Of Debts and Denial: The Crisis in the context of the post-2008 world – Presentation at the LSE on Tuesday 6th December

In London next Tuesday? Perhaps you may want to come along to this talk. I shall be using the occassion to make the basic claims that:

  1. The eurozone, in its original/present form, could never survive the shock of the Crash of 2008,
  2. Greece was just as much of a problem for the eurozone as Germany (and vice versa),
  3. the future of the euro will depend on a radical redesign of its architecture which will simply not happen unless it is preceded by change in the dominant narrative concerning (i) the Euro Crisis’ causes and (ii) the global economy’s post-2008 predicament.



  • Greeting from Latin America and welcome to the club!

    I have been following with interest your analyses and proposals, having had the unfortunate experience of living through two financial meltdowns… thus far.

    I hope you are able to influence the dominant counties’ dominant narrative away from quarterly GDP growth through militarization, financialization, and immigration and towards the creation of an international system that serves all peoples, starting with the poorest of the poor.

    So far, I have not heard the indignados, occupiers, and strikers emphasis the historical and global aspects of the crisis. Around here, by way of contrast, people are far from convinced of the wisdom of sending capital to Europe exposing us, once again, to financial predators while remaining as voiceless as ever in the governance of global institutions.

    • Lupita – What you say is true.

      And you should keep your capital away from Europe. There is no real reason to support the German position which is based on the desire of the German state to engineer a solution on the cheap for Germany at the expense of all other Europeans.

      The objective at the moment is to starve out Merkozy, isolate the beast and cut off its head.

      There is absolutely no reason to be sending messages of hope at this point to Merkel that her plan might succeed. Quite the contrary.

      The plan is that a coordinated effort by the markets, US, BRICS, Latin America and Asia of isolating Germany and driving her to the ground until she implements the only solution which she is refusing to implement: Eurobonds.

      This is now personal and my strong advice to you is not get involved in any action in favor of Germany because this will put you in the cross hairs of many Europeans at no good reason.

      Just step back and watch how we grab the German bull by the horns and twist its neck until it says “no more”.

  • As a 62-year old, I feel honored that young Dean Plassaras suggests that I should attend the LSE presentation. I certainly would like to if I were not still in Greece at the time. However, I have recommended to our younger son Thomas, who is an LSE graduate and who is planning to be in London at the time, to attend. This is why I recommended Thomas to attend:

    I told Thomas that Prof. Varoufakis impresses me like a brilliant mind and, more importantly, as an extremely eloquent and charismatic speaker. Since the Eurozone seems to be moving irrevocably towards some form of common debt obligations in order to get out of the mess, the Modest Proposal is to me the most promising solution for that problem. So, if Prof. Varoufakis were in charge of the European debt problem, I would feel quite comfortable.

    I did not tell Thomas, because he will find out after reviewing this blog, that the mission of Prof. Varoufakis has in actual fact very little to do with possible solutions to the problems which Greece faces today. In fact, I could even see dangers in a mission which incites followers to deny reality (“this crisis has nothing to do with Greek unions, tax evasion or corruption”; “Greece only got caught in a much larger problem and was only the first popcorn to blow up”; etc.). As it often happens then, followers can quickly become rude when confronted with realities which threaten good prejudices.

    My own take on the European debt problem is quite simple: if, at the end of the day, some of my savings in Austria go out the window, I will blame the EU-elites and their unbelievable incompetence for it (and not Greece nor any other country of the Southern Periphery).

    At the same time (and despite the fact that my Greek friends, “experienced Greeks” so to speak, call me an illusionist for it), I still hope that eventually Greek brainpower will get around to focusing on how their country can be gotten out of the present dire situation. It won’t happen by itself and it certainly won’t happen as result of the Troika-commands. But somebody has to make it happen and who else should that be but Greek brainpower?

    PS: I just read in the Kathimerini that the government is planning the establishment of Special Economic Zones (SEZ; I called them Free Trade Zones). Now, if those SEZs are structured well and if the EU guaranteed foreign investors the political risk, that would quickly attract private foreign capital for growth projects! I have described my views on this in the link below.


