In an astute commentary on the INET panel in which I appeared (see here for the text), to talk about Europe’s future, Eves Smith had this to say: “It is worth noting that one of the questions after the various presentations on the Eurozone mess raised the issue of the ‘democratic deficit’. The various speakers endorsed the idea of getting public approval, but they implicitly or explicitly acknowledged that it would be after the fact. Erm, so since when do you approve a fait accompli?” Yves is spot on. My excuse for not addressing perhaps Europe’s worst ‘deficit’ is that my task was to squeeze within my 20 minutes three policy proposals for dealing with Europe’s three crises (banking crisis, debt crisis and the hidden crisis due to under-investment and to the internal imbalance of payments). I only wish I had five more minutes to explain that these three policies are also our best chance for redressing the Eurozone’s democratic deficit.

The very structure of the European Union (inter-governmental rather than federal) puts a great distance between citizens and the EU itself. This is why, quite naturally, even though most Europeans are pro-Europe, the EU is rather unloved (and, for some, positively loathed). Then came the Eurozone. A currency union predicated upon a single institution (the ECB) that is, by design, unaccountable and, to boot, geared towards shifting the burden of an economic crisis from the social classes and strata whose actions helped cause the crisis to the weak shoulders of those who never benefitted from the preceding boom. Since such a ‘shift’ causes adverse popular reaction, the ECB is a natural ally of the domestic political forces (especially in the deficit member-states whose population bears the brunt) whose task is to bend the electorate to their will, and to the ECB’s will. To all intents and purposes, an economic crisis in the Eurozone ends up creating a form of neo-neo-colonialism within the world’s most advanced ‘democracy’ – within the EU.

In short, the awful architecture of our common currency, which was never designed to deal with a crisis like the current one, reacts to the unplanned for crisis with savage incursions into the democratic process of the deficit countries, whose populations must be beaten into a pulp until they surrender their spirit to the irrationality of the ‘cure’ (bailouts plus austerity). And since no one can remain free when others within their broader community are turned into slaves (to paraphrase Hegel), the democratic losses of the periphery soon expand to the core, the result being that Greece’s and Ireland’s democratic deficit soon spreads to Germany and Holland, diminishing the democratic processes of the surplus countries. In the end, as we have been witnessing in the Eurozone over the past two years, governments everywhere are misleading their parliaments and their people.

To put it simply, whereas in economic terms when one is in deficit someone else must be in surplus, in political terms we can all end up in a democratic deficit. The galloping Euro Crisis is dismantling the last vestiges of Europe’s democratic processes everywhere. Not just in the periphery. A necessary, though not insufficient, condition for ending this sad dynamic, and redressing the democratic deficit is to put an end to the Euro Crisis in a manner that does not give more discretionary power to the centre, to unelected officials, to ECB-like ‘rulers of the universe’.

The trick here is to find a way of decentralising power while, at the same time, Europeanising our responses to the three crises (banking crisis, debt crisis and the hidden crisis due to under-investment and to the internal imbalance of payments), i.e. managing them at the level of the Union, without creating new Czars that will tell electorates what to do and how to do it. Can this be done? It is my contention that the Modest Proposal’s implementation would achieve this. Notice that all three policy or programs it recommends (one per crisis) involve moves to be taken by Europe’s existing institutions which will now have to carry a lot more of the burden (compared to national governments) but in a manner that robs them of (as opposed to granting them additional) discretionary power. Let’s see them one by one:

Policy 1 – Public Debt Management by the ECB: On the one hand, the ECB is given a major task it currently does not have (to at as a go-between member-states and the international money markets). However, note too that the ECB gets no new discretionary power, in the sense that this debt conversion that it will now perform (on behalf of nation states) will be done on the basis of an automated rule, without conditionalities (except the super-seniority of the member-states’ ECB-debit accounts) and without negotiations between the ECB and member-state governments. Given the present state of affairs, where Mr Draghi sets conditions (of more austerity) to the Spanish or Italian governments for extending liquidity to them (via their insolvent banks or, again indirectly, through more ECB purchases of their bonds in the secondary markets), Policy 1 reduces substantially the ECB’s discretionary power over member-states. In brief, it gives the ECB an important new task while, at once, restoring power to the member-state (and without giving the latter more room to be ‘irresponsible’ – since the ECB’s debt conversion operations will only apply to the nation’s Maastricht Compliant Debt).

