And the Good Ship Greece Sails On: ‘Letter’ to an italian colleague

A few weeks ago I was approached by Andrea Adriatico, a theatre director from Bologna’s Teatri Di Vita with an interesting request: Could I write a ‘letter’ to some fictional Italian economics professor, outlining on a colleague-to-colleague basis, the Greek ‘situation’ as it is experienced by a Greek economics professor. That letter would then be read out during a play, and be part of the play [entitled Cuore di… Grecia, i.e. Heart of… Greece). Well, I was intrigued and said I would do it. The ‘letter’ I ended up writing follows. The first performance is scheduled toward the end of July…

Dear Colleague,

Like you, I suppose, I grew up with black and white images of movies depicting a southern Europe struggling to recover from the calamity of the mid-war era.

Like you, my mind is still full of images of struggling people whose trials and tribulations gave rise to waves of Italian and Greek migrants to far away places as well as to films like Ladri di biciclette or similar Greek ones where whole comic sequences were constructed around the yearning of a grown man for a cheese-pie or a bowl of desert. However, there came a time when it was no longer easy to recall the poverty and dispossession that gave those images and comic sequences their poignancy. As a result, our societies, Italy and Greece, drifted away from the cultural tradition of de Sica, Fellini, Koundouros and Kakoyiannis, and descended into the black hole of Berlusconi-esque vulgarity. During these years of ‘growth’ and consumerism, many of us hoped that our societies would find in themselves a capacity to rediscover the lost balance; to combine a full stomach with a preference for decent cinema over crass lifestyle shows on television.

Alas, we never got there. Before such a balance was struck (assuming that it could be struck), our generation’s 1929 hit. It happened in 2008 when, just like in 1929, Wall Street collapsed, the common currency of the era (the Gold Standard in 1930, the euro in 2010) began to unravel, and very soon our elites failed spectacularly to respond rationally to the Crisis’ triumphant march. Two short years after the Crisis hit my country, Greece, we have found ourselves, yet again, capable of relating to the comic sequences of the 1950s and 1960s movies revolving around the craving for a cheese-pie or the dream of desert.

When I was studying economics, as a young man, I recall I had serious difficulty understanding how it was that the governments of the mid-war era, from 1929 onwards, could have failed so consistently to arrest the economic malaise that led us, tragically, to the Second World War. I was reading about President Hoover’s commitment to reduce swiftly government expenditure, and to cut wages, while the US economy was imploding, and I just could not understand how he and his merry advisers could countenance such idiocy. I simply refused to believe that they were bad men wishing ill of their compatriots. But at the same time, I could not understand how they managed to convince themselves that their actions would bring relief to their suffering voters.

Well, many years passed since then and, at long last, I understood. Watching our government in Greece since the debt crisis erupted, observing Europe’s leadership dither and adopt one calamitous policy after the other, I finally got it. It is, come to think of it, not dissimilar to what happened in the United States in the late 1960s and early 1970s. Inside the Pentagon, smart generals understood perfectly well that America’s war in Vietnam could not be won. That sending more troops to fight in the jungles, unleashing more napalm bombs over Vietnamese towns, cranking up the war effort in general, was pointless. We know full well, courtesy of Daniel Ellsberg’s heroic efforts, that they knew individually, and in small groups, the error of their ways. And yet they found it impossible to coordinate with one another, to synthesise their views, so as to agree to a change of course. A change that would have saved thousands of American lives, hundreds of thousands of Vietnamese lives, not to mention a huge amount of money. Something similar is happening in Athens, in Rome, in Frankfurt, Berlin and Paris today. It is not that the members of our elites cannot see that Europe is like a train that is derailing in slow motion, with Greece being the first carriage to leave the tracks, Ireland and Portugal following, leading to the derailment of the larger carriages that follow: Spain, Italy, France and, finally, Germany itself. No, I believe that, in the eye of their mind, they can see it, at least as well as American generals could envision the final scenes in Saigon – with the helicopters airlifting the last Americans from the rooftop of the US Embassy. But, just like the American generals, they are finding it impossible to coordinate their viewpoints into a sensible policy response. None of them dare speak when they enter the conference rooms in which the important decisions are reached, lest they are accused of going ‘soft’ or of having ‘lost it’. So, they stay silent while Europe is burning, hoping against hope that the fire will put itself out, while knowing, in their heart of hearts, that it will do no such thing.

While they are dithering, fiddling as Athens, Rome, Madrid, Lisbon, Dublin are burning, our societies are descending into a mire in which hope vanishes, prospects are annihilated, life is cheapened, and where the only winners are the misanthropes, the ‘haters’, the seekers of scapegoats in the form of the ‘alien’, the Jew, the ‘different’, the ‘other’. As the lights are literally going out in my country, with families ‘choosing’ to have their electricity supply discontinued in order to put food on the dinner table, thugs ‘patrol’ the streets in search of the ‘enemy’. Nazi ideology is getting another chance, like hunger and dispossession, to infect, once again, our social fabric. And as our institutions, our trades unions, our cultural norms and organisations are turning into empty shells, little, if anything, stands in the way of the bigots, the racists, the exploiters of generalized pain and helplessness. Alas, the serpent’s egg is hatching again in Europe, and for the same reasons it did back then.

Your country and mine share a lot more of this sorry history than we care to admit. Before the war, both our societies spawned and tolerated fascist regimes. Your Mussolini and our Metaxas may have ended up waging war against one another, but they were both products of political failures and economic disasters that are eerily similar to the shared fate of our two countries today. I know that a strange and weird geography is at work in Europe today: Ireland is at pains to argue that it is not Greece, Portugal to claim that it is not Ireland, Spain screams that it is not Portugal and, of course, Italy wants to believe that it is not Spain. We must, I submit to you, cast this idiotic denial of our common malaise aside. Sure, Italy is not Greece but, nevertheless, the predicament that Italy is increasingly finding itself in as I am writing these lines cannot be usefully separated from the predicament of my country. Our disease may have resulted in a higher fever than the one you are experiencing but, believe me, it is the same virus. Your fever will rise tomorrow to the level at which ours is today.

Many people I know outside of Greece, including fellow economists, make the mistake of thinking of what Greece is experiencing as a deep recession. Let me tell you that this is no recession. This is a depression. What is the difference? Recessions are mere downturns. Periods of reduced economic activity and increased unemployment. As you and I teach our students, recessions are to capitalism that which Hell is to Christianity: unpleasant but essential for the ‘system’ to function. Periods of recession can be redemptive, in the sense that they ‘weed out’ of the economic eco-system the less efficient, the firms that should not really be in business, the products that are out of fashion, the productive techniques that are obsolete, the dinosaurs to coin a metaphor.

However, what is going on in Greece is no recession! Here, everyone is going under. Efficient and inefficient alike. Productive and unproductive. Potentially profitable and loss making enterprises. I know of factories that export everything they make to satisfied customers, that have full order books, a long history of profitability; and, yet, they are on the brink of bankruptcy. Why? Because their foreign suppliers will not accept their bankers’ guarantees in order to provide them with the necessary raw materials, as no one trusts the Greek banks anymore. But with the credit circuits well and truly broken, this Crisis is sinking every ship, wrecking every boat, ensuring that the whole of society drowns. And the more we cut wages, the more we increase taxes, the more we reduce benefits to the unemployed, the deeper the hole into which everyone is drawn. If anyone wants to explain the concept of a vicious circle, today’s Greece is a perfect case study.

Between you and I, from one economics professor to another, I need to convey to you a deep sense of shame about our profession. You know that other academics often compare us economists to seismologists, jesting that we are equally useless in predicting the phenomenon at the heart of our discipline. This is quite right. As a profession, we have never warned the world ex ante of an impending ‘earthquake’. Some isolated economists may have done so but, then again, a broken watch tells the time correctly twice a day. No, as a body of ‘scientists’ we have proven just as bad as seismologists are in telling us where, when and with what force the next earthquake will strike. Only we are much, much worse than seismologists.

Come to think of it: Behind every toxic CDO, behind all lethal financial engineering, there lurked some pristine model of one of us. Behind every economic policy that was responsible for ponzi (that is ‘pretend’) growth prior to the Crash of 2008, one can find some celebrated, some well respected economist who provided the ‘ideological’ cover for that policy to be adopted. Behind every austerity measure today, that suffocates our societies, again there stands an academic colleague of ours, whose models and theories provide the powers that be with the audacity to inflict such policies onto our peoples. In short, you and I are guilty for what our fellow Greeks and Italians are suffering. Even if we did not believe in these particular economic models, we did not do enough to alert the world to their toxicity. We are, indeed, guilty.

Last week an ex-student of mine, who is suffering from cancer, could no longer find the chemotherapy drugs that she depends on, following the collapse of the state’s agreement with pharmacists (who are in strife as a result of not having been paid, by the state, fro eighteen months). A number of her former professors (all economists) we got together and paid for the drugs to be purchased in cash. Helpful as this gesture was, it does not exonerate us. Our guilt is just as current as it was before that kind gesture. For we were the ones who taught students about the efficacy of financial markets, we had allowed the era of ponzi financialisation to become knows as The Great Moderation, we asked our students to have faith in the capacity of financial institutions to price risk properly, we sat idly by while our students read textbooks which taught them the great lie that markets are self regulating and that the best the state can do is get out of the markets’ way, letting it perform its miracle. Yes, my dear colleague, our heads should be hanging in shame. Even if individually we objected to the conventional ‘wisdom’ of our trade.

Before closing this letter, I want to evoke a lasting image by which to describe how my people, the people of Greece, are feeling right now. Do you remember Fellini’s brilliant E la nave va? Do you recall the war refugees on deck, being treated like an inconvenience by the crew? I shall not continue describing them. I am sure you recall Fellini’s masterly depiction. Well, this is how Greeks are feeling today, with good cause too, given the scapegoating that they have to suffer as the first domino to fall in a long chain of dominoes that threatens the whole of Europe with a postmodern version of an hideous, earlier era.

In sadness,

Faithfully yours

Yanis Varoufakis

146 thoughts on “And the Good Ship Greece Sails On: ‘Letter’ to an italian colleague

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  5. Nicely written, etc. etc. But I’ve lived in Italy for 3.5 years, and have been visiting Greece for the last fifteen, sometimes for months at a time. My Italian is fluent, my Greek is rather pathetic – all this being stated only to establish the fact that I’m not a TOTAL idiot on the subject… There is one major mistake here, and that invalidates a lot of what’s being said: the crisis did not ERUPT. It’s coming was plainly visible: the affected countries – and more than quite a few others (a very big one West of the Atlantic ocean comes to mind – where I happen to live for the time being) – have, for domestic political reasons, been spending way above their means for many many years, and covering the deficit that logically ensued by ever more expensive loans. Greece just had the problem of exaggerating even more than the others, and thus of being caught first. There is absolutely no need to invoke WW II (though I find the notion that it was caused by the great depression rather amusing, and miles off the mark), a German conspiracy, or the big bad wolf. The chickens are coming home to roost – and that’s all.

    • Karl – Well said. The whole situation is extremely simple to understand. Governments have been spending more than they take in and are expecting our grandchildren to pay for their spending today.

      The solution is equally simple. Cut government. Unfortunately the new government in Greece has said they will not cut a single government worker. It really is the twilight zone.

      I also wrote a little article on why government borrowing will only lead to higher taxes and less services. ie why government spending/borrowing will only make things worse (not matter where you are in the world) and that is a guaranteed fact.

      http://independence4wales.com/2012/government-spending-destroys-growth-1-simple-fact-that-squashes-obamas-plans

      The day politicians say they don’t have the answer is the day they start restoring some hint of credibility.

    • Richard

      Ok Richard. Change all the historical evidence of the true problems to fit your illogical logic.

