The Euro Crisis as a spectacular political failure. MELBOURNE ADDRESS – CPA, Tuesday 16th October 2012

Last Tuesday, at the CPA Annual Conference in Melbourne, I was invited to debate Norman Lamont, the UK’s former Chancellor of the Exchequer (under John Major’s government), on the Euro Crisis. The event was closed to the public (invitation only) and thus it was not possible offer a video link. But now here is the text of my intervention (that preceded the discussion). You can also hear my spiel by clicking here:  Audio (It is a recording I made using my phone – except for the first moments, the audio quality is rather good). 

In summary, Lord Lamont and I agreed entirely on our diagnosis of the crisis: The Eurozone was built on foundations that (a) could not sustain a large shock and (b) made a large shock more likely, if not inevitable. Where we disagreed sharply was on what should now happen. He argued in favour of the Eurozone’s dissolution. I argued that a dissolution would cause untold hardship on the global economy, hardship that is utterly avoidable.  

Continue reading for the text of my presentation:

MELBOURNE ADDRESS – CPA, Tuesday 16th October 2012

1.    INTRODUCTION – Why am I here?

Thank you Robert. Thank you Ladies and Gentlemen.

It is a great honour to be in your midst today. Still, I cannot but wonder: Why am I here today? Is it because of my work on the philosophical foundations of game theory? Or for my book on the global crisis?

Let’s be honest. It is because the Euro Crisis has promoted me from a run of the mill academic to a… renowned Greek economist. A most dubious promotion. But such is this Crisis that the marginal, all of a sudden, acquires undeserved discursive power and is propelled into the centre of things.

Take my country, Greece. At the margins of Europe’s map and economy for centuries, Greece has been in the global headlines for three years. This is quite absurd.

If a crisis in the Northern Territory had the capacity to threaten with disintegration the Australian Commonwealth, the problem would not be with the Northern Territory. Something would have been profoundly remiss with Australian capitalism!

Catherine the Great once said that: “if you can’t be a good example, you will have to be a horrible warning.”

This is, ladies and gentlemen, my task this fine morning: a Greek bearing not gifts but a hideous warning.

2.    THIS IS OUR GREAT DEPRESSION – OUR GLOBAL WINTER OF DISCONTENT

When the GFC struck in 2008, we entered not some recession we had to have but our generation’s Global Winter of Discontent, our very own Postmodern Great Depression.

It may not feel like a Depression in the streets of Melbourne today but scratch the surface anywhere on the planet and what you will find is justified uncertainty, legitimate insecurity and potential insolvency.

Can we expect the combined quantitative easing of our Central Banks to help? At the very best it will provide palliative care to a world in need of a cure.

A cure for what? A cure for what I term the Twin Peaks Problem that follows large financial crashes like those of 1929 and 2008:

  • The first peak that emerged is made up of massive unserviceable debtsand irretrievable banking losses.
  • A second peak consists of equally large idle savings, too terrified to fund productive medium term investments.

The solution requires the mobilization of the savings to produce the income that will pay the debts. Markets cannot do this once caught up in an equilibrium of fear which is only aggravated by universal austerity and merely cajoled by monetary easing.

Can we find such a solution? Of course we can. We did so twice since WW2. Once in 1944 and then again in the 1970s. Both involved a mechanism for recycling global surpluses in the form of productive investment into the deficit regions and sectors.

If our world is now in a state of pronounced bewilderment it is because no replacement has been found for the surplus recycling mechanism which died with the GFC in 2008, at the time the US lost its capacity to use its own deficits in order to recycle other people’s surpluses.

3.    EUROPE’S CRISIS AS THE LABORATORY OF THE FUTURE

Which brings me to the Eurozone. It was built on the presumption that America’s recycling of others’ surpluses would continue to provide adequate demand for net exporters like Germany. Thus no endogenous surplus recycling mechanism was built into the Eurozone.

For 8 years the Eurozone resembled a fine riverboat on a calm Ocean. But when America’s recycling powers suddenly gave way, the seas turned stormy and the pretty European riverboat began to take water in. Thus our modern Greco-European tragedy began.

  • Instead of treating our systemic Euro Crisis systematically, the Core started pointing moralising fingers at the Periphery
  • Europe concentrated on lending more money to the insolvent states to lend to their insolvent banks on condition of harsh austerity that shrinks the national income from which the loans should be repaid
  • Bailouts are being funded by CDO-like bonds that contain within them the domino dynamic which causes more European banks and states to fail sequentially.

