Europe’s April, and how to thwart it

The editor of a Swedish magazine asked me to contribute a short piece that combines elements of my Global Minotaur with the address I am about to deliver at the INET conference in Berlin this coming week on the Future of Europe. Here is the piece I concocted. Its title is borrowed from T.S. Elliot’s Waste Land

“April is the cruellest month”, wrote T.S. Elliot in his Waste Land. And so it proved this year in Europe’s wastelands, also known as the ‘eurozone’.

First came a very public, and at once hideously lonely, suicide in Athens’ Syntagma Square. A single gunshot, a solitary act of defiance in the midst of what had, hitherto, been the epicentre of mass demonstrations against the acutest symptoms of the common currency area’s malaise.

Then came another sign of cruelty’s triumphant advance: on the day that the finalists for the mischievous Wolfson Prize were announced (competing for a large wad of euros on how best to dismantle the… euro), Europe’s media were replete with news of a young Dutch boy’s entry. His idea? To force Greeks to convert their euros into drachmas and to expropriate from each a fixed sum with which to repay the monies owed by the Greek state to the bankers, the IMF, the ECB etc.

Of course, young boys are notorious for their unlimited cruelty The tragedy here is that the boy’s father, instead of breathing some reason and humanity into his son’s heart and mind, proudly translated his gibberish and submitted it to Wolfson. And, as if that were not enough, Europe’s media bathed his misanthropic nonsense in praise and plaudits.

Such cruelty is the last stage of intellectual and institutional failure at a grand scale. In today’s Europe it is a mere symptom of a stunning incapacity to grasp the nature of the Crisis and derivative of our botched attempts to deal with it. To stem its advances, nothing short of a gestalt shift will do; one that seeks the true causes of our shared predicament in place of the current blame game in which the Germans loathe the Greeks, the Greeks despise the Germans and, before long, every European nation turns on its own kind in a manner that ushers in a postmodern version of the 1930s.

On the eurozone’s woes: Lessons from the mists of time[1]

Once upon a time, in the famous maze-like Labyrinth of the Cretan King’s Palace, there lived a creature as fierce as it was tragic. The Minotaur’s voracious appetite had to be satiated to guarantee King Minos’ reign, a globalised regime which secured Peace and enabled trade to criss-cross the high seas in bountiful ships, spreading in its wake prosperity’s benevolent reach to all corners of the then known world.

Alas, the beast’s appetite could only be satiated by human flesh. Every now and then, a ship loaded with youngsters sailed from far away Athens bound for Crete – to deliver its human tribute to be devoured by the Minotaur. A gruesome ritual that was, nonetheless, essential for preserving the era’s Peace and for reproducing its Prosperity.

Millennia later, another, this time a global, Minotaur rose up from the ashes of the first postwar phase (also known as the Bretton Woods system). Its lair, a sort of Labyrinth, was located deep in the guts of America’s economy, taking the form of the US trade deficit which consumed the world’s exports. The more the deficit grew the greater its appetite for Europe’s and Asia’s capital with which our modern Minotaur satiated its hunger. What made it truly global was its function: It helped recycle financial capital (profits, savings, surplus money). It kept the gleaming German factories busy. It gobbled  up everything produced in Japan and, later, in China. And, to complete the circle, the foreign (and often the American) owners of these distant factories sent their profits, their cash, to Wall Street – a form of modern tribute to the Global Minotaur.

The tsunamis of capital racing across both oceans into Wall Street gave the impetus for what we now call financialisation. What do bankers do when between 3 and 5 billion dollars, net, passes through their fingers every morning of each week? They find ways to make it grow! To breed on their behalf. Thus, the 80s, the 90s and the naughties saw an explosion of private money minted by Wall Street.

Soon it went on the prowl for returns higher than the puny interest rates available in capitalism’s metropoles. It gushed, like flooding rivers, into Irish and Spanish real estate, the Greek state, continental Europe’s inane banking system. An era of cheap, plentiful, highly mobile private money was made to seem permanent.

