Taking stock of the Euro Crisis – a prelude to (the forthcoming) Version 4.0 of the Modest Proposal

This blog was initially established to discuss the global crisis of 2008 and, in particular, to promote our Modest Proposal for Resolving the Euro Crisis. As Version 4.0 of the Modest Proposal is being prepared (and will be published early next week), it is perhaps time to take stock of almost four years of Euro Crisis.

The Eurozone Crisis used to have three components. Now it has developed a fourth; possibly the most toxic.

As we all know, it all started with a banking crisis, which caused investment and liquidity to fall into a hole, which spawned a public debt crisis, which in turn reinforced the investment crisis, the result being more bank failures and higher public debt. In its infinite wisdom, the Eurozone decided to treat this multiple crisis as if it were just a debt problem, and to implement savage budget cuts and mammoth tax hikes. Incomes fell sharply reinforcing all three of the sub-crises: banks fell deeper into their black hole, debt to GDP ratios rose and, naturally, investment crossed into negative territory.

Our Modest Proposal, from its first version in 2010, identified these three crises and urged Europe’s leaders to deal with them in an integrated fashion; to avoid dealing with the debt problem as if it were independent of the banking malaise or of the dearth in investment; to desist from pretending that Greece’s crisis was separate from that of Ireland’s, Italy’s or indeed Germany’s. The Modest Proposal offered three simple policies, which could be implemented without Treaty changes, without fiscal transfers, even without troikas, haircuts or bank account confiscations (recall Cyprus). 

Three and a half years  passed and Europe remains in denial, committed to the same toxic remedy. While there has been movement along the lines of the three policies that we prescribed back then, Europe’s leadership always made sure that its baby steps in that direction would be cancelled out before there was a chance of making progress. On debt, they insisted on funding the EFSF-ESM with CDO-like eurobonds that came with the domino effect built into them. On direct bank recapitalisations, they chose to make these conditional on a banking union project which, naturally, ended up as the red herring that our leaders  pretend to be chasing after; a ploy by which to avoid breaking up the cosy link between national politicians and local bankers. On investment, apartt from some interesting ideas from Mr Draghi (on how the ECB could incite  the money markets to treat more kindly investment projects in the Periphery) all we have had was the re-labelling of unspent (pitiful in sum) structural funds as a ‘Growth Pact’. The only policy on which Europe has shown remarkable decisiveness is universal, self-defeating austerity.

Of course, by now, everyone sees that this policy is the century’s greatest own-goal. So, the only way of continuing with its implementation is by turning to authoritarianism; by turning nasty; by bending the rules of democracy; by persecuting the weak so that the less weak fall into line; by winking to the neo-nazis  and closing down public broadcasters (re. the Greek government’s social policies and closure of ERT); by cutting the meagre support that the unemployed and the sick receive – all in the name of reform and efficiency.

In short, Europe’s governments must increasingly rely on authoritarianism in order to ‘maintain course’, both in the manner in which they treat their citizens and in the manner in which the treat each other; the Northern governments their Southern counterparts in particular. Thus we have the fourth crisis: the crisis of European democracy. And the longer Europe remains in denial about the systemic nature of its crisis the larger the democratic deficit and the more Europeans will look at Europe as the problem (rather than the solution)

 It is for these reasons that we believe that the Modest Proposal for Resolving the Euro Crisis needs an update. Version 4.0 is thus just around the corner. 



11 thoughts on “Taking stock of the Euro Crisis – a prelude to (the forthcoming) Version 4.0 of the Modest Proposal

  1. I am very much pleased to read Ralph Musgrave’s comments. I’ve always thought that however well designed and cleverly thought they were, Yanis’s modest proposals adressed only the financial part of the eurozone troubles. Since the competitiveness divergence is probably the root of the crisis, I’ve always thought that financial grand schemes will only make a bad system agonize longer. In the end, I am convinced that the sooner we break up the eurozone, the lighter the political costs will be.
    I’ve never received a reply from yanis on any of my (very few I must admit) comments, but I think Ralph comments are going my way.

  2. Yanis,

    Re the three components of the Euro crisis with which you start, can I suggest you’ve left out a fourth and very fundamental component: the divergence in competitiveness between the Euro core and periphery?

    If the currently uncompetitive countries cut their wages, prices and costs by 20% or so, that would solve the whole problem.

    For example as regards borrowing, anyone is happy to lend at a reasonable rate of interest to an entity (e.g. Greece) which is competitive. And that in turn would allow stimulus in the periphery.

    There are some figures (see below) which seem to indicate a total failure of competitiveness to converge, so my pessimistic conclusion is that the Euro might as well be scrapped.


    • That is the problem… being at the periphery is not good to make big factories or companies relying in efficiency gained with the scale economy, I am portuguese, and we only have small factories…very small ones, for our small market. That is why we are unable to compete, the cost of oil was another burden… we are more distant, every time the gallon of fuel gain value… most industrial enterprises, gain with size, it’s the fractal way of economics… elephants are more efficient than mouse… the energy to run na elephant per gram is much lower than any mouse… that is valid in the Nature and in human processes… Sorry about my poor english…
      António Vitor

  3. A careful reading of the international press and european blogs (EU and private) makes clear that there IS an ultimate aim to the apparently meaningless destruction of periphery economies and societies in the name of ‘debt’.