In short, a dreadful monetary design was defended by toxic remedies. For three years now Europe’s response to the discovery that it had created a monster was an all-out assault on reason.

4. WATERBOARDING GREECE

Almost in a bid to defy my hosts I have said nothing so far about Greece. The reason is that there is little to say. Greece was the flimsiest, most corrupt, least entrepreneurial part of the Eurozone. These are the reasons why the domino effect started there. But it is not the cause of the domino effect!

Nonetheless, Greece:

  • Reminds us of how quickly a recession can turn into a depression
  • Of Britain’s and Australia’s predicament between the world wars, when they sought to stay within the Gold Standard by imposing self-defeating austerity on themselves
  • It also reminds us that when a financial crisis cripples an ill designed multinational currency union, the first thing that happens is a disintegration in the common currency; and very soon after that, we end up with real Nazis in Parliament.

Greece has already undergone the greatest fiscal squeeze ever attempted anywhere.

It is now being fiscally waterboarded to accept new measures that everyone knows will drive our economy further into the ground and guarantee that our partners will never get their money back.

So, why is Europe doing this? Because the alternative would be for its elites to admit that the Eurozone was built upon flimsy foundations.

5. WHAT SHOULD WE DO WITH THE EURO: It’s the politics stupid

In her final Parliamentary speech as Prime Minister, Mrs Thatcher famously said about the Eurozone:

“It’s all politics. Who controls interest rates is political. A single currency is about the politics of Europe.”

Hear, hear, I say. (You know that a crisis is deep when a leftwing Greek economist is missing Margaret Thatcher!)

Where Mrs Thatcher was wrong was in her belief that Europe’s elites had federation on some secret agenda.

Exhibit A that they do not have such an agenda is the current banking union debacle: Everyone knows a banking union is a prerequisite for stopping Italy’s and Spain’s quick march into the Grecian Vortex. And yet Germany is single-mindedly working to wreck in practice the banking union which it agreed to in June.

No, ladies and gentlemen, all talk of a federal agenda is bogus. As the Cambridge economist Nicholas Kaldor had predicted in the 1970s, an attempt to create a flimsy currency union would be a first step not toward a Federal Europe but toward Europe’s deconstruction.

6. CONCLUSION

So, what should we do?

Europe is now the laboratory of our global future. We should never have created this Euro. But given that we have, Europe has a moral responsibility to itself, and to the rest of the world, to fix it. Without the Treaty changes, fiscal pacts, or Ponzi Austerity programs that defy basic economic logic.

Technically we can achieve this in weeks. But, as Mrs Thatcher, might have said today, “It’s the politics stupid!”

If we fail, Europe will have inflicted mass pain on the rest of the planet for a third time in a century. And then you will all become Greeks too – and not in the benign sense of sharing a love for Homer, Sophocles and Thucydides.

74 Comments

  • Bravo as ever!

    However, this was obviously a fascinating talk and it is a pity that we cannot read a transcript of the entire debate, including Norman Lamont’s contribution. Would it be possible for you to post this, or provide a link?

    • And I have the say the sound quality was absolutely phenomenal. My question is what phone was it and does it have a video camera?!

  • I agree with a lot of things you say! But your (as usual) complete omission of the very active and major contributions by Greece, Portugal, Spain and so on to run into the problems they are in on one side and your sole blaming of Germany on the other side is ignoring a good share of reality.

    Yes, no doubt, the currency union is completely misdesigned! And the nature of the problems it is in now were predictable.

    No, the problems would by far not have reached the current extreme levels if the nations which are now in deep trouble would have acted more responsible.

    • Dear VSS
      Yanis states at the beginning of No. 3:
      “…the Eurozone. It was built on the presumption that America’s recycling of others’ surpluses would continue to provide adequate demand for net exporters like Germany. Thus no endogenous surplus recycling mechanism was built into the Eurozone.”

      Sounds plausible to me.
      However, checking the current account balance of the US, it appears that it’s been fluctuating wildly over the last couple of decades: In the 90ies, the US’ current account deficit was around 1% of GDP. Still a lot in absolute terms because of the US being huge – but not a high percentage at all.

      It was only since about 2000 that the current account deficit of the US grew exponentially, to around 6% of GDP in 2006.
      See “Figure 1” on page 2 of this document:
      http://www.hks.harvard.edu/fs/jfrankel/GrowthCommssnReasonsWorryDeficits.pdf

      Currently, the US current account deficit is back to 3%. That is a lot lower than when it peaked in 2006/2007. But it is still a lot and much more than before 2000 (except for a couple of years in the mid-80ies).