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  7. Dear Yanis,

    This is a brilliant contribution for the script. As always, your romantic nature shines through your writing. In my opinion, today’s miserable world, ruled by unreasonable governments, would become a better place, if the majority of economists shared your view…

    • Dear Demetre
      That was not a high salary – even in 1967. Anyway, I don’t believe (and never meant to imply) that “the Greek” are lazy.
      In fact, in my very limited perspective from being in Greece as a tourist, they seemed friendly, honest – and not lazy.
      You have just had a growing minority that took the majority to a ride – and now the bill has to be settled by the whole of the Greek society – and some others… ;-)

  8. Dear Yanis,
    an answer from Italy to your letter. Unfortunately I’m not an economist, but a man in the street. Anyway being a commoner could be an advantage, letting me free from too technical considerations. In my opinion in fact we shouldn’t focus too much on the economic mechanisms of the crisis, but on the lack of basic principles.
    You and your fellow economists are discussing on the kind of engine to be used in economy. Now, I don’t care about the mean, but my questions are:
    • Who is the driver?
    • Why is he driving?
    • Where are we going?
    Basically all the problems that our countries are facing – and with no doubt soon or later will affect even France, Germany and England – are not only economic, but mainly of political order. Politics should rule the economy, not the contrary as it is stated in EU. Most of the laws that have been issued by the European Parliament have been created to protect the interests of the oligarchy and to enslave the mob.
    Unfortunately we should admit that since the Greeks gave birth to the first example of Democracy, if we consider this form of government as the “expression of the will of the people”, the worldwide panorama in this sense is really discouraging. There have been just a few examples of real democratic governments, around the world, and mainly in small countries. Cause big systems are more difficult to be ruled. When there are financial, economic, political, military superpowers, the interests of the few bloody bastards that are maneuvering everything are gigantic as well, and all they think about is just how to satisfy their never ending appetite.
    We have allowed too many fishes to become too big, and now they are out of control.
    As a small fish, what I do ask is just to live well the short period between the birth and the death. That’s all. We live on a planet that luckily is rich of resources, and these should be made available to all of the people. Instead technology and economic instruments seem to be a private matter concerning what you call the “elite”.
    I don’t care now about the nature, the creation and the administration of money: I just say that if money represents the resources, a Government that really cares about the will of the people, should be capable to distribute it proportionally to the needs and on a meritocratic base. This must be the function of a Government, and the money could be the mean.
    I leave the technical matter to you economists.
    What you should do is to form a transnational committee in order to have a political weight in proposing your solutions to the citizens – first of all – and the administrations of your countries.
    Cordially and with hope

    Severo Magiusto

    P.S.
    I suggest you this video where you may find a very clear explanation of the crisis in Europe. Featuring “politicians” as Papademos, Monti, Napolitano, Berlusconi, Merkel, Draghi, and representatives of banks, financial institutions, industry, distribution, etc…; it’s called “the Euro run”: http://www.youtube.com/watch?v=tl4T26O0eq0

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  12. “the great lie that markets are self regulating and that the best the state can do is get out of the markets’ way”

    What about all those Eastern European states that rejected the market as a matter of policy and nevertheless all suddenly collapsed in the 1980s more comprehensively than any states have in the current crisis?

    • I think the point is that all markets need control and regulation otherwise they collapse. This point does not mean that markets should be altogether abolished and the answer to their inherent inefficiencies is no markets at all. Try Schubeter’s “Capitalism, Socialism and Democracy” for a more complete answer on the failings of uncontroled markets and why a regulated economy that still has a place for markets is preferable.

    • Tasos – “I think the point is that all markets need control and regulation otherwise they collapse. This point does not mean that markets should be altogether abolished and the answer to their inherent inefficiencies is no markets at all. Try Schubeter’s “Capitalism, Socialism and Democracy” for a more complete answer on the failings of uncontroled markets and why a regulated economy that still has a place for markets is preferable” So what is your explanation for the USA starting from zero at the start of the 19th century to becoming the dominant economic powerhouse of the world by the end of the 19th century with little or no government regulation and taxes?

    • Dear Tasos
      I haven’t read the book you mention – but I agree that if the crisis from 2008 onwards has shown anything than that a market needs regulation in order to ensure the mechanism works for the benefit of the society as a whole (and not only a few “tricking” the system).

    • @Richard
      The book I mentioned was written during prof. Schubetter’s stay in the US. He was no stranger to Capitalism, in fact he is a liberal-minded economist. For a more complete answer to your question for the economical development of nations and the crucial factors of their success or failures I would suggest “The wealth and poverty of Nations” by David Landes. I think in all his given examples lack of taxes and regulation was not among any of the important factors. These are neccessery conditions, in my opinion, for a well functioning society.

    • Richard

      Because the potential for growth was immensely more so rate of growth picked up without worrying then about bubbles.

      The powers that be had a lot of room for maneuvering.

      But the most important thing to consider is that the colonies of America at the beggining had debt-free government notes. Then wars where conducted so that the private banks take control of the issuance of money. Even then the potential for growth was so much that the bubbles took long time to occur.

    • Demetri – About bubbles, they are a phenomenon created by central banks. Check these graphs.

      GDP per capita USA http://visualizingeconomics.com/2011/03/08/long-term-real-growth-in-us-gdp-per-capita-1871-2009/#.T-tPBrAe5GQ – prove your point no?

      But then compare to inflation to put things in perspective. Growth before the Fed when adjusted for inflation pre 1912. Growth *only* due to inflation post Fed creation

      http://visualizingeconomics.com/2008/05/27/us-inflation-annual-percent-change-1774-2007/#.T-tPOrAe5GQ

    • Richard

      Hey ,nice site.
      Thanks for this.

      And wow ,look at these spikes during the wars. Heh!

    • Dear Dean
      That is exactly the kind of analysis that is vital now. Helps making Greece a master of it’s own fate again.
      I particularly lilked slides 4, 5 and 6 of “From decline to growth – policies and options moving forward”. The one in Greek I could not read… ;-)
      But that kind of sober, forward-looking thinking is essential in order to avoid finger-pointing and also in the best interest of Greece.

  13. Looks like the newly designated finance minister did not want to lead back to the Drachme and bailed out!

  14. Χωρίς να χρειάζεται να το σκεφτώ πολύ,εγώ θα γράψω ένα στίχο του Μανόλη Αναγνωστάκη :
    «Η αγάπη είναι ο φόβος που μας ενώνει με τους άλλους».

  15. here comes just an (unusually short^^) – off topic – addition to your twitter message (I’m not at twitter) about the Spiegel 4 hours ago and a report about massive consequences of a breakdown of the Euro-zone. You can safely delete it after or before^^ reading, it doesn’t really belong here.

    The message is also printed today in “junge Welt” today with the addition that a spokesperson of the ministry of finances already said “they had no such paper”. Spiegel, on the contrary, quoted a member of the ministry saying “saving would be cheaper than such a scenario”.

    http://www.jungewelt.de/2012/06-25/055.php (in german, sadly, who’s interested might use an always very funny google-translation).

    One wonders, taken the paper (of ourse…) exists – why the same day the CDU/FDP-politicians went on like before, even saying no to any pleadings from Greece. Would they be aware of the problems, how on earth could they go on like they do?

    – end of “off topic” and back to your discussion about the great letter.

    • The Spiegel article is an attempt to scare people of reintroducing a sound national currency. The cost of 2 Million additional jobless is about EUR 250 Million per day. The increase in (worthless) target 2 claims is almost EUR 2 billion per day.

      All the official rescue cost come on top. So the bailout until eternity is at elast 8 times costly.

  16. It is not that the members of our elites cannot see that Europe is like a train that is derailing in slow motion, …

    Perhaps, the “ignorance is willful.”

  17. By George Soros:

    Proposal for a European Fiscal Authority (EFA), a Debt Reduction Fund and European Treasury Bills

    Rationale

    In retrospect it is now clear that the member states entered the monetary union that was incomplete in its construction. The main source of trouble is that the member states surrendered their right to print money to the ECB without fully realizing what that entails- and neither did the European authorities. When the euro was introduced the regulators allowed banks to buy unlimited amounts of government bonds without setting aside any equity capital; and the central bank discounted all government bonds on equal terms. Commercial banks found it advantageous to accumulate the bonds of the weaker countries to earn a few extra basis points. That is what caused interest rates to converge. The large fall in the cost of credit helped fuel housing and consumption booms, which went unchecked. At the same time, Germany, struggling with the burdens of reunification, undertook structural reforms and became more competitive. This led to a wide divergence in economic performance.

    Then came the crash of 2008 which created conditions far removed from those prescribed by the Maastricht Treaty. Governments had to bail out their banks and some of them found themselves in the position of a third world country that had become heavily indebted in a currency that they did not control. Due to the divergence in economic performance Europe became divided into creditors and debtors countries.

    When financial markets discovered that supposedly riskless government bonds may actually be forced into default they raised risk premiums dramatically. This rendered commercial banks whose balance sheets were loaded with those bonds potentially insolvent. That gave rise to an adverse feedback loop between the solvency of the banks problems of the banks and the risk premium on sovereign debt.

    The Eurozone is now replicating how the global financial system dealt such crises in 1982 and again in 1997. Then the international authorities inflicted hardship on the periphery in order to protect the center; now Germany is unintentionally playing the same role. The details differ but the idea is the same: the creditors are shifting all the burden of adjustment onto the debtors and the “center” avoids its own responsibility for the imbalances. Interestingly, the terms “center” and “periphery” have crept into usage almost unnoticed. Yet in the euro crisis the responsibility of “the center” is even greater than it was in 1982 or 1997: they were the architects of a flawed currency system and failed to correct its defects. In the 1980’s Latin America suffered a lost decade; a similar fate now awaits Europe.

    At the onset of the crisis a breakup of the euro was inconceivable: the assets and liabilities denominated in a common currency were so intermingled that a breakup would have led to an uncontrollable meltdown. But as the crisis progressed the financial system has been progressively reordered along national lines. This trend has gathered momentum in recent months. The LTRO enabled Spanish and Italian banks to buy the bonds of their own countries and earn a large spread. Simultaneously banks are giving preference to shedding assets outside their national borders and risk managers are trying to match assets and liabilities within national borders rather than within the eurozone as a whole.

    If this continued for a few years a break-up of the euro would become possible without a meltdown but even then the creditor countries would be left with large claims against the debtor countries which would be difficult, if not impossible, to collect. In addition to all the rescue packages and ECB interventions the central banks have large claims against the central banks of the debtor countries within the Target2 clearing system. The Bundesbank had claims of €644 billion on April 30th and the amount is rapidly growing due to capital flight.

    The creditor countries led by Germany are always willing to do what is necessary to avoid a cataclysm. But that is not enough to resolve the crisis so it continues growing. Tensions in financial markets have risen to new highs. Most telling is that Britain, which retained control of its currency, enjoys the lowest yields on government bonds in its history while the risk premium on Spanish sovereign debt is at a new high despite Spain’s deficit and debt to GDP ratio being lower than those of the UK. The real economy of the Eurozone as a whole is declining while Germany is still booming. This means that the divergence between debtors and creditors is getting wider. The political and social dynamics are also working toward disintegration. Public opinion as expressed in recent election results is increasingly opposed to austerity and this trend is likely to grow until the policy is reversed.

    What is needed is a set of bold initiatives that are convincing enough to persuade both the public and the financial markets that the authorities have both the will and the resources to make the euro work. These initiatives have to conform with the existing Treaties yet they have to be bold enough to bring conditions back closer to those that were prescribed by Treaties. The Treaties could then be revised in a calmer atmosphere so that the current excesses will not recur.

    It is difficult but not impossible to construct a set of initiatives that will meet these tough requirements. They would have to simultaneously tackle the banking and the sovereign debt problems without neglecting to reduce divergences in competitiveness. There are various ways to provide it but they all need the active support of Germany as the largest creditor country.

    At the Rome meeting on Thursday June 22 the four heads of state agreed on steps towards a banking union and a modest stimulus package to complement the fiscal compact but Chancellor Merkel resisted all proposals to provide relief to Spain and Italy from the excessive risk premiums prevailing in the market. This threatens to turn the June summit into another fiasco which may well prove fatal because it will not provide a strong enough firewall to protect the rest of the eurozone against the possibility of a Greek exit. Even if a fatal accident can be avoided the divisions between creditor and debtor countries will be reinforced and the “periphery” countries will have no chance of regaining competitiveness because the playing field is tilted against them. This may serve Germany’s narrow self-interest but it will create a Europe that is very different from the open society that fired people’s imagination. That is not what Chancellor Merkel or the overwhelming majority of Germans stand for.

    Chancellor Merkel argues that it is against the rules to use the ECB to solve the fiscal problems of member countries and she’s right. President Draghi of the ECB has said much the same. There is a missing element in the current plans and this proposal is designed to provide it.