Policy 2 – Investment-led Recovery and Re-balancing Program:  Again, while a great burden of responsibility is now placed on European institutions like the European Investment Bank, the European Investment Fund and the ECB, the idea is again to do it in a rule-bound manner. To quote from my previous post: “the distribution of investments among the Eurozone’s regions (as opposed to member-states) may be calibrated, by means of a pre-agreed formula, in proportion to each region’s balance of payments deficit within the Eurozone”. Compliance to this formula means that, while a great deal of power (to reverse the Eurozone’s recessionary forces and to deal with its internal imbalances) will be transferred to the Centre, no increase in the Centre’s discretionary power will follow it.

Policy 3 – Unifying the Eurozone’s banking sectors: One of the greatest threats to democracy at the level of both the nation state and the Eurozone comes from what I term Bankruptocracy. The Eurozone’s Bankruptocracy is founded upon the cosy relationship between national elites (government, business etc.) and local banks. It must be broken down. Policy 3 does this effectively by shifting the responsibility of supervising and recapitalising banks to the Centre, while insisting that any recapitalisation will involve the transfer of equity from the private banks to the Eurozone. Such a policy, if implemented, would deal a massive blow to forces that are cultivating, nurturing and boosting the ‘democratic deficit’ in every nook and cranny of our nations and of the Eurozone.


Yves Smith was right: We should have addressed the question of the democratic deficit. And we did not. Some because, as economists, our mind’s eye cannot see beyond prices and quantities while others because we just did not have the time. In the preceding text I explain that which I missed out in my talk regarding the way our Modest Proposal deals, quite effectively, with the democratic deficit, in the process of arresting the Eurozone’s banking crisis, its debt crisis and the hidden crisis due to under-investment and to the ever increasing internal imbalance of payments.

Having said all this, democracy is a fragile flower that can never fully bloom while social power is distributed so liberally toward those with a near monopoly on the ‘value extraction process’. The Modest Proposal cannot address this larger issue. What it can do is give democracy the best chance it has within the type of world we live in.


  1. Pingback: Europe’s potential gains from a silent alliance between Paris and Athens « Greek Left Review

  2. Yani, this is not about saviours nor mobilisation. When you talked to the public at sintagma square I bet your intention was not to create needy followers, right? You see..counting on bright minds during dark days is really important because people like you bring reason, light and motivation to stand up against chaos. Let’s say that you are a “path cleaner”.I agree with Spyros :”Still, it feels like you are abandoning us in our direst hour of need.”

    Βεβαίως θα συνεχίσουμε να σας διαβάζουμε αλλά η φυσική σας παρουσία, ο δυναμισμός που επιδείξατε και η ενεργή συμμετοχή σας (δεν αναφέρομαι στα media φυσικά) ήταν μεγάλης σημασίας και η απόσυρση (καθόλου αναμενόμενη) ανατρέπει αυτό που εισπράξαμε από εσάς. Εμφανιστήκατε πολύ δυναμικά. Μετά όμως..?
    Best of luck
    Με εκτίμηση

    • Dear Maria, You may also recall that, at Syntagma, I insisted that we need no more saviours. That each and every one of us must mobilise. That I shall not run for parliament under any circumstances. By writing my “Why I am absent” letter I think I mobilised more people to realise that they cannot stand idly by, expecting someone else to “do it for them”. As for my ‘dynamic interventions’, believe me: they will continue as if I am there. Moreover, by not being there I think I can be more effective. Anyhow, as I wrote, I have not left. I am just nor there physically for the time being.