It was around that time that Europe had the brilliant idea to create a common currency lacking any of the shock absorbing mechanisms (e.g. a unified banking sector, a common debt instrument, and a substantial surplus recycling mechanism) that prove essential when things turn bad, when recession exerts disproportional pressure on its different regions, when the underlying faultlines begin to deepen and ever widening cracks develop on the surface.

As long as the rivers of private money kept flowing, the eurozone resembled a fine riverboat crossing a peaceful Pacific Ocean. Alas, the Global Minotaur that kept them flowing buckled under the weight of its own hubris in the Fall of 2008. The private money it was spewing turned to ashes and taxpayers were made to replace it with freshly minted public money (pushing states into the arms of bankruptcy). However, no state could fully replace the lost ‘liquidity’. Like a cruel tide that goes out in a hurry, nothing was left to remind the ample liquidity of the past except for a few weedy posts buried in the mud.

Thus, after 2008, the financial Pacific turned stormy and Europe’s splendid vessel started taking water in. Its fair-weather commanding officers remain, to this day, in denial about their ship’s seaworthiness, blaming the low-lying ‘peripheral’ compartments for being too close to the water. As long as passengers and crew are bickering, refusing to accept the urgent need for a re-designed vessel, the shipwreck is unavoidable. The question is: How can the eurozone be re-designed given the tight political constraints?

A Modest Proposal for Resolving the Crisis[2]

Europe is currently caught up in a false dilemma between current policies, which guarantee the eurozone’s disintegration, and a ‘federal move’ that cannot possibly unfold swiftly enough to arrest a crisis which promises to leave nothing to ‘federate’ but the ashes of what used to be the dream of a United Europe.

The first step is to identify the three realms in which the crisis is raging hitherto unimpeded: The banking sector, public debt and, last (but most emphatically not least), the eurozone’s chronic internal imbalances (and aggregate underinvestment). The trick is to ‘mend’ these broken realms without making the taxpayers of one country guarantee (or buy) the debts of another; without cumbersome Treaty changes; without new dictatorial powers vested in unelected bureaucrats; without committing now to a Federal Europe that should be only one of our future options, to be considered after the crisis is over (as opposed to a prerequisite for resolving it).

The backbone of our Modest Proposal comprises three policies:

(A)  Unify the eurozone’s banking sectors under one authority that recapitalises forcefully the ailing banks (as Sweden did in the 1990s) with no involvement by member-states

(B)  The ECB services a portion of each country’s Maastricht-compliant public debt by issuing ECB-bonds in its own name (without any member-state guarantees) and opening debit accounts into which the member-states repay these sums in the long term and at interest rates that the ECB secures on behalf of the eurozone as a whole

(C) The European Investment Bank (and the European Investment Fund) collaborates with the ECB (via net issues of ECB and EIB bonds) to shift idle savings into productive (and profitable) investments that (i) maintain aggregate investment at levels that avert eurozone-wide recession, and (ii) counter the internal imbalances which undermine the eurozone’s integrity.


To avoid a postmodern 1930s, Europe must devise its own New Deal after having grasped that the eurozone was a fair-weather vessel kept afloat by a Global Minotaur’s hubris. Once the latter met its nemesis, the only thing that can prevent the eurozone’s transformation into a sad shipwreck is the Europeanisation of three realms: banking sectors, public debts, and investment flows. If Europe fails to see this, and continues to play the ‘blame game’, April’s cruelty will turn into the summer of our shared discontent.  

[1] The narrative in this section stems from my recent book The Global Minotaur: America, the True Causes of the Financial Crisis and the Future of the World Economy, London: Zed Books

[2] This section summarises Y. Varoufakis and S. Holland, “A Modest Proposal for Overcoming the Eurozone Crisis”, Levy Institute, Policy Note 2011/3, May 2011


  • Nice essay, Yanis. You’re still my patron saint of lost causes.