    • Dear Klaus, attracting foreign private investment to a country at any cost does not require any brainpower at all, as testified by many dictatorships the world over. On the other hand, solving a country’s financial problems at a time of crisis (whilst remaining within the limits of civilization) requires more than brain power: it requires the co-ordinated effort and will of several players (governments, institutions and citizens). My understanding is that this is what Prof. Varoufakis is working towards.

    • It is not so well-known, but Andreas Papandreou made serious attempts to attract FDI from the diaspora. Some occurred in the early 1980s, but the results were disastrous. Despite reasonable production standards and good sales, the management of such enterprises was so corrupt that embezzlement outweighed profits and the investors left. The message went around the Greek capitalist diaspora: avoid Greece, the country is a disaster (even in comparison with North Africa and Turkey).

      For any hope of significant FDI, Greece has to sort out its corrupt legal system, its corrupt and incompetent accountancy system, its corrupt and appalling tax system… These are Herculean tasks, and no serious investor will come here until they are at least being tackled. There is no sign of any politicians intending to do so; and the Troika is neither competent nor particularly interested to get into that sort of detailed reform.

    • Regarding your (very valid) point that foreign investment makes no sense if it only supports corrupt business practices, I have addressed this issue in my paper. Essentially: without “good corporate governance” you can forget my proposal. That is why there would have to be mechanisms to assure/control that good corporate governmence is kept up: external audits by reputable firms focusing specifically on this issue and, if the EU were to guarantee such investment for political risk (which I think they should do), the even periodic EU-inspections. The whole idea is for FTZ to become role models in all respect (and over that years this might rub-off on the rest of the economy).

    • Certainly Mr Varoufakis struggles to find a solution at a european level . Suggesting the addition of a mechanism to circulate surplaces by european investment bank does not necessarily result in growing the economy of a country like Greece in an effective way .

      There is an issue here , since countries in Eurozone and within european framework have limited options with regard to building up growth.

      Each country must exploit its regional advantages . The real problem in national level , in Greece , is that there is no such strategic plan . Mr Varoufakis has not commented on these issues at all .

      Personally , i don’t believe in the concept of SEZ . These deals will probably be made in circumstances that don’t favor Greece as an equal strategic partner . Therefore it would be profitable mostly for corporations and will not have any real compensatory impacts on either the region , the people or the state .
      Especially if the agreements follow the same ridiculous path of many other investments done in the past in Greece , highly favoring the qualified by the “political system” . German companies have quite an experience on this field …

      I am pessimistic on this matter , unless we find a scheme , within which the co-operation between Greeks becomes possible . Unfortunately the number of such successful cooperations is too little , and therefore fall in the “exception” category . We must find a model that can serve as a general rule .

      WE must help ourselves first .

    • We seem both to be saying more or less the same thing: foreign investment makes no sense if it is nothing other than a bit of a con-game of foreign investors who figure out how they can take advantage of a country’s weaknesses. Full stop!

      This is why I say that it is extremely difficult to plan for the right kind of foreign investments (and, equally important, the right kind of foreign investors). Greece has to plan which foreign investments and which kind of investors she wants and not the other way around! Any such plan has to be embedded in the overall plan for the economy. What are Greece’s competitive advantages? (and how can Greece leverage-up on them?). What are Greece’s competitive disadvantages? (and how can Greece work around them?). Once again, that is the kind of planning which I so dearly miss these days!

      One example: Greece has an Invest in Greece agency. Some time ago, I wrote to them with an inquiry. I didn’t even get a response. Enough said?

    • u should prolly know that most if not all of the greece’s economy vigor is being burned by state corruption. now if growing apples results in an uncompetitive product due to over taxation, and revising ur industrial plan (because u thought to buy new machinery) takes 3 years, u know something is something fundamentally wrong. when theres no way to claim ur money from a bad bank cheque and if ur some1 on the payroll and the state collect a total of about 65-70% through direct and indirect taxation, u know theres an insane amount of money being burned as u very well state in ur post.

      In my opinion the entire issue is a matter of people. the only relevant question is this: How can we make sure to elect decent ppl to make a decent job. Everything else is largely trivial imo.