  3. I prefer to see Europe experiment in this fashion – with the mask off – its ugly but true to itself.
    Looking back now there was always a dastardly plan at the centre of this evil vortex , first they came for our small farmers in the 1970s via fiscal transfers then they came for…

  4. Dear Yannis (please allow me to call you ”dear”), I just read your article in Protagon ”why i am absent”, 04/17/2012! Very dissapointing decision for all thinking Greeks, your articles, your speaches in radios, TVs were an oasis, a really independent, positive and constructive way of thinking, I really believe that! Personally, I have never seen such comments and ideas, as yours, on public dialogue in Greece! Hope you are well, hope that you will keep sharing your thoughts about our world and our economy! Greek citizens need Yanis Varoufakis!!!

  5. At the time of the creation of the Euro, Germany insisted that the ECB be modeled on the Bundesbank. The French particularly, but also the Dutch and Italians had not better ideas, so the ECB is essentially a Bundesbank, BUT, with not even a wit of democratic accountablity. Probably not exactly planned to be that way, but unintended consequencies of shortsighted planning gave us this undemocratic system, easily taken over long ago by the neo-liberal religionists, and still, as Yanis has emphasized over and over again, no effective recycling mechanism, without which the European Project is doomed.

  6. What about the shadow banking system. What about the free movement of Capital. Soon there will be nom more money on the accounts of Spanish Banks. Greek Banks are already complete Zombies. Fucking Hedge Funds are betting on the Apocalypse. What about Louxembourg, Cayman Islands and friends. This system is screwed from the bottom to the top. Your solutions are running far to short, I fear.

  7. Pingback: Links 4/19/12 « naked capitalism

  8. By the way, your article about the banks and greek banks today, was excellent!The best i have read. And i am sure it took courage to write such an article, without “rounding” edges or avoiding taking a clear position. If only people with knowledge in Greece could tell things as you do. Thank you very much !

  9. Not commenting on the democracy deficit. Your article was as always enlightening and honest. Sorry for using this space to comment on your personal expressions in protagon. I just couldn’t help being extremely touched. Thank you for all your sincerity, creative force, the fact that you have managed all these years to keep your childish enthusiasm for life and that you wish and manage to direct it to us all. Please never stop believing in the sorry excuse human nature is. You keep us hoping and dreaming. I personally decided (so far) to stay in this beautiful and crazy country and take the blows. You will be more able to keep your soul intact in places where your offer is welcome I guess. It’s good to know you will be in touch. Good luck and keep creative. Thank you.

  10. So, the question Yani is why do you choose to be so vague when in fact Soros is far more explicit?

    BERLIN (Dow Jones)–The European Union is unlikely to survive the current euro-zone debt crisis without more pragmatic German policies, billionaire investor George Soros said Thursday.

    A long period of economic stagnation or worse faces Europe, Soros told a conference in Berlin today. German authorities, notably the Bundesbank and the constitutional court, are “dead set” on enforcing laws that have proved to be unworkable, he said.

    “This has turned statutes that were meant to be stepping stones into immovable rocks that stand in the way of finding a solution,” Soros said. “A solution can be found even at this late stage but it will require a change of heart by the German public.”

    Governments across Europe have raised taxes and cut spending as they struggle to finance budget deficits. Ireland, Portugal and Greece had to be bailed out by the International Monetary Fund and European Union after they couldn’t pay debts.

    Investor fears for the euro’s stability have grown and borrowing costs risen for countries seen at risk. Italian 10-year government bonds currently yield 3.75 percentage points more than their German equivalents, while Spain’s spread is 4.15 percentage points.

    Soros said other countries, such as Japan and Latin American nations, have come through similar experiences and survived, but the EU is not a country and is “unlikely to survive.”

    “The only way to reverse this seemingly inexorable fate is to recreate the European Union as a fantastic object worth striving for,” Soros said. “All it needs to do is to recommit itself to the principles of open society and that requires the authorities to recognize their mistakes and correct them.”