    The Proposal

    The June summit has to produce a Political Declaration which outlines not only the long-term vision of a political union but also practical steps towards a fiscal and a banking union. Since plans for a banking union are well advanced this proposal is confined to:

    • A European Fiscal Authority (EFA) which will serve as the embryo of the fiscal union and also provide fiscal backing for an embryonic banking union.

    • A Debt Reduction Fund (DRF) which will provide immediate relief to the periphery countries on refinancing their sovereign debt by issuing European Treasury Bills.

    These measures will require an Intergovernmental Agreement. With unanimity at the summit the process could be accelerated and, on the basis of the Political Declaration, some steps could already be taken in the meantime. This would bring immediate relief to the financial markets and reverse the political dynamics from conflict to cooperation.

    This is how it would work.

    European Fiscal Authority (EFA): To be established by inter-governmental treaty a.s.a.p.

    Membership: Finance Ministers of Eurozone countries

    Organization: Embryonic European Treasury

    Voting: According to shareholdings in ECB

    Majority

    • 80% when guarantees are involved that disproportionately affect creditor countries

    • 50% plus when members are affected proportionately

    Mission

    1. Implement Debt Reduction Fund – a modified form of the European Debt Redemption Pact that has been proposed by the German Council of Economic Advisors.

    2. Provide fiscal backing for banking union.

    3. Assume solvency risk on government bonds held by ECB.

    4. Provide financing for a growth policy to complement the fiscal compact.

    5. After a suitable transitional period allow for annual settlement of Target2 balances.

    Financial resources

    1. Control of ESM, EFSF

    2. One tenth of 1% additional VAT contribution from member states- approved by 80% majority. This will demonstrate the political will necessary to carry out the mission.

    3. Additional financial resources: to be mobilized as needed.

    The Debt Reduction Fund

    The EFA will conclude agreements with individual countries that will oblige them to abide by the fiscal compact and introduce specific structural reforms like labor market liberalization and pension reforms. In return the EFA would reduce that country’s stock of debt to 60% of GDP or such higher figure as the agreement specifies by acquiring bonds in 1) primary market 2) secondary market and 3) from the ECB and other official bodies.

    The EFA will finance its purchases by issuing European Treasury Bills and pass on the benefit of cheap financing to the country concerned. The bills will be assigned zero risk rating by the authorities and will be treated as the highest quality collateral for repo operations at the ECB. The banking system has an urgent need for risk-free liquid assets. Banks are currently holding more than €700 billion of surplus liquidity at the ECB earning only one quarter of 1% interest. This assures a large and ready market for the bills.

    Should a participating country subsequently fail to live up to its commitments the EFA may impose a fine or other form of penalty which would be proportionate to the violation so that it would not turn into a nuclear option that cannot be exercised. This would provide strong protection against moral hazard. For instance, it would make it practically impossible for a successor government in Italy to break any commitments undertaken by the Monti government. Having practically half the Italian debt financed by European treasury bills will have an effect similar to a reduction in the average maturity of its debt. That would make a successor government all the more responsive to any punishment imposed by the EFA.

    Only after the demand for European treasury bills has been exhausted will the EFA consider issuing longer-term bonds. After a transitional period long enough to insure that the Eurozone resumes growth, the participating countries concerned will enter into a debt reduction program which will be tailored not to jeopardize their growth. That will be the prelude to the establishment of a full fiscal union with the appropriate political arrangements which, in turn, will allow the replacement of the remaining 60% of sovereign debt by Eurobonds.

    A Euro Area Banking Union

    By taking control of the ESM and the EFSF, the EFA would be able to provide the necessary fiscal backing for a banking union. The EFA as a political authority acting in partnership with the ECB can do what the ECB as a monetary authority cannot do on its own.

    A banking union has to have three components

    1. A European source of funding for recapitalizing the banks

    This could be provided by the ESM acting under the control of the EFA. While the ESM has substantial resources that could be used for this purpose, allowing it to borrow from the ECB would substantially reinforce it. It would require a banking license for the ESM, best provided by a modification of the Intergovernmental Agreement. This is highly desirable but not critical for the plan to work.

    2. Eurozone-wide supervision and regulation of banks – this is best provided by the ECB acting together with the European Banking Authority.

    3. A Eurozone-wide deposit insurance scheme. This is the thorniest immediate problem. German depositors are reluctant to pay for the extra risk posed by Spanish banks in the current economic climate and German taxpayers are unwilling to make up the difference. But the EFA assuming the solvency risk on government bonds held by the ECB provides a makeshift solution. Specifically, the EFA could take over the Greek bonds held by the ECB coming due on August 20th and thereby avoid a Greek default. The ECB could then continue to provide unlimited liquidity to the Greek banks which have recently been recapitalized. This would not eliminate capital flight but it would remove the most immediate threat confronting the euro-area – a run on the banks of other periphery countries. A more lasting solution will have to await the formation of a full-fledged banking union. The EFA taking over the solvency risk on the bonds held by the ECB would establish the principle that the EFA is responsible for solvency risks and the ECB for providing liquidity.

    Growth Policy

    By laying the groundwork for a banking union and substantially reducing the financing costs of sovereign debt, the June summit will offer an escape route from the deflationary debt trap in which the European Union is currently caught. Nevertheless, it would be highly desirable to develop a growth policy to accompany the fiscal compact. This could form part of the Political Declaration but time is too short to go into details. The Political Declaration could point out that the EFA is providing the institutional framework for developing a growth policy.

    Annual Settlement for Target Balances

    Similarly, the Political Declaration could contain a paragraph announcing that after an appropriate transitional period Target2 balances would be annually settled. This would be a reward to Germany and other creditor countries for their willingness to provide the guarantees implied by the issuance of European treasury bills.

    Creditor countries should remember that they have made practically no transfer payments; they have only made loans which will result in losses if they are not repaid. The proposals outlined here to are comprehensive enough to reduce the likelihood that any losses will be incurred. The more complete the guarantees the less likely they are to be invoked.

    Sequencing

    Immediately – at June summit issue a Political Declaration and set in motion and Intergovernmental Agreement establishing the EFA with the appropriate powers to carry out its mission.

    Very short term – in anticipation of Intergovernmental Agreement

    • ECB starts accumulating Italian and Spanish bonds.

    • ESM takes over ECB’s holdings of Greek bonds insuring the ECB against default risk.

    • No implementation of austerity measures as long a country has negative GDP growth rate.

    • Finance Ministers start negotiating structural reforms that will qualify “periphery” countries to benefit from debt reduction scheme.

    Short term – hopefully before year-end

    • Ratify and implement new Intergovernmental Agreement.

    • Develop growth policy.

    Medium term – next 3 to 5 years

    • Creation of fiscal, banking, and political union.

    ************

    Germany’s reticence to agree threatens European stability

    Financial Times

    June 25, 2012

    At the meeting in Rome last Thursday the four heads of state agreed on steps towards a banking union and a modest stimulus package to complement the fiscal compact. But Chancellor Merkel resisted all proposals to provide relief to Spain and Italy from the excessive risk premiums prevailing in the market. This threatens to turn the June summit into a fiasco which may well prove fatal because it will leave the rest of the eurozone without a strong enough firewall to protect it against the possibility of a Greek exit.

    Even if a fatal accident can be avoided the division between creditor and debtor countries will be reinforced and the “periphery” countries will have no chance to regain competitiveness because the playing field is tilted against them. This may serve Germany’s narrow self-interest but it will create a very different Europe from the open society that fired people’s imagination. It will make Germany the center of an empire and put the “periphery” into a permanently subordinated position. That is not what Chancellor Merkel or the overwhelming majority of Germans stand for.

    Chancellor Merkel argued that it is against the rules to use the ECB to solve the fiscal problems of member countries – and she is right. President Draghi of the ECB has said much the same. There is a missing element in the current plans for the June summit: a European Fiscal Authority (EFA) which, in partnership with the ECB, can do what the ECB cannot do on its own. It could establish a Debt Reduction Fund – a modified form of the European Debt Redemption Pact that was proposed by Chancellor Merkel’s Council of Economic Advisors and is endorsed by the Social Democrats and Greens. In return for Italy and Spain undertaking specified structural reforms the Fund would acquire and hold a significant portion of their outstanding stock of debt.

    It would finance the purchases by issuing European Treasury Bills – a joint and several obligations of the member countries – and pass on the benefit of cheap financing to the countries concerned. The Bills will be assigned zero risk rating by the authorities and will be treated as the highest quality collateral for repo operations at the ECB. The banking system has an urgent need for risk-free liquid assets. Banks are currently holding more than €700 billion of surplus liquidity at the ECB earning only one quarter of 1% interest. This assures a large and ready market for the Bills at 1% or less.

    Should a participating country subsequently fail to live up to its commitments the EFA may impose a fine or other form of penalty which would be proportionate to the violation so that it would not turn into a nuclear option that cannot be exercised. This would provide strong protection against moral hazard. For instance, it would make it practically impossible for a successor government in Italy to break any commitments undertaken by the Monti government. Having practically half the Italian debt financed by European Treasury Bills will have an effect similar to a reduction in the average maturity of its debt. That would make a successor government all the more responsive to any punishment imposed by the EFA.

    After a suitable period the participating countries will enter into debt reduction programs which will be tailored not to jeopardize their growth.

    That will be the prelude the establishment of a full political union and the introduction of eurobonds. The issuance of European Treasury Bills would of course require the approval of the Bundestag but it would be in conformity with the requirement by the German Constitutional Court that any commitment approved by the Bundestag should be limited in time and size.

    It is not too late to turn into a Political Declaration which outlines not only the long-term goal of a political union but also a road map towards a fiscal and banking union. Guided by this Declaration the EFSF could immediately takeover the ECB holdings of Greek bonds, the ECB could start accumulating Spanish and Italian bonds and Italy and Spain could implement the structural reforms that will qualify them for the Debt Redemption Fund.

    This would have the same effect on markets as the finance ministers’ declaration in November 2009 which saved the financial system. It would also change the political dynamics.

    The main obstacle is in German politics which is mired in a “can’t do” mode. Chancellor Merkel insists that a political union should precede a full-fledged fiscal and banking union. That is both unrealistic and unreasonable. The three have to be developed together step-by-step. There can be no treaty or constitutional clause preventing the establishment of the EFA if the German electorate as represented by the Bundestag approves it – otherwise there could have been no ESM. If the rest of Europe is united behind this proposal and the Bundestag rejects it Germany must take full responsibility for the financial and political consequences.

    • Greece Debt Free [GDF]

      Conquer The Debt – Own The Future

      The Greek national debt affects all of us in different ways.

      Understanding that Greek national debt is being bought and sold by financial speculators at prices lower that what we owe is important.

      Right now each Greek owes about € 24,800 in national debt, but this is being bought and sold on the international market for about € 3,000.

      GDF accepts donations for the purpose of buying Greek government bonds in international markets at prices much lower than the amount owed by the Greek government.

      GDF will then help reduce the debt through the cancellation of these bonds.

      GDF also allows people to vote online and choose products to carry the GDF logo and contribute 50% of the value of their profits to reduce the Greek national debt in the same way.

      http://www.greecedebtfree.org/

      http://www.facebook.com/greecedebtfree

    • Soros garbage?

      Are you debating the person or his ideas?

      Because as far as the ideas are concerned you couldn’t find anything more solid.

      That Soros once destroyed the Bank of England after a tip from the Bundesbank is none of my concerns. But I understand it still hurts you.

    • Hi Dean, I have no problem with Soros as long as governments, ie me and you as taxpayers don’t help him.

      A random line from his article

      “Then came the crash of 2008 which created conditions far removed from those prescribed by the Maastricht Treaty. ”

      Err, no, the conditions leading up to 2008 from the introduction of the Euro were far removed from Maastricht. 2008 was the correction which should have been allowed to happen. 2008 didn’t create anything.

      “Governments had to bail out their banks and some of them found themselves in the position of a third world country that had become heavily indebted in a currency that they did not control. ”

      Err, no. What “third world” country does not have control of its own currency? Why did government HAVE to bail out the banks? These are not the words of a capitalist. Heavily indebted, so? Most countries are, nothing special here, nothing to do with the Euro.