      This leads me to two points:

      1. The Euro was introduced on 1st January 1999. Hardly anybody really noticed because actual Euro banknotes and coins were only issued on 1st January 2002.

      Nevertheless, from 1st January 1999, the Euro was in existence with the then still existing national currencies linked to each other at a firmly fixed rate, irrevocably and to be made clear to the largely ignorant public with the introduction of real Euro money on 1st January 2002.

      The Eurozone had been decided upon in the second half of the 1990ies. With the US current account deficit having hovered between 0 and 2 percent for the previous 10 Years or so, I wonder how the Eurozone could have been originally designed based on the assumption of massive US deficits? Those came only later, once the Eurozone was already in existence!

      My second point is: With the US current account deficit currently being at around 3%, I don’t see that much has changed in terms of the US “recycling” other peoples surpluses. It’s currently a lower deficit than 2006 / 2007 – but still big (and substantially bigger than the long-term average between, say, 1980 and 1999).

      Isn’t the main problem that the “EU periphery” joined the US in trying to “recycle” other peoples’ money, excessively so, just as the US did in the period 2000-2007?

      That path of the US and the Eurozone’s periphery was clearly unsustainable.

      In those years, both the US and the Eurozone periphery amassed debts that fuelled the domestic economy but are now hard to service – and painful because there’s not much scope for additional debt now to soften the recession as the debt is already so high.

      Maybe this is a very German view?!

    • Amen, it is not the Greek economy that is in trouble. It is the Greek government. It has nothing to do with the Euro or the Eurozone. It is down to an out of control government which is expecting everyone else in Europe to bail it out and the ones that are feeling the brunt of the burden is the Greek taxpayer.

      Ill say it again. The only problem in Greece is the Greek government. It is a Greek government problem. The Greek people were doing just fine.

      Also, for Yanis to say Greeks are not entrepreneurial is simply wrong. From my experience of Greece, the Greeks have the greatest entrepreneurial spirit in Europe by a big margin.

    • As usual, VSS, you don’t know what you’re talking about. Do you even know what a surplus recycling mechanism is? Jeez….

    • If you do yourself a favor and understand the role of deficit spending by a monetarily sovereign government i guarantee you that you will come to 2 conclusions:
      a)The euro came attached with self-imposed constraints that in no way constitute actual constraints
      b)Responsibility doesnt have anything to do with keeping a balanced budget or achieving a budget surplus.On the contrary,it has a lot to do with spending as much as “demanded” by the economy in order for it to achieve its full potential.Whether this has to be a 10% of gdp deficit or a 3% surplus is irrelevant for a monetarily sovereign entity.Not doing so is what is totally irresponsible.

    • Crossover – “Whether this has to be a 10% of gdp deficit or a 3% surplus is irrelevant for a monetarily sovereign entity.” When you get a bit older you will change your opinion. When the value of your pension and savings are slowly eroded every year you will release that a deficit which is a supported by money printing is making you much poorer.

    • Mister,

      Which part of the following sentence did you miss?

      “… I have said nothing so far about Greece. The reason is that there is little to say. Greece was the flimsiest, most corrupt, least entrepreneurial part of the Eurozone. ”

      Mr. Varoufakis is not solely blaming Germany for the current mess, and has not done so in the past. Moreover, you could go back to former posts and read about how germans, greeks, italians etc are useles categories to analyze the crisis. German bankers or industrialists, spanish bankers or unemployed, well…that’s another story.

      There is one thing you might be wrong, though, Yannis. I’m afraid there is plenty of competion for the flimsiest, most corrupt part of Europe.

      I’ve been reading your writtings for months now, first comment. Just wanted to say thanks for taking the trouble to write as you do.

      Cheers from Barcelona

    • xavier – “Greece was the ……. least entrepreneurial part of the Eurozone.” – Yianis is completely wrong on this

    • Your opinion of who is to blame is so biased – it is an almost carbon copy of the German position.For the Germans consumption is a mortal sin.Who do you (and the Germans) expect to take up the responsibility of the consumption of the products of the surplus nations.Its all well and good to produce,but someone has to consume.Can you and the Germans tell us who will undertake that task.And can you explain why the Germans steadfastly refuse to invest their surpluses in the E.U.?

    • Plockton – The biggest load of garbage I have read in a long time “For the Germans consumption is a mortal sin.” – Sorry, have you ever been to Germany? Its just like Britain, it has the same shops and everything! And forget about the roads, there are more new cars in Germany than there is in the UK!

