While the Columbia University technicians are preparing a proper podcast of my debate with Marshall Auerback (held last Friday, 5th October) on the Euro Crisis at the Columbia Law School, readers can have a pre-hearing (as opposed to a preview) of my presentation. The audio is reasonable and can be heard here: YV talk Columbia Law School 5 Oct 2012. (During the first two and a haf minutes you can hear the introduction by Professor George Ugeux. The audio gets much clearer when my talk begins.
Also, read on (or click here for the original web page) for written answers provided by Marshall and myself to some questions that were sent to us after the event by members of the audience.
1. What is the role of speculative attack on Bonds of Eurozone Periphery nations?
M. Auerback: It can be significant, but again blaming speculators for this is akin to criticising the symptoms of the disease rather than the underlying cause. The whole financial architecture of the euro zone lends itself to speculative attacks What changed with the euro, and the ‘divorces’ from the national central banks, was the ability to fund national deficits. The euro nation’s financial dynamics became very much like the US states. They can no longer ‘print the money’, and are instead revenue constrained. However, the difference is that, unlike the US states, the euro members entered the euro with the higher debt levels incurred when they were issuers of their currencies, not constrained by revenues, and acting to offset demand leakages as required to sustain output and employment. Add to that free capital mobility allowed under the Treaty of Maastricht and you’ve created a perfect environment for speculators.
Y. Varoufakis: The same as that of cholera bacteria in a city without sewers: given a rotten human design, the bacteria have a field day. Similarly in the Eurozone: once a currency union was created that was never designed to take the thrust of a full blown global financial crisis, the moment the latter hit it was inevitable that confidence in Eurozone Peripheral bonds would sink and, as a result, money could be made from betting sequentially against the Periphery’ bonds. The rest, as they say, is history.
2. How did unelected technocratic leaders like Mario Monti came to power in countries like Italy?
M. Auerback: A financial coup d’etat. Berlusconi was proving to be uncooperative in implementing the Troika’s agenda and so they got a nice, longstanding EU functionary, Mario Monti, to do their bidding. Of course, what Monti didn’t count on was being double-crossed himself. He basically implemented the “reforms” requested of Italy, but was given no carrots in return for bringing out the sticks. The result is that the disease now afflicting Spain is likely to come to Italy next.
Y. Varoufakis: In every fiscally-stricken member-state of the Eurozone, the government of the day collapsed. First Ireland and Portugal, soon after Spain, then Greece, France and Italy. It is what happens after an economic implosion. In countries where an opposition that the powers that be in Berlin, Brussels and Frankfurt could “do business with” was in place, ready and willing to carry out austerity programs, they just took over (e.g. Portugal, Ireland, Spain). However, in two of these countries, the opposition was either not ‘reliably austerian’ or too feeble politically to be trusted to govern. Italy was a case in point: Berlusconi had managed, in past years, to decimate the left wing opposition. In the absence of a centrist party that could take over, the establishment, in cahoots with Northern European elites, opted for a coalition under a former Euro-crat – Mr Monti. Greece was a similar case. With the rightwing opposition part of Mr Samaras have adopted an anti-austerity narrative (solely as a means to make inroads into the socialists’ electorate base), the Berlin-Brussels-Frankfurt axis could not accept a simple takeover by the official opposition. Thus, another ‘technocrat’, Mr Papademos (formerly a Vice President of the ECB) was recruited to head a temporary administration until Mr Samaras’ rightwing opposition part could be ‘given a chance’ to mend his ways and become another austerian. The moment he passed that test, he was ‘allowed’ to take the reins, some time last June.
3. How long is a debt(private and public) driven AD going to rebound without the pile of toxic derivatives ?
M. Auerback: Well, the dirty little secret is that the (unstated) goal of policy is to revive the value of many of these toxic derivatives as another means of bailing out the banks. We don’t use fiscal policy to help improve incomes and increase employment (the most sustainable form of financial stability in my view), so our central banks become serial bubble blowers to temporarily increase growth, one by-product of which is the revival of toxic derivatives. We’re already setting the stage for the next financial crisis.
Y. Varoufakis: Let’s not be too cynical here. Capitalism has rebounded in the past without another financial bubble. It happened under FDR, with the New Deal, it happened under the War Economy even more successfully, it happened again in the Bretton Woods era (as a result of fixed exchange rates and massive surplus recycling at a global scale by the United States). It could happen again if a way is found to channel idle savings into productive investments. It does not have to be another bubble that gets us out of this mess. That the Fed is trying to extract American capitalism from the hole it found itself (due to the stupendous explosion of toxic derivatives) by refloating the toxic derivatives themselves does not mean that this is the only way it could be done. Tragically, there seems to be no political process in play capable of accomplishing this. Which is why the world finds its self in a state of depressed bewilderment.
M. Auerback: “That the Fed is trying … Tragically, there seems to be no political process in play capable of accomplishing this.”
That’s the key insight. To me that is why my response might have seemed cynical, but it’s based on a pretty objective assessment of the political facts on the ground. Of course, FDR showed us a different way forward, as did you “Modest Proposal”, but we haven’t yet reached the point politically where we can move in this constructive direction.