  11. Even Soros, talks about that the crisis as way above Bundesbank’s pay grade to call the shots.

    So, when you are complaining about the banking system’s lack of control from the center, isn’t Germany that insists in not relinquishing control over to the ECB?

    Isn’t this the very cause of the crisis? Germany proclaiming that it knows better but in fact she does not?

    You keep talking about control of the banks on the abstract and then you are shy of saying who is responsible for it. Not collective responsibility, singular responsibility.

    If you don’t know by now that the reason we are in this crisis is German minimalism, incrementalism and “control relinquishing” obstructionism, then you are on your own.

    I hardly find entertaining these generalisms anymore of the big bad wolf posing as the EU and EU institutions.

    Big bad wold was always been and continues to be a singular entity residing in Germany or Allemania for those of you who can’t locate Germany on a map.

    • “So, when you are complaining about the banking system’s lack of control from the center, isn’t Germany that insists in not relinquishing control over to the ECB?”

      Wrong, and a supreme demonstration of ignorance of actual developments. Germany has no control over the ECB, and in fact, holds less influence than ever, as German nationals are in less powerful positions than previously.

      In fact, what Germany has traditionally done is insisting on ECB independence from political influence.

      Trying INVENT “facts” to find your scapegoat is less than convincing.

    • O.H.:

      What are you talking about? The Bundesbank was been fighting the ECB for as long as one could remember.

      George Soros who isn’t beating around the bush when it comes to the euro has warned it “threatens to destroy the European Union” and says that if he was still an active investor he’d bet against it. The comments come in an interview published yesterday afternoon in Le Monde:

      “The introduction of the euro has led to divergence instead of bringing about convergence. The most fragile countries of the eurozone have discovered that they are in a Third World situation, as if they were indebted in a foreign currency, with a crucial effect that there is a real risk of default. Trying to make them respect rules that don’t work just makes matters worse. Sadly, the authorities don’t understand this.

      Mario Draghi has launched extraordinary measures with his €1 trillion injection of liquidity through three-year loans. But the effect of this operation has been broken by the counter-attack of the Bundesbank. Watching the growth of the ECB’s balance sheet, the Bundesbank has realised that it risks heavy loses if the euro blows up and is therefore opposed to the (LTRO) policy. Let us hope that this does not become a self-fulfilling prophesy.”

  12. Merkel spent the better part of 2 years trying to convince us that the problem with Greece was bad governance. Yet, in Spain’s case the majority of the debt is due to bad real estate loans. So, now Merkel needs to re-invent herself in convincing us of a new cause in need of a new remedy.

    Meanwhile the crisis grows forever bigger due to German inaction:

  13. Yanis, I think your analysis has a major flaw.

    You keep attributing to the EU and EZ that which is a 100% German design deficit.

    It’s absurd to suggest that EU countries like Spain, Italy, France, Greece, Ireland, Portugal et al are creating or condoning a democratic deficit.

    The democratic deficit – in all its glory – belongs to Merkel and her entourage. It’s an idea/concept Made in Germany.

    Soros also keeps talking about “those in authority”. But this is simply polite talk for Merkel and her entourage.

    Unless we are able to call things by their real name, there is no hope of ever curing the problem.

    • Sure, when in doubt, blame the Germans. Problem is: The current German leadership had precious little to do with desgin of the EU, and as such, can hardly be blamed for a democratic deficit, aside from the patently false suggestions that the current heads of government in some countries got their position without due democratic process. This last accusation routinely demonstrates lack of familiarity with the history of the countries at issue.

      If you want to find a solution, trying to find a scapegoat is hardly the way to go.

    • Don´t worry Dean never had any new idea or contribution other than bitching about Germany on this blog here… It is difficult to find a single of his posting that does not rant about Germany. Just ignore him.

    • O.H.

