation that the bailout for Greece was a bailout for the German and French banks—effectively, the German chancellor went to the Bundestag, to the federal parliament in Berlin, and lied to her MPs. She was asking them to pass money on to the Greeks, when in the end she was passing it on to Frankfurt.
If there is a significant debt write-off, she will have to go back to the Bundestag, to the federal parliament, and confess, and say to them, “Um, it wasn’t exactly true what I told you six years ago. The money went to the banks. The Greek state didn’t get any of it, so they didn’t manage to invest it, so they can’t repay it. So we need to write it down.”
That takes political leadership, and Mrs. Merkel as we speak is particularly weakened by the crisis within Germany, by the refugee crisis, and by the fact that she’s been around for a while and there are a number of pretenders to her throne who are sharpening their knives. She just doesn’t want to do it.
CM: You write about the Bretton-Woods system, the first negotiations for which began in 1944 during the Second World War, and mention the rupture that occurred in 1971 when Nixon took the US off the gold standard.
To what degree did the US set the stage for Europe’s financial crisis? Did they set the stage dating back to a mistake made in World War II with Bretton-Woods? Or can we blame all of this on Nixon?
When I was sitting in parliament in my ministerial chair, in front of me were twelve or thirteen thugs—elected members of parliament! Pure Nazis. Not neo-Nazis. Nazis. There’s nothing neo about them. They are unreconstructed followers of Adolph Hitler.
YV: We’re all in it together. America and Europe are so closely intertwined. Maybe we need a lot more coordination as a result of this interwoven nature of our economies.
The Bretton-Woods structure was designed in 1944, and it was actually of quite magnificent design. It had its faults. It could have been better. I believe that if John Maynard Keynes, the British representative, had been listened to, maybe it would still be around. It would have survived the 1971 rupture. But it’s easy to criticize with hindsight. It was a magnificent system.
It was a system predicated upon two pillars; it had two major characteristics. The first one was, just like the gold standard of the twenties, fixed exchange rates and some connection—via the dollar—to gold. It was not really a gold standard, it was a dollar standard. The dollar, which emerged after the Second World War as the only significant internationally tradeable currency, became the anchor of the international capitalist financial system.
But that wasn’t the only pillar. The second pillar had the same understanding that the New Deal had had at the time in the 1940s: that fixed exchange rates on their own cannot survive. At some point there will be crisis, a rupture like in 1929. To make them sustainable, we need to have a mechanism that recycles surpluses (profits, gains from net exports) where they are produced and transfers them in some manner to areas of the system that are in deficit.
In the United States, this happens every day. When, for instance, Boeing gets a contract from the Pentagon to build a new fighter jet, it gets its orders from the Pentagon to build parts of that airplane in new facilities in a deficit state such as Missouri or Arizona. Not because of philanthropy towards the deficit state, but because that’s the only way of ensuring that there is investment in the deficit state that produces the incomes that allow the citizens and residents of the deficit state to purchase stuff from California, from Illinois, from the state of New York, in order to allow them to maintain their surpluses.
And the New Dealers understood that if they’re going to have a global system of fixed exchange rates, they would have to have a global surplus recycling mechanism. And they did. What was it? It was called the United States of America. The United States used its own surpluses to finance parts of the global Bretton-Woods system that were in deficit. That was the Marshall Plan, for instance: just taking a chunk of American income and giving it to the Europeans so that the Europeans could then buy American goods. Same thing with Japan. Japan was nurtured into being an industrial giant by the United States. It would not have happened without the United States.
This is real hegemony at work. Surplus recycling plus a constancy of exchange rates. The Europeans never understood that. So when they were thrown out of the dollar zone in 1971 they tried to reproduce their own Bretton-Woods in Europe, but without the surplus recycling. They ended up with something resembling the gold standard of the 1920s—and something which got its comeuppance in 2008, our generation’s 1929.
CM: You write, “Following the tumult of Europe’s expulsion from the dollar zone in 1971, European nations attempted to huddle together like sheep in a storm. But as the solidarity of the 1970s evolved into a badly-designed common currency, it turned into toxic bailouts yielding psychological faultlines along the Alps and up the Rhine. An irrepressible evil is crawling out of these faultlines with the power to devastate the European project, and moreover, to destabilize the world at large.”
How would you describe this irrepressible evil? And is the evil lurking, waiting to undermine the European project today, the same evil that tore Europe apart with two world wars?
YV: It is a post-modern version of it. Just look at the government of Hungary at the moment. It is officially espousing authoritarianism, and speaking against—and conspiring against—journalistic freedoms, the independence of the courts, the independence of the central bank. Look at the rise of ultra-nationalist, fascist, racist xenophobes everywhere in Europe.
Everywhere you look. The AfD party in Germany is making substantial inroads. They have a purely racist, isolationist social-conservative agenda that takes us back to the 1930s. If you look at France, they have their neo-fascist National Front, which is the leading party in France as we speak. In next year’s presidential election, Marine LePen, the leader of the National Front, is going to come first. Whether she will win or not is another matter, because there’s a second round there, unlike the United States.
Let me put it this way: if France had the same electoral system as the United States, France next year would be guaranteed to have a president from the National Front. You only have to state that in order to start panicking.
In Greece, we have Nazis in government. Not neo-Nazis. Nazis. There’s nothing neo about them. They are unreconstructed followers of Adolph Hitler. When I was sitting in parliament in my ministerial chair, in front of me are those twelve or thirteen thugs—elected members of parliament! Pure Nazis.
And similarly, wherever you look, we have borders being re-erected, fences being electrified in Europe. We have an economic crisis which is very similar to the early 1930s, pulling Europeans apart and turning them against one another. If we allow this process to continue, even just from an economic point of view, the deflationary shock that Europe is capable of inflicting upon America, upon China, upon the global economy, is such that a new Great Recession is in the offing. And I’m saying this even setting aside the political toxicity of the rise of these vulgar and brutish forces throughout Europe.
So we’d better do something about it. That’s why I end the book saying that Europe—once again, just like in the late 1940s—is too important to be left to European rulers.
CM: Why do you believe the crisis can’t be left to the Europeans? And can only the US save Europe from World War Three?
YV: It’s very simple. Europe—or at least our leadership—is following the script of the late 1920s, which with mathematical precision is going to lead to a major deflationary shock that the United States’ economic recovery is not strong enough to sustain. Therefore, to the extent that there is a common interest for the peoples of Europe and for Americans to prevent this from eventuating, we have a moral obligation—good people of the United States and good people of Europe—to impress upon our leadership the urgency of ending this cycle.
CM: Yannis, it is a pleasure hearing your voice again. Thank you so much for returning to This is Hell!
YV: I enjoyed it enormously.