    Unfortunately, what is true in US is true in Europe:

    “The bankers own this place.” Senator Dick Durbin, on the failure of financial reform legislation in US Congress.

  • “In order to guarantee the strength of any international economic system, Kindleberger explained, a stabilizer — only one stabilizer — needs to provide five public goods: a market for distress goods (goods that cannot find a buyer), countercyclical long-term lending, stable exchange rates, macroeconomic policy coordination, and real lending of last resort during financial crises. The United States did not supply these things in the 1930s. Germany fails the test on all five items today.

    First, rather than providing peripheral countries with a market for their distress goods, the Germans have been enthusiastically selling their manufactured goods to the periphery. According to Eurostat, Germany’s trade surplus with the rest of the EU grew from 46.4 billion euro in 2000 to 126.5 billion in 2007. The evolution of Germany’s bilateral trade surpluses with the Mediterranean countries is especially revealing. Between 2000 and 2007, Greece’s annual trade deficit with Germany grew from 3 billion euro to 5.5 billion, Italy’s doubled, from 9.6 billion to 19.6 billion, Spain’s almost tripled, from 11 billion to 27.2 billion, and Portugal’s quadrupled, from 1 billion to 4.2 billion. Between 2001 and 2009, moreover, Germany saw its final total consumption fall from 78.5 percent of GDP to 74.5 percent. Its gross savings rate increased from less than 19 percent of GDP to almost 26 percent over the same period.

    Second, instead of countercyclical lending, German lending to the eurozone has been pro-cyclical. Indirectly (through buying bonds) and directly (by spreading its exchange rate through the euro), the country has basically given the periphery the money to buy its goods. During the economic boom of 2003-2008, Germany extended credit on a massive scale to the eurozone’s Mediterranean countries. Frankfurt did quite well for itself. “European Financial Linkages,” a recent IMF working paper, reveals that in 2008, Germany was one of the two biggest net creditors within the eurozone (after France). Its positive positions were exact mirrors of Portugal, Greece, Italy, and Spain’s negative ones. Of course, as the financial crisis began to escalate in 2009, Germany abruptly closed its wallet. Now Europe’s periphery needs long-term loans more than ever, but Germany’s enthusiasm for extending credit seems to have collapsed.

    And what about the third public good, stable exchange rates? By definition, the euro gives the countries that choose to join it a common external float, the credibility that comes with banking in a potential global reserve asset, and the credit rating of its strongest member. This is both true and where the problems begin. At the core of the eurozone lies a belief that, if countries adhere to a set of rules about how much debt, deficit, and inflation they can have, their economies will converge, and the same exchange rate will work for all members. This is true in theory, but only so long as countries obey the rules. And, despite being the author of many of those rules, Germany showed a singular lack of leadership and responsibility when it came to following them. When it broke the Stability and Growth Pact (SGP) in 2003, it sent the signal to the smaller countries that fiscal profligacy would go unpunished. The result was heightened public sector borrowing and increased public spending. Germany’s enthusiastic lending to the periphery only exacerbated the problem.

    Fourth, economic health requires the stabilizer to coordinate macroeconomic policy within the system. In this domain, Germany failed spectacularly, by insisting that the rest of the world follow its peculiar ordoliberal economic philosophy of export-oriented growth. By ignoring long-established ideas such as the Keynesian “paradox of thrift” or the “fallacy of composition,” Germany is advocating a serious dose of austerity in the European periphery without even a hint of offsetting those negative economic effects with stimulus or inflationary policies at home. German growth, after all, was partially fueled by demand in Southern Europe (made possible by excess German savings). By the iron logic of the balance of payments, one country’s exports are another country’s imports and one country’s capital inflows are another’s capital outflows. So, the eurozone as a whole cannot become more like Germany. Germany could only be like Germany because the others countries were not. Insisting on ordoliberal convergence is guaranteed to produce economic instability, not stability.