      Every time there is a crisis in Euroland, 3 things happen:

      1. Euro value gets lower
      2. Germany achieves close to 0% financing for its sovereign debt (yesterday’s auction yielded 0.14% which for all practical purposes is zero % or otherwise known as FREE money).
      3. All investment capital (liquidity) in Europe flees for Germany posing as safe heaven.


      a. When the euro gets lower, Germany sells more overseas (China et al).
      b. With free money she has no debt burden, aka negligible servicing on her sovereign debt.
      c. With investment capital fleeing to Germany for ridiculously low returns, the entire continent dries up and the fiscal circulation mechanism gets arrested.

      As a result, one might say that it is Germany’s job to manufacture a crisis even when there isn’t one. Germany alone thrives in crisis imposed on all others.

      However, one does not need to be an expert in game theory to understand that one country can not have all the marbles when it’s playing against 26 other players.

      Logic tells you that the end is near for the German game.

      There is no scapegoating here. Just pure, cold facts.

    • It´s about time Germany “benefits” as you call it. Aactually it is just the same situation as before the Euro was introduced. Remember when Greece paid 20% interest?

      When the Euro was introduced money left Germany and Germany was the sick man of Europe. Now the ClubMed is sick. The difference is Germany did not get any support from other EU countries, IMF etc.

    • Dean, looking on the market´s valuations:

      The level of return on German bunds makes no sense, if the market believes that Germany will be drawn even further into Eurozone liabilities.

      The bund was at 140 yesterday – all time hugh. There are futures for June up to 155 available. This would make no sense, if Germany would remain in the Eurozone. If it would leave, the bund future would jump closer to 150

      There is only one conclusion: Germany will leave the Eurozone until the summer.

    • @NO EU Dictatorship

      “Remember when Greece paid 20% interest?”
      Apples vs Oranges again?
      Remember when Greece paid 20% interest WHEN IT WAS ISSUING DRACHMAS?Thats the right way to put it.Greece would have no problem paying 1%,20% or 80% interest if it was still issuing its own fiat,free floating currency.That rate was a result of the high target rate of the Bank of Greece,it wasnt somehow reflecting any solvency risk or whatever.

      If this was the case let me remind you Greece always had debt/GDP over 100%.In 90s,in the 00s and now….btw so does Japan….

    • The only reason Greece was able to pay its bills in 90 out of the last 200 years was that it issued its own currency.

    • Αre you kidding me?Thats the case for any sovereign country….You seem to forget that Japan has been (and still is) in much worse position in terms of debt/gdp…..Theres nothing like “paying bills” for a monetarily sovereing country….countries that issue their own fiat,free floating currency are nowhere near similar to a household financing its needs.

      You seem to have a problem with Greece itself,trying to degrade it with non withstanding “facts”.

  14. I wonder, how the emergence of the internet has influenced/influences economic thinking. While industrialization had a big impact on economic theory, how about the internet? And speaking of democracy: are you informed about the new German party of the “Pirates”? Their main topic is to reform democracy using an idea (implemented as software) which is called liquid feedback.
    Even the phenomenal success of your blog and other phenomena give me the strong feeling, that the internet is chaning economy/democracy, not only in quantitative but also in qualitative ways.

  15. In Germany, parliament has two chambers. One is elected directly. The other is filled with representatives of the member states governments. These governments are not directly elected, but elected in turn by the state parliaments.

    In the EU, there is a parliament that is directly elected and another set of bodies, in which representatives of the member states discuss. These, in turn, have often not been directly elected, but rather elected by the parliaments of their nations (or given a vote of confidence).

    Chief difference? In Germany, the directly elected body does most of the day-to-day legislation, with the second chamber approving bills touching the member states and occasionally making their own proposal. In the EU, the balance of influence is tilted to the other side.

    is that tilt in balance enough to speak of a “democratic deficit”? Or is there simply a communication problem?