      “Due to the divergence in economic performance Europe became divided into creditors and debtors countries.” What divergence? New divergence since 2008? I think not. New divergence since the intro of the Euro? Possibly and like I said, 2008 was the correction.

      I could take the whole article apart piece by piece. Its nonsense, Soros lost all credibility when he said deregulation spread like a cancer. Not only did deregulation not cause the 2008 crash, it was government back stops of bank debt that caused reckless lending. Really, it is complete and utter garbage.

      Don’t get me wrong here, I don’t think Soros is stupid, the opposite.

    • I assume he would promote anything that is harmful to Germany. Must be his decent.

    • You could both try showing a little more respect for those who have a rather better understanding of the crisis than you do. And rather more experience of international finance than anyone on this blog has, too.

    • Richard

      Yeap ,i can agree with you.
      Only problem that the correction of 2008 ,unfortunately is not used as a correction by the powers that be.

      Well ,what’s new.

    • Demetri, thank you for the kind response.

      I am sure it has always been the case but 2008 brought everything out in the open. Bankers held a gun to the head of governments and governments folded like handkerchiefs. (When I say bankers I don’t mean your local neighbourhood bank, they perform a service which benefits the population)

  18. Thank you for that brilliant text, Prof. Varoufakis! Its reading should be mandatory. I will make my part by showing it to my friends here in Portugal, where lots of people still scapegoat Greece (which is really ironic since many of them are economists) and firmly believe in the redemption associated with the suffering, which is scary since many of them are in the government. Our Prime Minister even referred to unemployment as an opportunity and advised young people to leave the country.

    Best regards,

    Sérgio Duarte

  19. Yiannis, I think you need to start softening to the possibility that the end game here is an ECB with total control of the currency (ie bypassing national governments on currency/economic policy), with the ECB working directly with local banks and bypassing local government.

    Your modest proposal states this exact solution but I think you need to at least acknowledge that it is a possibility that your solution is their goal and the only way the can implement your modest proposal is by creating chaos and blaming the free market.

    Barroso uses you modest proposal as the answer (from Reuters/Athens News) “As well as progress towards a banking union, the paper discusses the need for a more integrated budget policy, steps required for deeper economic integration, and how to retain “democratic legitimacy” if countries give up some sovereignty.

    The document has been drafted by European Commission President Jose Manuel Barroso, European Council President Herman Van Rompuy, European Central Bank chief Mario Draghi, and Jean-Claude Juncker, head of the Eurogroup countries using the euro.

    European leaders have already said the first area they need to work on is a banking integration as they try to break the link between bad banks and indebted governments, with the worsening situation in Spain an immediate concern. ” http://www.athensnews.gr/portal/11/56471

    I think the evidence is obvious, first off the measures implemented in Greece are utterly socialist ie the maintaining of big government at all costs and while the blame is being squarely aimed at markets.

    You yourself also regularly highlight the complete stupidity and ignorance of the actions of the ECB and EU. I put it to you that it is impossible for anyone remotely qualified to be so stupid. They are playing it French to centralise power.

    This is not the first time something like this has happened, you yourself give an example

    “When I was studying economics, as a young man, I recall I had serious difficulty understanding how it was that the governments of the mid-war era, from 1929 onwards, could have failed so consistently to arrest the economic malaise that led us, tragically, to the Second World War. I was reading about President Hoover’s commitment to reduce swiftly government expenditure, and to cut wages, while the US economy was imploding, ” which is the opposite of reality,

    http://en.wikipedia.org/wiki/Herbert_Hoover

    “Hoover tried to combat the ensuing Great Depression with volunteer efforts, public works projects such as the Hoover Dam, tariffs such as the Smoot-Hawley Tariff, an increase in the top tax bracket from 25% to 63%, and increases in corporate taxes.”

    What Hoover said and what he did are two completely different things. He did not shrink government at all. I hope history does not say that the Greek government was cut back hugely and that is what led to the depression because again, that would be the opposite of the truth. Again.

    You experience a bit of doublethink here
    “Last week an ex-student of mine, who is suffering from cancer, could no longer find the chemotherapy drugs that she depends on, following the collapse of the state’s agreement with pharmacists (who are in strife as a result of not having been paid, by the state, fro eighteen months). A number of her former professors (all economists) we got together and paid for the drugs to be purchased in cash. Helpful as this gesture was, it does not exonerate us. Our guilt is just as current as it was before that kind gesture. For we were the ones who taught students about the efficacy of financial markets, we had allowed the era of ponzi financialisation to become knows as The Great Moderation, we asked our students to have faith in the capacity of financial institutions to price risk properly, we sat idly by while our students read textbooks which taught them the great lie that markets are self regulating and that the best the state can do is get out of the markets’ way, letting it perform its miracle”
    You acknowledge that the problem is created by the state, ie the state not paying people but you then attacked capitalism as being the cause of the states problems. Not cool. For example you make no mention of the fact that the Greek government bans your friend from having a home based business.

    In short your arguments are bullet proof but I think you are working with faulty data, ie the data/opinion/sound bites/statements being supplied by the governments and mainstream media who are almost completely dependent on governments for their news. Take Athens News as an example, conservatively 95% of their news is about government and I think this is typical of most media outlets, god forbid a media outlet should have its access to government cut off, they would have no news. Chomsky highlighted this situation extremely well in his book Manufacturing Consent: The Political Economy of the Mass Media

    When you only work with the data that the government and media supplies you are going to find yourself advocating the same solutions as government, you are just going to be raising the point earlier because you can say something that is socially unacceptable whereby the government has to wait until it creates the environment that makes their solution socially acceptable.

  20. Baboulas, I think that you are asking the wrong guy for solutions. I know that the Greeks have the idea that professors are better than other folks. Like if a physician is a surgeon and professor and does 100 surgeries a year and other surgeon who is not a professor does 500 surgeries a year a Greek will chose the professor.
    Professors don’t solve problems. Professors teach.

  21. Yanis, this was very good. Your proposals so far though are not good for Greece. You were paid by Greeks, therefore you should try to help Greece first not Europe.

  22. Klaus Kasstner,
    All the great products of the last 100 years are synthesis of group of people, the collective, putting their um and labor to produce great products for all to enjoy. These collectives are the companies. Yes it takes an individual to come with an original idea, but even he does not work in a vacuum. Thousands of people are working at the same time on some problem, influencing each other, seeing what errors others are making, but at the end the guy who comes first with a solution is a hero. Yes each one works individually and as a collective, just as it has to be.

  23. Klaus Kasstner,
    What lazy siestas? I was working in Greece making holes for electrical columns from the morning to the night. Yes, we had one hour for lunch, but we were dead tired. We ate the lunch and immediately fall asleep, just outside in a hard soil. For that we were not paid. Your wife probably was a recipient of my hard work for having electricity. At that time I had my engineering degree and had three years of experience. I was paid $3.30 for a full day’s hard labor in the sun. After that I was working in a factory making products licensed from Siemens. They were old technology and it was no way that we could sell them outside of Greece. This is the naivety of Yanis thinking that Germans would help us produce products that they will incorporate in their distribution.

    • You were working for a whole day for USD 3.30? Are you serious? When was that then?

    • @Martin
      Minimum wage now in Greece is as low as 450-500 euros net, meaning minus tax and social security. You can do the math and unfortunately I am serious. This hapens now in 2012. There is no official minimum wage in the country. Collective bargaining is abolished and workers face a take it or leave it attitude from employers at a time of unemployment as hig as 24%. They also face reduced working hours through “flexible” contracts with even lower pay than the one mentioned above. But hey, the IMF seems happy with that!

    • Tasos, you support the minimum wage? If so, why do you think the government has the right to tell people if they can work or not?

    • Dear Tasos
      I agree that 450-500 EUR per month is indeed a very low salary from e.g. a German or French perspective.
      But at least in Germany, there are some people, that work for a salary like that, too. Luckily not many, though (yet – let’s see what happens when the Eurosystem collapses).
      Anyway, what stunned me was that Demetre claims he has been working for US Dollar 3.30 per DAY. This stikes me as unrealistic. Unless he’s referring to very, very long ago when 3.30 Dollars was quite a respectable salary per day – but that would have been in the 1950ies or maybe 60ies, I guess.

    • Tasos net is after tax & social security.

      the minimum wage in Germany is much lower. There is none.

    • @Richard
      Yes I support the existance of a minimum wage level and collective bargaining. I know that neo-liberal economic thought wants them abolished. I do not agree that a minimum wage level is translated into the question you posed. Because the issue is highly political and has significant social backlash any debate on it is pointless. Either you support it or you don’t, valid arguments can be made from any side.

    • Tasos – argument can be made for and against the minimum wage.

      Yeah that sounds reasonable but in reality in its not.

      Lets get down to the absolute basics of what the minimum wage is.

      It is the government telling you as worker who you can work for and for how much. Regardless of your situation. It is impossible for the minimum wage to make things better given this fundamental fact.

      The only argument for the minimum wage is that people get paid more which is complete and utter garbage. How does the government saying all jobs should be paid a minimum of X amount make it so? Of course it cant. The only thing that can happen is that jobs which are worth less than X disappear. If you are in Greece trying to make ends meet, trust me, he last thing you want is the government telling you you cant work because pumping gas does not pay X.

      I know people in Greece who are in this situation and because they dont want to get government hand outs they may have to work illegally. You tell me who is the criminal, the government stopping someone from working or the person that wants to work a job the government says should not exist.

      This is important to understanding what is happpening

      http://independence4wales.com/2012/minimum-wage-tool-of-incompetent-governments

      and this http://www.youtube.com/watch?v=X25U_7mx9jU

      Im not attacking you

    • No they work closer to market rates than in countries that have introced a minimum wage. –> Less unemployment

    • Pedro

      Let me tell you that if Germany hadn’t been in the Euro ,she would already have introduced a minimum wage.
      She wouldn’t have a choice.

      Germany hasn’t learned just yet the serious problems of extreme neoliberalism because she was backed by the deficit of others.

      Anyway ,even if she does ,this system is the status quo that the powers-that-be want to preserve ,so they are going to do their best to get their way.

    • Demetri. Let me break the minimum wage down for you. It is the government telling power people they cant work.

      Let me give you an example. I was speaking to a Greek friend yesterday. He said he was now working 7 days a week. On Friday, Saturday and Sunday night he was delivering fast food at 4 Euros a hour to make ends meet. If the government had a minimum wage of 5Euros an hour they would be telling my friend he wasn’t allowed to work.

      In short, the minimum wage hurts everybody. Hard to swallow, but my friend agrees and he voted Syriza. Some videos

      Bear in mind the last video, Schiff thinks there is austerity in Greece when there is none.

      http://independence4wales.com/2012/the-truth-about-austerity-in-europe-what-americans-do-not-understand

      http://independence4wales.com/2012/there-is-no-austerity-in-greece-documented-evidence

      http://independence4wales.com/2012/greeks-love-austerity-unfortunately-they-are-not-getting-any

      Its a massive propaganda offensive attacking the private sector for problems created by government

    • @Richard
      Of course I do not believe that you are attacking me. I am sorry that I did not elaborate in my support in favor of the existence of a minimum wage but I really think that it is pointless. You cannot draw any significant conclusion, both sides have valid arguments and solid examples to offer. This is a very old discussion, this issue is of great social and political significance and of course it always comes up in times of economic distress when unemployment goes up.

    • Richard

      Yes as i have said before i do not find the flexibility in the narrower frames of the system disturbing and troubling. On the contrary. As long as we have a stable broader system with multilateral controls of the flow.

      Then we can have this so much wanted “security” that there is the possibility for a person and for a business to work for less hours and with no minimum wage.

      The goal is not only to have a flexible economy for growth but it also is for economy to work for the people and provide them stability. Now it works for the few.

      So why do i say that if Germany wasn’t in the EuroZone she would have minimum wage by now?
      Because she follows the same system that if in normal conditions (outside EZ ,less exports ,bigger unemployment) ,she wouldn’t be as stable and people would have demanded government to provide the counterweights.

      It is also a political reason.

      Thanks for the links.
      Cool.

  24. I am from Ohio. I will tell you that the federal government does indeed help the states with financial transfers.. The federal government does not have the state sign what is nothing more than a Financial Treaty of Versailles that is the norm in Europe. Blaming everything on the Greek citizens or the government will not stop the meltdown that is to come. The tragedy is unfolding as it did before. It will swallow everyone.
    Wonderful piece.