      “expect to take up the responsibility of the consumption of the products of the surplus nations.” If Germany want to give away its products, then I think I speak for Wales when I say we are ready. And yes, I think we are even prepared to buy BMWs, Mercedes at retail prices. I am also positive that German factory workers prefer to work rather than shopping for Siemens washing machines, Karcher pressure washers and Porsche 997 Turbos.

      You think that Germany benefits from Greece going down the tubes? Their sales of cars to Greece has gone down by over 60%. They want their export markets to be healthy, they don’t want to have to prop up inefficient governments to do it.

      If they were happy with that they would simply sell their products at discounts in order to get the business. They don’t need a recycling mechanism, especially at the moment!

      The fact that they don’t should tell you that they would rather not sell to Greece full stop than have a recycling mechanism.

    • Dear John Plockton
      You wrote:
      “And can you explain why the Germans steadfastly refuse to invest their surpluses in the E.U.?”

      Wasn’t part of the problem that Germany (and other “surplus nations”) invested TOO MUCH in Greece etc in the first place?

      This is not to say that it is helpful or sensible to completely stop investing money in Greece now. Of course, withdrawing that funding that in the period from 2000 to 2008 was plentiful now completely is going to the other extreme and only goes to deepen the crisis in Greece.

      But – maybe I am getting something wrong here but still – my understanding is that Germany (and others) invested TOO MUCH (not too little) into countries like Greece and Spain. Which is what means that, given that a lot of those “investments” actually went into local consumption. Ideally, a recycling meachanism would be to the benefit of both sides – this was not really the case here because the money was spent primarily on consumption, supporting dysfunctional structures and delaying structural changes.

      To continue with this or go back to that would not be very promosing, would it?

      I think what could be beneficial for Germany would be if the surplus could be “recycled” in Germany itself. At least a significant part of it. The “investment” of German surpluses (forgiven German consumption) in e.g. US “junk mortgages” or Greek government bonds was not exactly very wise. It would have been by far wiser, if somehow, a major part of that money could have been spent in Germany itself. There’d be plenty of potential projects to spend money on – the infrastructure is not bad, but (compared to what the West German infrastructure was like in the 1980ies) worse now than it was then. So much money flowed to the east of Germany. Which was good – but billions of Euros could be spent on West German infrastructure. Furthermore, if such a shift towards “growth in Germany itself” instead of “investing” most of it away on useless stuff abroad would take place, it could kick-start a positive feedback loop:

      German domestic economic growth would go up, wages would go up, tax income for the government would go up, immigration (hopefully managed sensibly) would go up feeding more growth, etc etc.

      I really don’t see why Germany constantly did or should throw its money away by spending it on foreign investments that turn out to be very bad ones more often than not.

      I’d say this phase with first loosing German investments in the US in 2008-2010 and since then loosing German investments in the Eurozone periphery should teach Germany a lesson:

      It is not wise to invest abroad like there is no tomorrow. It makes much more sense to try to divert some of those money streams into the domestic economy. In order to make that economically beneficial, it has to be money well spent (not on consumption primarily) – like on education, infrastructure, childcare that enables people to have children and still work, etc etc. There is so much that could be done. But somehow, it’s like there’s some sort of depressive mood in Germany (maybe due to demographics) that could easily turn into a self fulfulling prophecy. It goes like this: There’s no point in hugely investing into Germany – the population is falling and the workforce is aging. Much better to divert as much money as possible abroad so German investors can expect income from foreign investments when the domestic German economy falls in relative terms. But that, unfortunately, is a self-fulfilling prophecy. As we can see now, assets invested abroad are easily lost. So much more sensible to invest more in Germany itself!!

    • @ Xavier

      Yanis spoke about the Euro crisis in general, not about the Greek crisis in particular. Consequently, I responded context oriented ‘… by Greece, Portugal, Spain and so on…’.

      Which part of this is it that you didn’t understand?

    • @ John Plockton

      Whom exactly do you refer to if you say “And can you explain why the Germans steadfastly refuse to invest their surpluses in the E.U.”?

      The vast majority of Germans NEVER investet their savings outside of Germany – not knowingly! They gave it to small banks and insurance companies in Germany, of course expecting they would invest the money in the own country.

      The vast majority of Germans had not the foggiest notion these financial institutes would send it instead to Greek, Irish, US or Spanish banks, to name just a few, so these could transform it into extremely dangerous loans.