    • Wrong. The biggest difference is that the EU parliament cannot initiate legislation, they get proposals from the unelected EU commission (jus like in the USSR. Seond difference. The German parliament, as all national parliaments represents a people. What does the EU parliament represent? Nothing. There is no European demos!

    • @Pedro
      You are quite mistaken. The Commission needs a vote of confidence from the Parliament – the same way as all governments do. Neither the French nor the German Minister of Finances was elected into their respected position by the people, but appointed and confirmed by a vote of confidence. As for the right to propose legislature, of course it is true that the EP does not have that power. But when push comes to shove, usually bills are brought in by the government bench in most countries – because they have a majority in parliament and can hope to get the bill through. Plus the parliament can ask the commission to come up with a bill on a specific question – true, they cannot demand it.

      As for the German parliament representing a German people, may I suggest you brush up on your European history? There’s been a unified German state since 1871. Of the time since then, it has again been split into two for a significant portion. And in fact, the major conservative party, the Christian Democrats, do not exist in the State of Bavaria, where instead their sister party, the Christian Social Union holds sway.
      While nominally, any member of the Bundestag represents the whole of the German people, you can figure out quite quickly which part comes first for the CSU – they can’t lose any voters anywhere else. I’d suggest you stay out of this historical minefield without acquiring quite a bit more background knowledge. And I haven’t even touched the issue of Austria there.

      Fact is that the democratic deficit is far from as drastic as people make out with their talk of “unelected” bureaucrats where said unlected officials are no more or less unelected than most national governments. The fact that in some nations, it is customary that members of government are also members of parliament is notwithstanding, as it is a completely different office they were elected into and instead poses serious questions about the separation of powers.

      But apparently, that’s not a topic a lot of people care about, yes?

  16. Pingback: What Kind of Europe Do We Want? « parina

  17. Pingback: THE MODEST PROPOSAL AND THE DEMOCRATIC DEFICIT « Yanis Varoufakis « Grin Without Cat

  18. Your departure is a blow to us all, though we understand your decision. Still, it feels like you are abandoning us in our direst hour of need.

    • I understand, sympathise and apologise. But then again I stand convinced that my leaving is a political move with significant potential at mobilising others (especially those who are looking for saviours, as opposed to acting themselves). Moreover, you will hardly notice my absence (as far as writing and speaking out is concerned).

    • Commenting on your parenthesis
      I don’t really know your work in the university of Athens. How could I?
      By reading your article in protagon, I assume based on your thinking and stance in life (also assuming by your presence in interviews and posts), you will not let your work (human and spirit) in the university of Athens to fade away. I also assume easy promises are not a part of your character as well.

      P.S. as far as your presence in public debate, your physical presence away from Greece is more useful. Anyway, i don’t think that the main media in Greece will miss your thinking.

      P.S.2 I would like to stress the need of plans of Growth in Greece. I know that this is not your area of expertise but … the need is a need.
      The only person i have heard with a viable plan of growth in Greece adapted to the “Greek” thinking is Mixalis Charalambidis. For the time being though, it is in the form of a vision, not a plan. Based on his definition of politics. Politics means to predict. There will be a time in the future (hope in the near future) that we will be asked to choose our growing route (this is inevitable).

      If things in Europe turn around in terms of strategy, we will be asked. It is in our interest to have a plan.
      If things remain the same, we will be forced to answer this question. Thus, it is inevitable.
      Lacking such a plan in the near future will be entirely our fault.
      None of the current votes have such plans. This is the other real deficit of our political regime.

    • “mobilising others (especially those who are looking for saviours, as opposed to acting themselves)”

      Dean this was for you!

    • Pedro:

      Yeah, right.

      I have no Messiah complex, nor do I need someone to do the thinking for me. If my fellow Greek citizens need to be lead like sheep, I am not a Shepard.

      BTW, in case you have any doubts about the amazing intellectual power of the Greeks in figuring out matters of the Polis, then this video might enrich you far beyond this daily German mechanic’s nonsense:

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