    The Federation of German Industry announced last summer that it aims to shift outsourced factories from their present location in China to Greece as ‘investments’. At first they would start as SEZs, in which greek workers would work 13 hour days, 6 days a week for the minimum wage (+/-550€ per month) and without welfare benefits. I do not have the links here, but it is well documented so please google it.

    For the German companies to consider ‘investment’ in Greece (and Portugal, Spain etc), the Greek government must offer these companies corporate tax breaks and also provide guarantees against possible ‘Grexit’.

    For example, a german blogger located in Munich whose blog is aimed exclusively at greeks / Greece and who comments frequently on this site restated this today in his blog, and reported the above SEZ plans at this time last summer. Link:


    This is not ‘left’ or ‘right’ wing fantasy, it is simple mercantilist strategy from the heart of Europe. Yet WHERE is the discussion about this politically?

    Meanwhile Yanni, you are correct that the situation on the ground in Greece has become increasingly authoritarian and very few are spared or have immunity. The greek right to demonstrate enshrined in the Constitution has been radically curtailed and there appears to be little or no corrective oversight to police abuses. The average citizens in Athens have become increasingly fearful of the police…

    Please note I am neither young nor radical……but the truth is that the worsening reality – and as yet publically undisclosed goals for the Greek economy and society cannot help but radicalise even the most conservative (if they are not poised to benefit from it I suppose).

    Yanni, PLEASE could you write a short post on mercantilist policies, mercantilist strategies. I find that most people have no idea what this means!

  4. Dear Yanis,
    I’ve been foolowing this blog for a couple of years now and has constantly proved a invaluable source of information and education for me.

    I’m not an economist but I had some economics education during my college years that allow me to follow your arguments. To sum it up they make pretty good sense to me while the case for austerity and the enforced policies mix is completely nonsensical. That, I think, was quite clear to anyone with any basic knowledge of economics since the day of the first memorandum in Greece.

    The important question we need to ask is why?

    Why after 4 whole years of failures, these policies are still being pursued with “remarkable decisiveness” as you say?

    Is Europe in denial?
    I don’t think so.

    There are very strong arguments made by the leading industrial force of Europe that in order to maintain or increase Europe’s (Germany’s) competitiveness in the international scene the “old European” standard of living cannot be maintained. It’s simply impossible to be competitve in the world markets and pay the wages they are currently

    The competitiveness part has been openly and repeatetdly “lobbied” by the Germans in every oportunity with understandably internal and external recepients of the message.

    I don’t see any other European country dissagreeing on that. I have the feeling that the only dissagreement between the big European countries (mainly Germany, France, Italy and England) is on how and to what extent this should happen.

    In such a case it’s obvious that everyone (I’m talking about the big 4) want the least possible cost for his own people and their own political careers amidst pressures from their own industrial complexes, and I’m sure they have followed very closely the experiment in Greece, Portugal and Spain and the social reactions there.

    In such a situation the ones that are being pushed aside and commoditized are the weak (weak coutries and weak classes and a mixture of both) which are dimminished to providers of cheap labour, preferably high quality one.

    I think by now it should be quite obvious that we are living in a multipolar world. The big industies in Europe are less and less dependent on internall demand for their goods and services. More and more they are focusing on BRIC(S) markets to drive their growth. The total effect of that shift is that Europe will surely become more export oriented based on “cheap labor” as their competitors do.

    The resulting new reality for Europe is a Germany leading by it’s economic strength, cherry-picking the best and the cheapest labor form other European countries as they please. At least that is the vision of Germany and quite inline with it’s world view.

    It’s economic elite will surely reap the fruits. It’s people would have avoided the worst, after of course they have made some consessions themselves (why should we pay you twice the salary of that Spanish chemical engineer ?).

    The remaining 3 big ones will play the same game the best way they can and they will compete for no 2, at least for now…

    What I’m trying to say is that even though I thoroughly understand your arguments I’m afraid there are strong forces at move on a predetermined path laid down by choices made far back in the past, or even routed in the nature of our societies.
    We are witnessing a shift in the balance of power on a global scale driven by population boom, scarcity of resources and capitalistic competition.
    I don’t really see Europe going back to it’s glory days through any conceivable policy.

    To end, I’ve been trying to specify my thoughts on that situation as I see it and I can only say that History is most probaby cruel. Nations (and by that I mean an abstract that is part collective conciousness, part established institutions, part collective interest) haven’t changed at all. Their acts are made by necessity driven by self preservation in a world governed by the rule of the mighty.

    The question is whether the people, or the individual can make a difference…

  5. Pingback: Taking stock of the Euro Crisis – a prelude to (the forthcoming) Version 4.0 of the Modest Proposal | gold is money

  6. Great Yanis. I eagerly await your update. No doubt you have noticed the rather schizoid attitude on the part of the IMF re the UK, first telling Osborne to cut back on austerity and then saying that it isn’t as bad as they thought, ignoring manufacturing, which isn’t doing well. Perhaps you could include some comments on their dithering, which isn’t helping any.

  7. Pingback: Yanis Varoufakis: Europe Resorts to Authoritarianism to Paper Over Banking and Austerity Failures « naked capitalism

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