      There is no ‘the Germans’, when will this ever be understood? It was a small ‘elite’ in the German finance world who fuelled the bubbles abroad, w/o ever telling anybody what and why they did.

    • “I think what could be beneficial for Germany would be if the surplus could be “recycled” in Germany itself. At least a significant part of it… German domestic economic growth would go up, wages would go up, tax income for the government would go up, immigration (hopefully managed sensibly) would go up feeding more growth, etc etc.”

      This would be the opposite of what Germany did in the early 00s and which is what a lot of you are proud of and boast about it.You kept the wages frozen and domestic demand weak and all those surpluses could only be invested abroad.You created a circuit where growth was fueled by exports which were fueled by foreign demand which was fueled by invesment of german surpluses.This was part of your strategy.Thats what you strived for.At the same time weak domestic demand kept the imports low thus the big external surplus.You cant keep the pie and eat it.
      Im all in for stimulating domestic demand in Germany,but this means you will have to do away with the big surplus you currently produce.Not that there is anything wrong with that.On the contrary,this would help rebalancing the EU imbalances.But most Germans dont like that.We see it here all the time.

    • @Richard

      Just so that you wont bother, unless you provide facts (= sources) about deficits being by definition inflationary, all this is just yip yapping to me.So dont bother.Instead of going to the same old same old, bring me FACTS.Else dont bother.

    • Dear Crossover
      I agree what I described (“recycling” the surplus in Germany domestically instead of investing it away by selling foreign assets that then often prove less valuable then assumed, e.g. US “asset backed secuties” or Greek government bonds) would be a paradigm shift.
      But a healthy one. Shouldn’t be overdone but while the shift 2000-2006 was important for Germany, now investing a bit more in Germany’s domestic economy would be good for everybody.

    • Why would anyone “invest” in Southern Europe? There are much better places in the world to put ones money.

      Europe has no growth, Southern Europe is not competitive, labor laws are not flexible and there is a risk of Euro Break up.

      So why risk so much for so little opportunity? If you want to invest in a third world country environment, go to a real third world country. At least there you only pay a third world price.

    • Crossover – The video you gave. It starts off by saying that politicians think an economy is an household. This is obviously wrong, see the US government deficit.

      The first guy with black hair. A couple of points. He says savings takes money out of the economy. The is obviously wrong, it gets lent out which is why you get interest.

      He implies that increasing the amount of paper money makes you richer, this is obviously wrong. It simply devalues the money that is already in circulation.

      He also says that all money is government debt. This is wrong, the Federal Reserve also prints money for banks by buying their assets http://en.wikipedia.org/wiki/Open_market_operations

      The woman, people are users of the currency, an insult, the money is the peoples labour and property.

      The government can buy anything it wants, wrong, government/central bank can print as much money as it wants, its up to businesses and people if they choose to accept it as payment.

      Spent into existence, she means printed into existence.

      Thanks for putting the video up, I am enjoying it, its a good mental workout. The speakers remind me of the lobbyists in this movie http://www.youtube.com/watch?v=iBELC_vxqhI

    • “This is obviously wrong, see the US government deficit.”

      You probably never heard Obama saying “we’re out of money”.The deficit would be larger (as needed) if they realised they are different from a household

      “The is obviously wrong, it gets lent out which is why you get interest.”
      No you are obviously wrong and ignorant.Banks dont lend deposits.Its loans that create deposits.Banks create the loans by expanding their balance sheets,creating both an asset (the loan) and the liability (the deposit).

      “He implies that increasing the amount of paper money makes you richer, this is obviously wrong. It simply devalues the money that is already in circulation.”
      Ive discussed this with you already.MV=PY. You assume that in an economy that is working below full capacity if M increases it will cause P to increase.Can you prove that it wont cause the Output (Y) to increase ?

      “He also says that all money is government debt. This is wrong, the Federal Reserve also prints money for banks by buying their assets”
      The Federal Reserve is part of the consolidated government sector.

      “The woman, people are users of the currency, an insult, the money is the peoples labour and property.”
      Ofcourse they are users.They cant create it by fiat unlike the government (which is the issuer).They have to provide resources in order to obtain it.

      “Spent into existence, she means printed into existence.” No matter how you call it its the same thing with the same consequences.

      First time i see lobbyists being against the current gvt policy….why is it you always get things twisted?

    • Crossover – You said “Banks dont lend deposits”, you stand by that right?

      “MV=PY” – We have been through this before also, re what is money?

      “The Federal Reserve is part of the consolidated government sector” – Please research what the Federal Reserve is.