    • Sending money to Greece also does not help the meltdown of the Euro. That is why I am sending my money to the US!

    • There is a little difference: The USA is a nation and the “states” it consists of are of ultimately less importance than “the USA”, also in the conscience of the people (even though Californians are happy to be there and Texans are very proud, etc).
      Today’s Europe is the product of 2000+ years of history, much of it (until fairly recently in historical terms) being pretty violent, including major wars.
      There has been some sort of conscience that we were Europeans – but if you were French you were foremost that, same with the UK, etc.
      Luckily, due to the tragedy 1914-1945, western Europe united to a union of nations that has been joined by Eastern Europe after 1989.
      But it is a slow process and until very recently, nobody (except the Germans, maybe) was really prepared to give up their national identity and become European first (and only after that citizens of their nation).
      The countries are different – different languages, mentality, history, values, architecture, climate, preferences in terms of equality vs enterpreneurial freedom, etc.
      It’s basically some kind of miracle the EU made it so far.
      It is not at all clear that the EU one day will be something like the USA. Personally, I am undecided whether that is good or bad.
      But you in America can’t just assume that naturally, the richer northern countries would share their wealth with the in their eyes badly run troubled nations in the south.
      Have the US shared their comparatively huge wealth until recently with countries in Latin America? I don’t think so!
      So to assume that e.g. Germany should do what the US did not is a bit, well, weird.
      It may still be the right thing for Germany and the other surplus countries to go ahead, take huge risks and effectively force-merge their systems with the troubled south.
      But that’s Europe’s decision – and especially the decision of countries that would be giving wealth away and should be democratically legitimised and very, very well thought through.
      After the Euro-disaster, it is a major gamble to risk even going one step further instead of taking a step back.

    • @Martin
      Very good comment. I totally agree. As it stands now transfer payments are out of the question and I am not so sure about any further fiscal and political unification. For a single economic and monetary space as the eurozone to succeed, inevitably you need transfer payments and debt unification. This is what happened recently in Germany (state debt unification). If something like that is culturally and politically impossible then we are only wasting time waiting for the inevitable collapse of the eurozone and the EU with it.

      What needs to be done in order to save the eurozone is not the formation of one homogenized European identity, we should cherish our differences, but the realization that said union is something that is beneficial to all parties involved. No union that slowly degenerates in a state of “winner takes all” meaning in the end you have absolute winners and absolute losers can have any hope of survival. I think an honest discussion needs to start about what it takes for the eurozone to be kept together in all involved countries. The political narrative thus far in all countries has proven to be toxic and has strained relations between nations and estranged pro-European citizens.

      Finally I would like to add that if one studies Greek economic history he would come to the conclusion that the only phase that drove Greece towards developing an industrial base and a somewhat self-sufficient economy was the late 50s early 60s when the drachma was devalued BUT also the very young industries of Greece where protected from the international markets with high custom taxes for imports. Maybe this is the general way to go, maybe what we are facing is the inevitable failure of globalization. Maybe all countries should steer towards a road of self-sufficiency even if it means controled closed markets for international products. Some countries who rely on exports too much would be hurt then, but they too should face their imbalances, for their exports and surpluses are someone else imports and deficits.

      In the end we should face the fact that we live in a zero sum world and that everything has consequences.

    • Or maybe your government should stop taking money from you with the threat of physical force, just a thought…

  25. Hi Yani,

    Much of what you say is very true . However many economists have not studied enough Economic History to fully understand and put in historical context the Dilema Of Europe …What do I mean ?? I mean that the entire debate above has hardly hinted at The Rise of China and the effect upon Europe .China is the sleeping giant that now rises from the ashes of The Vietnam War …Who won the Vietnam War?? …C H I NA …this was the conclusion of a retired USA general when interviewed on Aussie ABC radio .The result was that China obtained Access to hitherto closed markets of the West … The result is that China and Thailand can make cars and i phones and pay people $30 or $45 per week and therefore many jobs are flowing from Spain , Italy , Usa AND Japan into these formerly impoverished and HUNGRY FOR WORK countries…China pre-1750 was a major economic power but this is not taught at university in the West… after a long time the Dragon Awakens and we see the re- emergence of Asia … Europe SLEEPS and can not see this … In 2009 when in Greece I tried to mention this but was howled down ….it is time for Europe to look further EAST and stop its internal bickering …YOU ARE ALL BROTHERS MATE …. an Aussie Greek …yia sas …yani m.

    • You were howled down? I am not surprised. If you did this Down Under, you would too. They don’t know they have an “attitude” problem because they all don’t want to know. You would know if you look from a different perspective e.g. from that of a Chinese. I am one. Have been living Down there for a few years, I should know. That’s why I said you would (with certainty) too if you said the same thing down there. Because they have the same “attitude”. I don’t mean to criticise and I have nothing to brag about. I’ve got only one thing to sell – we are all mates. Don’t disregard what your mates say simply they look different. They say it hoping to do good really, you see?

  26. A systemic crisis can be overcome only systemically.
    My idea is to run the tax on the added debt – DAT
    Similarly, as the Value Added Tax – VAT.
    Similarly, as VAT is charged with pre-payment in the real sector.
    DAT blocks the overproduction of debt. And do not reduce economic activity as the Tobin tax.

    The central budget DAT should be formed in Brussels. Single tax for the eurozone. Other taxes will remain at the disposal of the sovereign countries. This is a compromise.

  27. Thanks, interesting article. Including particularly:
    “Your Mussolini and our Metaxas –
    products of political failures and economic disasters”

    Prof. Zinn, Ifo-Instituts, wrote about a vacation in Greece is the euro.
    But do offer the optimum…

    Drachma. Weekend instead of the holiday.

    Flash crossing phantom currency:

    Euro → Drachma → Euro new exchange rate

    for example:
    1 Euro → 1 Drachma → 0.9 Euro

    No trade or payment transactions in drachma.
    Only the depreciation of domestic debt!

    Period of operation – just a few hours, days.
    Greece remains in the euro zone and devalue the domestic debt.
    For optimal devaluation of debts the process can be repeated.

    The transition could be easily modeled with/based on official statistic data.
    Test Phantom-currency empirically. You can make a painless transition through an experimental phantom with the devaluation of the currency on the symbolic 0.1-1%.
    _________________
    Sorry for my English.

    P.S. Peter Barnett has defined your letter “Greco-Roman oratory” :)

  28. Very nice letter. Moving and scaring.

    Moving because it reminds me what my parents and grand parents were telling me. Scaring because there is no hope

    The entire situation does not make any sense any more.

    That the Piggiies countries had their own faults, it’s without doubt true. But faults are never on side. For instance: how in Italy could we sustain the former government we had? That was itself a fault. What was happening was well known, so where where the people who could at leats ring a bell?

    The present construction of the Euro is not sustainable. And to change, it looks impossible work. Then when all Greeks will be starving, when the Italian industry will be destroyed, what we will do next? Nobody is telling.

    Even from Latvia which is mentioned as a successful example I hear grim stories.

    Euroland consolidated balance sheet is not so bad. But when you look at what is happening inside, it’s another story.

    In the first 10 years of the Euro, Germany Ltd has earned 1,3 trillion € from the Piggies (Eurostat). Lacking the automatic stabilisation through the exchange rate, how could the Germans think that this could go on forever.

    You mention that now it is even impossible to supply Greek companies because banks do not even accepted confirmed L/C from Greece. It is my personal experience.

    On the other hand if there is a country with surplus, there must be countries with a deficit.

    The issue of the government debt is big lie. What it is critical is the total debt. If the current account is negative, the debt will continue to grow. Either the public debt will grow, or it will be the private debt.

    Then there is the question of the banks: the Euro allowed the growth of the bank to a size to become a risk. How is it possible that when you have banks with a balance sheet bigger that thei country of origin nobody thought about the systemic risks involved?

    It is true that one solution would be for the Piggies to have an external surplus and maintain a deficit with Germany, but that would mean a net one sense transfer.

    That will make them happy, but the outcome will for the rest be to go back to the time you mention: emigration, dirty poverty etc.

    This is the question that should be asked to Ms. Merkel and her minions.

    Writing from a nation where the newspapers report everyday of thieves who have
    robbed whatever was available and no hope that this will change in the future, I can partially understand the feeling of the Germans. However the question remains: it’s a question of government debt or of the thieves?

    I hoped that the creation of the EEC had sense and then the Euro was big achievement,

    Through a large economical area it would be possible to optimize the economy so that joining the efforts there should be an improvement for all the people.

    But that never happened: everybody for themselves

    This I why I think that the only real solution is a planned break-up of Euroland. If adequately planned it might not be dramatic as certain people are saying.

    Internal devaluations makes no sense. It’s an excuse for protecting vested interests.

    Even when here the inflation was at 25%, there was more hope and in a way or the other there was future. I lived though that time and it was better than now.

  29. Dear Yannis Varoufakis,
    I am from the Netherlands, have lived in Greece for several years in the 80’s and have always kept in touch with friends there. I agree with your point on the consumerism. I always wandered how my friends there could afford their fully equiped apartments, their cars, their trips etc. when I, as a student, was living in a squatter house with no bathroom or proper heating..
    I am talking 80’s now. However, that picture did not change that much since then..( until recently of course) .When in 2006 , now as a family, we drove through Greece in a 20yr old 3rd hand RangeRover, it struck us that even in the remotest village on Crete people drove the latest model Nissan 4wd… And us most certainly earning more money than those car-owners…… How was this possible? I believe that the relentless consumerism, of course provoked by and encouraged by the financial sector, it at fault… But on the other hand: did everyone truly believe that all that was for free??? Please don’t get me wrong: I strongly support the Greek people who suffer so much now…. I have many friends there who barely survive… It is just something I never managed to understand…

    • Hi Alice, don’t really want to argue about consumerism or corrupt, but i would like to point out the following facts, given that i have lived abroad myself and now residing in Crete.

      First of all don’t take Crete as an average place in Greece. A small example is that real estate really boomed during the last 40 years. Prices in real estate changed order of magnitude.

      Secondly, Greeks really invested heavily into two things. Houses and education. In a way that no other country in Europe had done. And believe me, it was no easy thing to build a house before the 90s. They have been built the hard way…

      4wd trucks are much cheaper compared to other countries … if you are a farmer. And in most villages they were real farmers, until recently … .

      The tricky part though is that Greece had not big individual debt before 2000, meaning that Greeks had not borrowed beyond their means.

      It’s the public debt of Greece which really was and still is out of control. Why? It’s a long story.

      After 2000’s though, it’s a different sad story.

      In short, before 1995 or so, it was the different culture that made it difficult for you to understand. After that turning point …

  30. Oh, the unbearable Greek tragedy, of being misunderstood and ridiculed as victims of their undisciplined lusts of indulging in the Mediterranean lifestyle of fiscal irresponsibility and child-like hedonism. This chorus of world wide condemnation that devastates the Greek soul with such deep pain that it immobilizes the body into a posture mistaken as laziness, and saturates the Greek mind with consolable self-pity that makes it impossible to focus on solutions.

    Abandoned and alone in the hot desiccating Greek sun, aimlessly wandering through avenues of untaxable revenues and political labyrinths, and early symptoms of feverish Xenophobia – the Greek spirit stumbles over the rocks being pelted upon them by the world community. Emotionally exhausted, standing on a sheer cliff with it’s back to Europe – far below in the Mediterranean Sea appears a whirlpool that could drown such an insufferable fate.

    Back in self-righteous Europe, where all mirrors of rational comparison have been smashed in a collective renunciation of identifying with the miserable Greeks – finger pointing and cries of consternation scream the Euro technocrats, “We are not Greeks”. This myopic chant ricochets off the Euro walls of self-deception. Dark conspiratorial shadows lurk in the Euro heart as shame and blame is projected on their Greek bothers and sisters. Soon, we shall see the Shakespeare drama merge with Greek myth.
    Thanks to Yanis for illuminating this unfolding drama.

  31. First of all, being a writer myself, I am glad at least that this letter will be read in a theater play!
    My only small objection, and after reading a taz-interview I think you would disagree, is that you write

    “Nazi ideology is getting another chance, like hunger and dispossession, to infect, once again, our social fabric.”