    Finally, Kindleberger would want Germany — or, rather, the ECB, which is dominated by Germany — to act as a lender of last resort by providing liquidity during the current crisis. Germany instead insisted on IMF conditionality for the bailout countries and on severe fiscal austerity measures in exchange for limited liquidity, thus failing Kindleberger’s final test. The most obvious example is German obstinacy against letting the ECB play the role that the Federal Reserve played in the United States in 2008 and 2009. By lending heavily, the Fed was able to arrest the United States’ slide into despair. Only a couple of days ago, Jens Weidmann, the president of Germany’s powerful Bundesbank, flat-out rejected the idea of using the ECB as “lender of last resort” for governments, warning that such steps “would add to instability by violating European law.” It is hard to see how yet one more violation of European code will add significantly to the already horrendous levels of instability, when brushing democracy aside is considered good for the euro.

    Throughout much of the twentieth century, the “German Problem” — the fact that Germany was too strong, too powerful, and too economically dynamic for the rest of Europe — bedeviled European elites. “Keeping Germany down” through NATO and European integration was seen as the solution. The problem today is not German strength but German weakness — a reluctance to take up its hegemonic role. It is not too late for Germany to change course. Even though they have profited handsomely so far from the current arrangement, they must realize by now that its model was always based on shaky foundations, cannot be generalized to all states, and has reached the limits of its sustainability. If the euro ends up collapsing — and the European Union with it – Germany will clearly be much worse of. Many of its markets will disappear while the new deutschmark soars to unknown heights. In such a world, the ‘old’ German problem would be back at the heart of the ‘new’ Europe.”

    • German exports in countries outside the Eurozone increased even more than to countires inside the Eurozone.

    • I agree with Dean, your part was good. Lets hope that this exposure will bring more attention to your appearance this week at the ‘Future of Europe’ conference in Berlin.

      I learned long ago that when being interviewed by the press to limit my remarks to what I wanted broadcast. The press will, everytime, edit out the most important part of what you have to say. In this piece “60 Minutes” wanted to excoriate Greece more than were interested in solutions.

      And, yes Dean, Wolfgang Schäuble, as you”ve pointed out before, is a walkiing talking piece of shit.

  • Saw you on 60 min tonight. I thought the piece didn’t talk enough about the imbalances within Europe. Too much time was given to the establishment leaders IMO

    Do you think that all the financialization will have to be unwound for your proposal to succeed?

  • I cannot agree with the suggestion that “Greece’s borrowing way too much, its being a fairly unproductive society and its not paying taxes do not have the capacity to explain the present situation”. Allegedly, that has always been the case before but before the Eurozone it never created the coma of today.

    Greece, to my knowledge, has never before been able to borrow so much abroad as in the 2000’s. One could possibly argue that Greece would never have been able to borrow so much had it not been a member of the Eurozone. That’s anybody’s guess, of course. My guess is that Greece could have and would have. Lenders were in a frenzy to buy sovereign bonds and to make loans to banking sectors, be the borrowers in the EZ-zone or not. Nothing demonstrates that frenzy better than the amount of CHF-loans made to Hungarian banks so that those banks could make CHF-loans to Hungarian house buyers. Some foreign banks advertised that borrowers wouldn’t even have to provide personal financials as long as the property financed was of good value.

    Had the Greek government and the Greek banking sector received the same amount of foreign credit without the Euro as they did with it, the “coma” would be the same today. I personally think they would have and there are several non-EZ-countries which prove that.

    Let me be clear on one point: lending/borrowing is always a joint responsibility of lenders/borrowers. Even more, a dumb borrower can only get credit if he finds a dumb banker. Of course, easy credit was “thrown after Greece” (as it was thrown after so many other borrowers world-wide). But one must not lose sight of the fact that financial professionals in the Greek public debt management, in the Bank of Greece and in Greek banks knew what they were doing (or thought they did…) and, unfortunately, they were as wrong as those investment bankers who thought that one could convert three lousy sub-prime loans into one investment grade loan.