    • Dear CM, I welcome any alternative to foreign investment if there is one. Given the fact that Greece has a structural current account deficit (and will have one for many years to come), it is a mathematical necessity that funds flow into the country through the capital account. Otherwise, there simply won’t be enough money to pay for imports. Even if Greece were forgiven her entire sovereign debt (something which the Modest Proposal does not even come close to suggesting), even then the Greek economy, despite a balanced budget, would still require 10-20 BN EUR annually from abroad to cover the current account deficit (please note that in the last year before the Euro, the current account deficit was already over 10 BN EUR and that was 10 years ago; this year it will be about 21 BN EUR incl. interest).

      Perhaps I am overlooking something but I can only think of the following foreign sources of funds through the capital account: grants or other “gifts”; loans; remittances by Greeks living abroad and — foreign investment. Perhaps the current account deficit can be covered through grants, gifts, loans and remittances but I doubt it. So you are back to foreign investment. Incidentally, the former communist countries of Eastern Europe would never be where they are today if they had not been successful in attracting foreign investment.

      Take the US as an example where there is almost daily a debate among politicians, economists, journalists, etc. about questions like: which revenues to increase, if any; which expenses to cut, if any; an additional fiscal stimulus or not; etc. In Greece I see nothing but the execution of Troika-commands. And when expenses are cut unintelligently, you get what you have in Greece today (I have not yet heard anyone argue that expenses, in sum, should not be cut at all because they are not out of whack in the European comparison, which they aren’t; that, instead, they ought to be radically restructured to provide more evenness and fairness).

      The Modest Proposal is primarily a plan how to solve the European debt problem. It is not an economic development plan for the Greek economy and this is what is desperately lacking.

      Attracting the right kind of foreign investment, in others words the foreign investment which leads to sustainable long-term growth, is one of the more difficult things in economic planning. If you don’t plan that well, you get the multinationals with “elongated workbenchs”; they come when incentives are offered and they leave as soon as there are no longer incentives. That is certainly not what Greece should want.

      But by no means do I want to suggest that one should plan only for foreign investment. One needs a long-term plan for the entire economy and that I have not seen anywhere as yet (sorry, I have seen a couple of documents which could be considered as first attempts at such a plan: the McKinsey Report and the 1st Report by the EU Task Force but what I have in mind is a longer-term economic plan for Greece prepared and underwritten by Greeks).

    • Essentially: without “good corporate governance” you can forget my proposal. That is why there would have to be mechanisms to assure/control that good corporate governmence is kept up…

      The mechanisms are in place. Unfortunately, they are not applied. For example, the Sarbanes-Oxley Act in the US that was passed in 2002 —this piece of securities legislation on corporate governance has more teeth than a great white shark. Yet, since the financial crisis of 2008 not one CEO or CFO of the big five banks has been brought to justice … and we’re talking serial offenders here.

  • Here’s an article by economist Michael Hudson on the history of debt, published in this weekend’s edition of counterpunch.com and also appearing in the the Frankfurter Algemeine Zeitung on December 5, 2011, that readers of this site may find interesting:

    Hammurabi Knew Better: Why It Destroyed Rome — Why It Will Destroy Us Unless It Is Stopped

    Bad debts are not exactly a recent phenomenon. History is replete with examples of “debts that can’t be paid, won’t be.” It is also replete with examples of how to screw up an economy — by imposing severe austerity measures during a recession.

    I just finished watching a German (?) documentary on youtube, with English subtitles, on how banksters from the big banks conned many Italian municipalities — a la Orange county — into financially ruinous interest rate swaps. Matt Taibbi is interviewed throughout the documentary.

    Btw, Joe Cassano wants to know if anyone here is interested in a financial swap — your cash for his trash 😉

    • My apologies. The complete title to Michael Hudson’s article is “Hammurabi Knew Better: Debt Slavery – Why It Destroyed Rome, Why It Will Destroy Us Unless It’s Stopped.”

    Why didn’t you email that topic through your newsletter ?
    I just saw it… on tuesday I was in London, had time and would have been very pleased to see you (though I already know what the Modest Proposal consists in…).
    People in France don’t know enough about you, I am at the moment writing something in french to introduce a bit of the MP, maybe you will enjoy the result.
    Best wishes,

    • Not omitting it at all. There are two problems with Bunds at the moment. First, there are not enough of them issued. Secondly, there are denominated in… euros (before a rational plan for fixing the euro system is in place).