    The term ‘Nazi’, we all know it, was used a billion of times now, and nearly always unjustified and partly, or most of the time, utterly, wrong. (My ancestors suffered from the Nazis and some died in Auschwitz and elsewhere. There was a mood of constant despair, and personal hard things for those who survived I can’t and wouldn’t tell here. The “there must be an end to this all” is common since two days after Auschwitz was no longer a concentration camp. You very rightly say in your interview with “taz”: the past should not stop Germany doing something good, leading in a good way for example like you explain in your Minotaur. Yes yes yes! That means newer generations have nothing whatsoever to do with 1919-1945 – it didn’t only begin in 1929, Yanis, far from it. But well, Germany “leads” indeed again with others, and not in any good way for our actual crisis, as you know so much better.
    The fact what the german fascists did is, even if we spare ourselves the discussion if it is “unique in history” or not – a thing impossible to find words for, and nothing that can be easily compared to other utterly horrible crimes in history. We don’t know what is getting another chance.)

    I like the Vietnam-comparison much more. We don’t know what will come of it, and of course ‘scapegoats’ will in all bad cases be searched and found.

    – – – – – – – – – – –

    I want to just show you what came to mind after I read about De Sica (I watched “Ladri di biciclette” and Miracolo di Milano when I was 20) and Fellini. The time that followed, you mention it, went like you say. Just that it grew a bit more difficult afterwards. Read or ignore this, it doesn’t add much to your letter. Yet, I think it helps to understand like in another puzzle why apart from “guilty” economic-professors a whole lot of cultural scientists, art-people and intellectuals were plain wrong and even to a ridiculous extent disinterested. And they were those who are now “in the media”.

    You write, after your childhood-remembrances there was indeed hope for

    “to combine a full stomach with a preference for decent cinema over crass lifestyle shows on television.”

    Now besides this truth the problem is yet another one. The years which are, since 20 years at least, connected at universities in many countries with postmodern thoughts got us not only crass lifestyle shows or ranking-absurdities (the best popstar, cook, the worst idiot, farmer finds wife, big brother and what not.)
    It also gave us a horrible amount of art-people, professors who started, in many countries at least, to actually defend “big brother” (that was the start). And in a kind of hate-speak-attitude. They started to shout into the faces of all who disliked such shows that were to come. (Political talkshows are a part of it, but that’s another topic, albeit interesting if we want to understand our mess of today.)

    I just write, instead of a few hundreds of pages the topic would need and deserve, a small little example. It might be very small. Yet it shows a “Geisteshaltung”, an ideology that spread after people praised films by de Sica. (Not too rarely did I hear postmodernists, quoting Derrida, Deleuze, Foucault, De Man, Kristeva or whoever and talking very eloquent, saying about “Ladri di biciclette” or the Milano-miracolo or about La Strada: “oooh, this is all monocausal social romanticism”.
    A paper like the taz, Frankfurter Rundschau and lots more called so many artworks like those “einen gedehnten social spot” – a lengthily stretched social spot”.)

    the example: As a review of your “Minotaur” the same lady who later interviewed you wrote a review in the “taz”. Now go to a german webpage called “perlentaucher.de”. This website reviews the cultural pages of papers. The taz-review of your book was a positive one. And then there is a shiny little part which I seem to have read in three millions of reviews since 1990.

    “The critic especially liked the absence of each and any moral speech. Neither financial professionals are accused of greed nor “European solidarity” is demanded.” (my translation)

    You have what I call the communications-designer’s or journalist’s postmodernism in a nutshell here.
    After years of left-wing-people bashing, after praising oneselves as “people who are living variety” instead of “monocausality” (that is for the stupid politically interested others!) – indifference is what became the most important thing of all for by far not only “taz” or countless journals like popdiscourse-magazins and what not.

    Now what is special about this, you ask?
    It is a bit like sitting in a warm room in Germany and calling the people in Egypt as they first fought for their rights at the Tahrir-place

    “generation facebook”.

    Would you call the brothers and sisters Scholl in Germany during the fascists

    “generation leaflet” or “generation flyer”?

    The sheer absurdity would immediately make your blood boil. Yes, they gave leaflets to people, like the brave egyptian demonstrants used facebook to say “this day, this hour, tahrir place”. But that is not what was in the least important. To fight, was important. The Geschwister Scholl were killed by the Nazis. The egypt people risked their lives, and our smart journalists loved to repeat over and over again how the “generation facebook” was so cool… The same applies to the review of your book. These smart people prefer to be “cool”, and the definition is “let nothing touch you, don’t think anything (besides your coolness) was important “.

    You might say that’s not much of a thing. Yet it influenced, more than these ridiculous TV-shows, since over 20 years the people who present the political news to us.
    This elite or self-called elite, intelligent (no doubt) and with good knowledge about postmodernism and what followed (= postmodernism^^, but that’s another story) – did not only bash and disregard all political efforts of mainly left-wing people fighting for a better and more enlightened societies. (You can, if you had the time, read that they had a much softer spot for people like Berlusconi, Merkel and others – simply because they knew the remaining few of the left would criticise Berlusconi!). They forgot about artists like de Sica, Fellini, and in Italy so many neorealismo-artists, for example, as it was not what they needed. You can’t write that De Sica was “full of irony” and that “he made no accusations”. Nor did peole who watched, with the heart, “Ladri di biciclette” think about if it was “ironical”, “virtual”, or “accused someone”. Postmodern times pretend to be “full of soul”, yet are cold as stones in winter often.

    And so what remains if people read the review in the taz, in hundreds of similar papers is – oh, the author is somehow ironic, he doesn’t want anybody to do anything, he is free of such commitment. How uncool that would be!
    You can’t understand the political indifference in the midst of seemingly heated discussions without understanding this, I believe.

    It was great to give an interview there (taz) after the “Minotaur” was reviewed, as it was clear and couldn’t be misinterpreted. The title, as per usual, was misleading; “germans always go crazy”.
    The interview is first of all about the actual crisis, about Greece and hopes how to overcome cynical or wrong ways. And then at the end about german leadership. So the title is a bit of the usual taz-style, but well, indeed Germans often go crazy, just that the taz is not critisising them then^^. These kind of media presume they were “the better ones”.

    What I was trying to point out is a “Geisteshaltung”. A way how with a kind of snob-like indifference, the ‘inscening’ of “we are variety, we are better than you” and many other postmodern attitudes indeed changed the way we get politically informed.

    You could simply write a review about your Minotaur. But the intellectual readers of “perlentaucher” and of “taz” too like, by far, the “ooh he is not such a monocausal one, he doesn’t accuse anyone” best.
    It – at the end of the day – gave and gives them still the great feeling that everything is okay. (and, it still is for nearly all of them, even if fights within the media can be very tough, I hear.)

    These postmodernists not only in Germany overlooked the dumping wages that came to be more and more and more common. Quite the opposite – they bashed people who criticised those.
    The postmodernists were never as famous as former cultural “stars” were (de Sica, Fellini, Pavese, Elio Vittorini, Natalia Ginzburg, ‘my’ much-loved Alberto Savinio and many more. (Savinio, with his wonderful book about Milano, for example, yet so much more – was born in Athen in 1891 and died in Rome in 1952, you could name him in your letter, such a grand man, he even wrote an own personal encyclopedia.)

    Yet they got very influential not only in social and cultural sciences and in many art scenes, but, much more important, in many media.

    Then, in 2008 (and before a bit due to other crises) they were shown that they had been utterly wrong with their kind of “sarcastic, ironic plays” They, mainly living in rich countries and very well fed, their parents not exactly being poor, had for too long thought politics were useless crap or just a bit of a fight for fun, or nearly every problem was solved, just the “old left” of about 1967-85 or a bit later had not recognized it .
    Politics were not merely “private” as postmodernists loved to see it (“Das Private ist das Politische”, they meant style, what you wear, with whom you go out, that would be “political”.).

    It was great to fight for the rights of homosexuals (at last, it only began around 1968!) and to make gender studies more known, yes! Very much so. Yet – they were destroyers also, much loved by more conservative people, if they even knew them.

    The past is most of the time in no way better – so let’s put it this way – in 25 years we would not believe that there was such a mixture of arrogance, elite-pretensions and snobism mixed with bashing of people who fought for a better world for ALL and against poverty worldwide, climate changes that affect the poor first and so on… Yet – there was and still is. It still is a kind of “scent-mark” (Duftmarke)-journalism.
    A kind of “we are way cool cause we….”

    You would have been, not too long ago in these many media, be way uncool if you wrote about people suffering from cancer who could not pay for their medicines, for example. (The “lengtened social spot” is originally from a german newspaper.) That sounds a bit like an accusation – oh no no no, we don’t like this. Irony, young man, and a tad of coolness, please!

    Of course we all know that it is indeed sometimes too easy or even nonsense to accuse – but as a habit it was a weapon made of language. And like the phrases “Gutmensch”, “do-gooder” and so on – it worked.

    If you want to understand the people who are indifferent what might happen to Greece, and later to many more countries – if you want to understand why many political news can be so horribly wrong and sounding cold – don’t just think the journalists were not intelligent. Nearly all of them are intelligent.
    There are those who simply believe yellow press. The “show-watchers” of “country’s best top-model” and what Yanis so rightly describes. But that’s not the whole story.
    We must learn and know about everything that might cause bad information, one-sidedness, the mess we are in. This was the part postmodernists, as far as I can see it, play(ed). And it is a bit of a paradox that they, as individuals, are by far not as much known as Heinrich Böll, Mikis Theodorakis, Vanessa Redgrave or so many were. You could say “what is this all about”, but well, do you still have some good european papers from 2008 lying around? Chances are you’ll find, and not only in the cultural-parts, a lot of these attitudes.
    Another paradox is that many of them who always claimed to be so “full of variety” and “inscened themselves daily new” ended up accusing their very very few “ennemies” that existed of being “monocausal” – yet they did this in a rather, rather monocausal, immergleich-manner.

  32. Dear Prof,

    You say “During these years of ‘growth’ and consumerism, many of us hoped that our societies would find in themselves a capacity to rediscover the lost balance; to combine a full stomach with a preference for decent cinema over crass lifestyle shows on television”

    I am an Indian. What you have described is what the Indian society is also now undergoing. I only hope that the balance can be struck. Or is it destiny of humans, because of the way they are designed, that the balance won’t be found and disaster that is striking Europe today will strike us in another form another day.

    I would have described your letter as an intellectual treat, but for the guilt that I would be enjoying a poignant and stark reality.

    • “…Or is it destiny of humans, because of the way they are designed, that the balance won’t be found and disaster that is striking Europe today will strike us in another form another day.”

      I am wondering exactly the same thing…

  33. Yiani,

    While I share your sadness, it is time to stop lamenting the past. In a previous post, I asked that you (and Syriza) provide some bullet point suggestions for the malaise culprits that Greeks are able to address:

    – how to overcome the inefficiencies and corruption of the public sector
    – how to overcome the effects of continuous labor strife
    – how to instill confidence in investors to consider Greece as an opportunity
    – how to establish a just and effective tax system
    – how to repatriate the money that the plutocracy stole
    – how to prosecute the thousands of thieves who are still at the bousoukia

    Short of concrete answers, this is nothing but an endless academic lamentation.

    Regards,

    Nick

    • Baboulas

      Surely not any correction if people are being intimidated from the Troika to keep voting for their corrupted friends.
      Now Samaras is the MP. Go ask him.

      Klaus why don’t you give your solutions? Then go to Samaras and see what he does.

    • Nick and Klaus: I think you both need a reality check. The sort of changes that you ask about (all of them desirable) cannot come about when an economy is collapsing, its infrastructure on the verge of complete collapse, and its population massively overtaxed to the point of the policy almost being a crime against humanity.

      Why is all of this happening? Because by virtue of being in the eurozone, Greece has been prevented from default — in order to save other European countries’ banks — and is basically a walking corpse whose sole purpose is to save the eurozone and specifically Germany.

      So, all of this talk about “not lamenting the past” is complete twaddle. The past is currently also the present, and you had better deal with that fact. Until the mistakes of the eurozone are addressed, and until Greece is released from its impossible situation, there is no hope for economic recovery in Greece. This is why Syriza offered the only slim chance for improvement, and the Germans, Troika etc were terrified that they would no longer be in control. Their illegal and disgusting interference with the democratic process in Greece (which the idiot President should have taken to the European Court of Justice) resulted in semi-educated elderly Greeks being frightened away from voting anything other than ND.

      So, please, just deal with the reality. It is all politics, and at this moment no economics. The results are economic, but the solutions lie elsewhere.

    • - how to overcome the inefficiencies and corruption of the public sector – cut government spending massively, government will then be forced only to concentrate on the most important things, rather than things that just make peoples lives more difficult.
      – how to overcome the effects of continuous labor strife – default and null all labour contracts. After default no government involvement in employment and no minimum wage.
      – how to instill confidence in investors to consider Greece as an opportunity – see the above
      – how to establish a just and effective tax system – make it voluntary
      – how to repatriate the money that the plutocracy stole – see all above points
      – how to prosecute the thousands of thieves who are still at the bousoukia – prosecute? difficult. but let those who are willing to prosecute them prosecute through a private suit, why should Greek citizens who want to move on be forced to pay for lawyers and government investigations?

    • Yes there is an urge need for concrete answers!
      I just call awareness what you call academic lamentation.

    • Dean

      And how nice it would be if we already had the necessary environment for research in Greece ,not just for certain someones to get their hands on money ,so that our people work their miracles here.

  34. Dear Yanis, this i Italian journalist Paolo Barnard. Yes, we had a bit of a scrape in the past, but let’s go beyond personal little things. No comments on your touching piece, not the point here. Point is, MMT is what can save Greece, drop the euro, follow the MMT road to full sovereignty recovery and to full employment. Again, let’s join efforts to spread MMT to the Greeks, you, the UMKC economists and me. My email is dpbarnard@libero.it. Yours Paolo

    • Apologies Paolo but I am not likely to turn into an MMT evangelist in my old age. MMT has some interesting points but it misses the point. Long discussion…

    • Yanis, it would be great if you could briefly summarize your relationship to MMT at some point. (and why it misses the point)

    • Yanis

      The point MMT misses is in your judgement the inter-national surplus recycling mechanism you called the Global Minotaur?

      (No arguing intended. Just trying to understand.)

  35. Yanis, what a beautiful letter, indeed! I admire how you can come up with ever new spins, spiked with beautiful cultural bits and pieces (quite unusual for economists), to display how various evil forces of the world have caused unnecessary pain all over the Southern Periphery, particularly Greece, turning Greece into a helpless victim.

    I take it that you will now be spending much time in the US and with Americans. Hopefully not only with “sophisticated” Americans. You will find that the self-pity routine doesn’t play so well in downtown Peoria. Those Americans are less interested in hearing about all the reasons which caused, say, Greece to pain but, instead, they want to hear what Greece CAN AND WILL do about it. Waiting for others to do something does not play well in downtown Peoria. And should you ask them for advice, they are likely to tell you what Jack Welsh said at the end of one of his books: “Never allow yourself to feel like a victim!”

    To be with Greeks in the diaspora is nothing new for you but the American diaspora may still be a bit different. As one of the diaspora Greeks wrote in a book about the 1950s: “The Greeks seemed to absorb the Calvinist work ethic with their first step on American soil. They abandoned afternoon siestas and long, lazy hours in the coffee shops to work fourteen-hour days – husbands, wives and children side by side…”

    The Greek-Americans will hopefully rekindle your belief that the atom of society’s development is the individual and not the collective, and if you want a good collective you have to first make sure that individuals have all the possibilities and incentives to develop their potential – and that they fulfill their own responsibilities instead of pointing fingers at others.

    The downside of all of this is, of course, that as individuals become more sure of their own worth and thought, they become less gullible to the mental control exercised by others; less subject to the “arbitrary will of others”. I hope that won’t bother you too much.

    Lastly, I hope – but there I am not so sure – that you will accept that a USD is NOT worth the same in a bank in Washington State as in Florida. It’s not even worth the same in all Seattle banks because they certainly don’t all pay the same rate of interest on deposits and they probably don’t all have the same reputation and creditworthiness. And I hope you will accept that Ohio or Washington State do not get the kind of federal support which some economists claim that the EU should offer the South. If politicians of Washington State screw up that state so badly that Microsoft & Co. emigrate to, say, California and if mass unemployment is the result, few Americans will feel sorry for that self-inflicted pain and the unemployed are likely to emigrate, too. Neither Microsoft & Co. nor the unemployed are likely to emigrate to California, though, because that state has already been screwed up quite badly by its own politicians.

    I love your dialectical trick how you move Greece up into the company of Italy, Spain and Portugal. You could have congratulated your Italian colleague that Italy, despite suffering from the same virus as Greece, is still exporting almost as much as the entire Greek GDP and that despite their Euro-driven reduced competitiveness, their exports still cover about 96% of their imports (only 48% in Greece). Way to go!

    What might hurt, though, is if Italian, Spanish and Portuguese economists took up your initiative and sent you letters in return. They might disassociate themselves from your suggestion that you are all in the same boat. In fact, they might even resent that (an actual poll shows that 51% of Spaniards and 49% of Italians have kind of had it with Greece and want the Grexit). Perhaps they would even point out the differences. Differences like having governments to start with. Governments which have not, in the last 2 years, ridiculed every agreement they signed by immediately undermining the commitments they just made. Differences like not having agitators all over the place who do everything in the book to scare those away which the country should welcome (investors, lenders, tourists, etc.). Differences like not having as much unfairness and injustice in their societies as Greece does. In fact, they might simply conclude: if Greece hadn’t completely wrecked the image of the Southern Periphery in the last couple of years, we all might be back on a recovery track by now.

    Before I am accused of being a prejudiced Austrian: whenever I express critical views of Greece they have their origin in the feelings of my Greek wife, born and raised in a small Greek mountain village with a value structure of honest and hard work and clean living. And, I should add, who proved her worth in the diaspora, too (and who is still blindly in love with Greece!).

    • I beg to differ Klaus. Americans, at least the many of them that I have come across in the past year, are VERY interested in the human dimension of the tragedy. They put the majority of Northern Europeans to shame. As for your penchant for posing the questions “What are we Greeks prepared to do to get out of this mess?”, keep at it. I have no problem with the question. It is one that we Greeks constantly ponder. Even if the answer is as poignant as the one the good citizens of Ohio could give when in 1931 they were asked “What are the citizens of Ohio planning to do to get our of their economic malaise?” I know you mean well but, I very much fear, that your steadfast denial of the systemic nature of the Crisis (at a euro-level) is making your invocations seem patronisingly besides the point rather than well meaning.

    • Yanis, a blind man would have to recognize that there is a systemic crisis in the EZ and I am not blind. In fact, there is a post in my blog titled “A Nueremberg Trial for EU-elites” spelling out all the irresponsibilities which were (and continue to be) committed by EU policy makers. So I am totally with you on that.

      If I come across patronising then it’s because I am not able to come across as Baboulas above, but he is saying exactly what I intend to say.

      Yes, having spent 23 years of my life with Americans and in America, I know that Americans have ALWAYS been very interested in the human dimension of things all over the world (even though Europeans generally don’t understand that). But even President Obama who is admirably a champion of the human dimension (and whom his opponents describe as a “European socialist” for that) never fails to remind his country men and women of their responsibility to themselves and their country.

      I obviously understand that all of this “patronising” doesn’t do a bit of good to all of those Greeks who really can’t help themselves. A 30-year old Greek Phd recently told me in a discussion “we would like to contribute and help ourselves but someone has to show us what we can and should do!” That is why I criticize all those Greeks who would be in a position to show them what to do for not doing that. And by that I don’t only mean politicians. I mean all those who by virtue of their position, stature and communication skills have the power to influence policies.

    • Self-pity routine Klaus?

      Is this how the bankers call the truth nowadays?

    • Yanis, I have read the Google-translation and got the gyst of it. Yes, those are the kinds of soundbites which Greeks must here from all sides. You may be surprised that I can identify with many of the themes which Tsipras brings across. Too bad he thinks the public sector is part of the solution and not a big part of the problem.

    • But surely it is both. It is a main part of the problem; a problem that cannot be solved without it!

    • Klaus

      “That is why I criticize all those Greeks who would be in a position to show them what to do for not doing that.”

      If that is what you meant all along then i can not agree more.
      Sometimes it seems like you attack Greece in general without mentioning the irresponsibility of all parts involved.

      This problem has many many roots and it surely is not a self-pity routine when we do not like it that Greece is attacked from all sides for the mistakes of others also.

    • May I also give my opinion on this, as a reader, living since 24 years in Germany, since I was 18… I may remind the readers, that the first year of the crisis (the greek part of it), that is 2010, the PASOK still had around 70% approval rates. It was the first year of the most severe cuts. But there were no riots and no demonstrations on the streets, of course except the usual suspects…
      What do you conclude out of this?
      I conclude, that the Greeks were indeed willing to reform and to sacrifice and they sacrificed a lot indeed. But what happened then in sometime in 2011?
      The reform willing and hopeful atmosphere of 2010 was crushed, by the facts and policies of the troika and greek government. A bewildered public saw the debt raising more and more, despite the sacrifices. The public saw the troika lacking any sign of self-criticism. Instead, the blamed the people of Greece for the failures of their program! This they continue doing until today. What then happened, it even happened in me, who i am just reading about all this, is the following:
      – people lost hope, that their sacrifices will lead to a better future
      – people lost trust to the troika, that the aim of the policies, was to help them at all.

      So Klaus, yes, we have to continue our life, and believe me, we are all going to do the best out of it. But that is no reason to leave the failure and the hypocrisy of the european leadership unmentioned.

      A movement of reform and renewal has began with the hopes of many Greeks in 2010. If you live in Greece, see Greek TV and hear Greek radio, you should feel this spirit. There was a self-questioning every where. But the idiotic policies, as Yanis says, to which the troika persists, are the best way, to destroy this spirit and to establish walls and barriers of fear instead.

      Me, living in Germany, I must say: Germany has a need of reform, just as much if not more urgent than Greece. Perhaps not in economic terms, but in terms of thought reform. A generation is in power which has forgotten the lessons of the past. (Look at the reply article of Prof. Ritschl to Prof. Sinn in the economist) I just hope Germany will not be loaded from history one more time with a collective guilt. I love this people and I wish us to escape this historic trap.

  36. Pingback: Yanis Varoufakis blog, much more on the economic crisis « Lukeskyrunner

  37. Pingback: Greek tragedy « David Petraitis

  38. This is beautifully written, although I still disagree with you regarding what I perceive to be your underestimation of the level of corruption, tax evasion and, well, toil evasion, pervading Greek society. Years of “socialism” cultivated those curses and the principle of ‘the lesser effort” was unfortunately transfused to younger generations, thus making the problem extremely more difficult to eradicate.
    Those productive, successful and exporting businesses you mention, for example, were always been robbed blind, along with their employees, so that the state could enjoy 45 gardeners in an institution with no garden (just giving a famous example here) and its administrative employees could steal 30% higher salaries for at least 50% less work (compared to their ‘colleagues’ in the private sector).
    The systemic (financial) crisis which you so beautifully describe was added on top of everything else and gave those poor productive, successful and exporting businesses the killer kick. Even if there were no systemic crisis, how long do you think a system such as ours could survive? In my youth I studied Economics at the same institution you taught and although I veered away from the core subject as soon as it was humanly possible, I do remember my professors warning that if we continue like this, we are going to the dogs. And this was the late eighties, for God’s sake!
    But I will admit that it is difficult to fully understand the situation unless you are a private sector plebian, with no ‘connections’. Given that nobody else abroad can understand the, shall we say, ‘idiosyncrasies’ of the Greek economy either, what happened after the Memorandums was only natural. What Venizelos did was effectively steal money from the private sector so as to pay State units of non-production, thus depriving the real economy of it’s life blood. In addition, he did nothing to cut expenses, corruption and tax evasion and the fact that he had the audacity to ask for our vote and even get 12% of it speaks for itself.
    Did Europe make mistakes? Of course it did, but they had nothing, or very little to do with the policies applied in Greece after 2009. That was pure Greek Government. But after a year or so, the Troika, failing to understand what happened, turned on the private sector wages, wanting to suppress them, only to find prices going up instead of down. (I bet no economist can explain that either!) They are clueless regarding our situation that’s true. But given its craziness, can you blame them?
    I do believe you are hitting the nail on the head with your anti –austerity and systemic crisis analysis, though. Although I am certainly no expert, my feeling is that the “ball has been lost” by all sides. But even if it is recovered on a global level, unless we as Greeks change our perspective, unless we redefine our values first and above all, unless we develop as a nation, we will always be the outsiders, always, at best, the weakest link.

    P.S. I also clearly remember being taught that if it was one thing that the Great Depression taught us, it was that markets should not be left unmonitored. So don’t be too hard on Economics Professors!

    • Dear Alienellin
      To me, what you write sounds very plausible.
      I don’t have the insight into Greece because I don’t live there but I am glad that you do point to some things Greece could (and should) do in order to be part of the solution, not the problem.
      Sure “Europe” has made mistakes (and “the banks”, etc) but it’s great to hear there is some awareness that it’s not only the fault of others.

    • Martin

      When never said it was only the fault of others Martin.
      We said that this is what the “others” do.
      Blaming it all on Greece. And they still do.

      These problems are common. And they are so HUGE at the high levels of power ,that if the broader system does not reform ,whatever reforms take place individually will do nothing ,as is already proven.

      Now Spain and we continue.

  39. Is it really about “loosing face”, that the leaders in Europe won’t change their policies? The more people in Greece, Spain, Italy and elsewhere suffer and the less likely it becomes, that Merkel and those responsible will change their views before the european project goes bust.

  40. “Do you recall the war refugees on deck, being treated like an inconvenience by the crew?”

    There was an incident about two years ago, I think, where some refugees from Africa were stranded in the Mediterranean because of an engine problem and NATO refused to help them. They were allowed to perish.

  41. This is a good one, thanks, Yanis! Must be the 1st time I see an economist admit the total and for the world utterly desastrous failure of his profession.

    And no mistake here: it doesn’t matter which nationality or school (saltwater/freshwater or whatever) the one or the other economist represents, it is not a personal failure by one or a few. This ‘science’ in total lead have brought armageddon.

    • Wow…This is the first time that i find myself completely agreeing with one of your posts. Congrats VSS. You are absolutely right. Economics is not a science. It never was and I admire Yannis’s intelectual integrity in pointing out the failings in an otherwise fascinating principle. In my opinion economics is closest to philosophy and it is at its very best when it does not try to emulate methods developed and put to good use by the hard sciences. More political economy then, less mathematics and computer models.

  42. I saw this on a friend’s status and I thought it was…funny.

    In our Parliament recently, an MP during his speech told a story…..

    “There was a father who gave 100 euros each to his 3 sons and asked them to buy things and fill up a room completely.

    First son bought hay for 100 euros but couldn’t fill the room entirely.

    Second son bought cotton for 100 euros but couldn’t fill the room entirely.

    Third son bought a… candle for 1 euro and lit it up and the room was filled with light
    completely.”

    The proud MP declared:

    “Our Prime Minister is like the third son.

    From the day he has taken charge of his office, our country is filled with the bright light of hope.”

    “Where are the remaining 99 euros?” asked a voice form the backbench

    • Are you asking what Europe can learn from the Middle East?

      Turkey is nothing more than a cheap labor camp for manufacturing Europeans goods.

      Why would we want to turn our country into an industrial dumping site?

      Israel has far more and better lessons for Greece as far as comparable economy in terms of per capita GDP and composition. High tech, pharma, research and development, all activities that favor highly educated people like us. In fact Jewish people and Greeks are very similar in many respects. And many Israeli-Greek JVs are already under way.

      Turkey is an inflationary joke the type of which we want to stay away from as much as possible.

    • If Turkey had joined the euro, it would be in the same mess as Greece or worse. Fortunately for the Turks, they have been kept out of the exclusive club (partly for having the wrong religion) and have by sheer good luck escaped this disaster currently befalling Greece.

    • Dear Dean
      I think you are being too harsh on Turkey. Besides, the point of the newspaper article is that Turkey was in a crisis that is in some respects very similar. But they acted swiftly when the crisis hit them 2000/2001 – and the result was that the economy was back on track remarkably fast.
      Your idea that Greecd could learn from Israel is surely true, too. It’s more on a level with Greece in terms of GDP per head.
      However, Turkey’s handling of the 2001 crisis may be helpful in terms of trying to avert a complete disaster in Greece. Israel would more be an inspiring option how Greece may economically develop. But first you need to fix some very basic things before Greece can turn into a start up nation. Israel is lightyears ahead in terms of human capital, high tech and efficient administration…
      For all it’s problems and political, military and moral problems due to the continued occupation it is a fascinating and economically – in some areas and the spirit – extremely advanced place, with very capable, well educated and business minded people.

    • Neither Turkey nor Israel could be what they are were they members of the EU not to mention the EZ. As for the rest I totally agree with Dean. Greece was on Israel’s tracks (albeit far behind due to reasons unrelated to our discussion) before the process was effectively and rudely interrupted by joining the European Union.

    • “Turkey is nothing more than a cheap labor camp for manufacturing Europeans goods.

      Why would we want to turn our country into an industrial dumping site?”

      That pretty much sums up that you seem to be happy with living on other peoples money. BUT, the problem with socialism in whatever form is that at some point you run out of other peoples money!

    • “In fact Jewish people and Greeks are very similar in many respects.”

      I agree what “aspiration” is converned. On achievement both are in different leagues.

    • Israel has far more and better lessons for Greece as far as comparable economy in terms of per capita GDP and composition. High tech, pharma, research and development, all activities that favor highly educated people like us.

      Of course, Dean Plassaras does not bother to mention the 100s of BILLIONS of dollars of US aid (not to mention guaranteed loans and covert aid) that Israel has received over the last 50 years . . . and counting!

      He also does not bother to mention the massive economic protests across Israel last year. The protests, to get Dean Plassaras up to speed, were about stagnant wages, rapidly declining, purchasing power, unaffordable housing, unaccountable government bureaucracies, high unemployment, . . . you know, a dysfunctional economy.

      In fact Jewish people and Greeks are very similar in many respects.

      Are you talking about Israelis or Jews, Dean?

    • Dear Martin:

      To make a long story short. Turkey has its own currency. Greece has the euro.

      Conclusion: nothing that Turkey does or did has any practical application in Greece.

      Plus we don’t use countries as a model that have the same growth rates as Congo and Zimbabwe. And under no circumstances we take lessons from the middle East with the exception of Israel. It’s a completely alien world to us.

      And as I said before. There are several Israeli-Greek joint ventures under way and many more to come.

    • n eu d

      “That pretty much sums up that you seem to be happy with living on other peoples money. BUT, the problem with socialism in whatever form is that at some point you run out of other peoples money!”

      Not really. Germany succeeded in taking other people’s money just fine and now she is the “τζάμπα μάγκας” as we say in Greece.

      She became the macho man and the bully because of power and money she got and development she had thanks to others.

      And what Dean says is that there are much better solutions than becoming Turkey. Without giving our money freely to Germany to then give it back as her own money, while our production and growth was destroyed for your sake.

    • Dear lastgreek

      You write: “Of course, Dean Plassaras does not bother to mention the 100s of BILLIONS of dollars of US aid (not to mention guaranteed loans and covert aid) that Israel has received over the last 50 years . . . and counting!”
      Sure Israel has received huge amounts from outside (aid from e.g. the US and Germany on a government level and Jews living abroad, etc).
      However, I don’t think you can just compare that to Greece because Israel built a nation with all the infrastructure, etc to go with it – and spent vast amounts of money on the military. Whether the latter is a good thing is another story – but they feel threatened and given their history in Europe as recently as 1945 (and then the history of Israel from 1948 onwards), that feeling is understandable.
      I know Greece feels to be in a somewhat similar situation with Turkey, but the situation for Israel, virtually surrounded by nations that want to eliminate it (and vastly outnumber Israel in terms of population) is on a completely different level than what Greece may have with Turkey.
      So the “100s of billions” you mention where to a large part used for military and setting up a state where in major parts, there was not much before in terms of what you could call a country on a western level – not exactly the situation in Greece (though I realize it was pretty poor until recently). But Greece was Greece and existed in one form or another for thousands of years. There was some basis that did not have to be built from scratch (houses, roads/paths, etc). That was a little different in Israel.

      You carry on with “He also does not bother to mention the massive economic protests across Israel last year. The protests, to get Dean Plassaras up to speed, were about stagnant wages, rapidly declining, purchasing power, unaffordable housing, unaccountable government bureaucracies, high unemployment, . . . you know, a dysfunctional economy.”.

      Those protests point to some real problems – but it does not indicate a “dysfunctional economy”. Cost of living in Israel in absolute terms is actually quite low. But wages are low, too (compared to Western Europe or North America).
      There are tensions in the country for reasons of rising inequality etc. But the country, economically, is competitive and not exactly “dysfunctional” in my eyes.
      I’d argue the other way: Israel tries to keep the economy going and that means that while they have such ridiculously high expenditure for military (that’s only partly funded by outside help) and still invest lots in research and development, education and start-up capital, they have to save somewhere not to go the Greek path.
      They do that with keeping a lid on wages and by, well, being quite harsh on the lower third or so of the society (not generous unemployment benefits, etc).
      That is not nice but in a way it is the opposite of “dysfunctional” – it shows resolve to keep the country going and not to buy a few nice years with the prospect of a harsh crash further on.

      Regarding the high unemployment that you claim: The current rate in Israel is 5.4% – that is actually pretty low (lower than e.g. Germany and about half of the average of the whole Euro Area).

      So I think Greece could indeed see Israel as a country it could learn a lot from – at least in terms of running the economy.

    • @Martin
      Do you actually KNOW anything about the Israeli economy? Have you read some detailed economic studies to inform yourself? Please tell us which ones; and why the massive subsidies and capital inflows (both implicit and explicit) by the world’s biggest economy are of no relevance!

      For the record, I should also tell you that Zionists in the nineteenth century were inspired by the new Greek Kingdom, and many visited to see this rare example of a new ethnically-based nation state. In that sense, Israel copied Greece. All similarities end there, since Greece does not have the protection and subsidy of another powerful nation. All it has is Germany trying to control the EU for its own national benefit — and casting Greece off as a useless piece of flotsam.

      When you make comparative analysis, you need to ensure that (a) it is comparative, and (b) it is analysis. You have failed on both counts.

    • Dear Guest (xenos)
      I think we are maybe all getting a bit carried away with Israel here (myself probably the most judging by the length of my comment, sorry).
      I did not intend to make a comparative analysis, I just meant to comment on some of the statements that “lastgreek” made because I disagreed with some of his points (and some of what he presents as facts such as that Israel got high unemployment, which it does not).
      In the end it may be helpful or not to emulate another country. I am sure there are things Greece (and many other countries) could lean from Israel but it would neither be realistic nor desirable to simply try to become some sort of copy.
      My knowledge of Israel is limited. I have been reading about it and I have been there – but certainly, I am not at all an expert and I am aware of that.

      I still believe that Israel, though it surely received way more in terms of external funding, overall made very good use of it’s means. While Greece, overall, did not. Greece did receive subsidies over the decades that it has been part of the EU and over the years that has been a massive amount (though not as massive as what Israel received, but the security situation is different leading to a lot more military expenditure in Israel).
      Anyway, I don’t think we will agree and after all, that is ok. We’ve exchanged our standpoints.

  43. Dear Prof Varoufakis,

    I have just joined your blog after having heard your name & read some of your comments, as late as June 2012.
    My gut feeling tells me that you have some good ‘news’ to tell and be shared – time will prove same.

    I left Greece in 1981 as the neo-greek life attitude, attributed to another economist/professor from Berkeley, was taking the wrong direction; shortcuts & the easy road, consumerism vs frugality. Since then I have lived & worked allover the planet – and since January 2009 I teach maritime matters in a Chinese university.

    As a geopolitical animal I have been following the financial matters worldwide – as an amateur civilian – having lived among austere poverty and vulgar capitalist.
    Both systems have failed

    Would you care to comment that time has come to commence talking about ‘Financial Evolution’ ala Charles Darwin? Unfortunately not during our time…

    Thank you for your hospitality

  44. Pingback: Links 6/24/12 « naked capitalism

    • Just one more proof about the so called bailouts and the lies of the politicians to their own people convincing them that they pay ,while the southerns pay with severe austerity for the criminal activities of the banking elite.

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