      “users. They cant create it” – Again, I refer you back to the question “what is money?”

      “No matter how you call it its the same thing” – Its completely different. the Fed prints it, it is only “spent” when someone chooses to accept it in exchange for something of value.

      “why is it you always get things twisted?” – Untwisted I think you mean

      Again, going back to fundamentals. Money has ZERO value in itself. ZERO. If you can understand this everything else will fall into place. Everything will become “untwisted” if you like.

    • “Myth Drives the Budget Fuss”

      Nearly everyone believes that Uncle Sam is like a family that must get money before it can spend. But that is not true. A basic function of any sovereign government is to create and run the country’s money system. Unlike a family, the US government is sovereign. It creates money and can never run out. All the words about America’s financial limits mean nothing.

      Years ago, our money was based on silver and gold. But that did become a limitation when economies around the world needed money to grow faster than metal was dug out of the ground. The US went off the gold standard in 1971, but we still act as if its limitations remain.

      The economy is often shown as a circular flow of goods and services moving in one direction from producers to consumers, and money to pay for them flowing in the opposite direction. Like a juggling act, the flow keeps running until something interferes. Families that save interfere by removing some of the money. They also remove money when they buy more things from other countries than the US exports. The flow of goods and services slows down when money is removed unless some other party replaces it.

      The sovereign federal government is the other party. It creates new dollars by spending more into the flow than it removes with taxes. The big bad deficits that haunt so many people are just new dollars that the government crates to replace dollars that savers and importers remove. Moreover, the federal debt that causes so much heartburn is just the sum of all new dollars created since the country began.

      Truth in labeling would have deficits called something like “new dollars created” or “new savings” and the debt would become “total dollars created” or “total savings”. This is shown every week when savers bid to buy Treasury securities as safe places to put their dollars. The debt is not a liability that will burden future generations, it is an asset that present and future generations of savers will depend on.

      The details of how the country’s money system works are complicated, but the basics are simple. Most of our money consists of bank deposits that are transferred electronically or by check. Behind most deposits are mortgages, credit card balances, and other types of loans. When things work well, banks create money as it is needed by lending to increase deposits and remove it when the loans are repaid. As the population grows, as people want to save, and as the country imports more than it exports, new money is needed to supplement the bank deposits. The government creates that new money by spending more than receives from taxes.

      If you understand that paragraph, you’ve got it! You are way ahead of most Americans and nearly all our politicians.

      The power of the money system is also easy to understand. Because the government creates money by spending more than it receives from taxes, it will always be able to pay its bills. Neither it nor any of its programs can ever be forced into bankruptcy. This means that there are no Social Security, Medicare, or Medicaid crises. While there is widespread unemployment, there is no financial reason not to help those in need or spend to create jobs. It is negligent to put off upgrading school buildings, roads, bridges, power grids, and water and sewer systems until they fail. It is gross mismanagement to force state and local governments to fire thousands of public service employees that could be avoided with federal revenue sharing. And it is a basic social failure to not educate our young and prepare them for life without burdening them with education debts.

      There are limits: if the government creates too much new money, it can lead to inflation. But inflation is not a problem now, when millions of people are out of work or not earning adequate incomes because too little money is in circulation. If our leaders understood how the system works, they would see how easy it would be to prevent serious inflation with taxes.

      None of the arguments against actions to improve the situation today are valid if they are based on the myth that because the government is like a family it can’t afford to spend beyond its income. In reality, the government is just the opposite, or a mirror image of a family.

    • “You said “Banks dont lend deposits”, you stand by that right?” Its a fact.Its not just me saying it or wishing it was like that.But i dont see anything wrong with that.With this system, loans are simply subject to supply (which derives from the willigness of banks to lend) and demand (which derives from the wiligness of the private sector to lever).Whats wrong with that ?

      “Please research what the Federal Reserve is.”
      Federal Reserve Act, Article 6, section 10:

      “Nothing in this Act contained shall be construed as taking away any powers heretofore vested by law in the Secretary of the Treasury which relate to the supervision, management, and control of the Treasury Department and bureaus under such department, and wherever any power vested by this Act in the Board of Governors of the Federal Reserve System or the Federal reserve agent appears to conflict with the powers of the Secretary of the Treasury, such powers shall be exercised subject to the supervision and control of the Secretary. “

      http://www.federalreserve.gov/aboutthefed/section%2010.htm

      And along with the fact that the Fed (as any central bank) is a creature of the state and it passes all its profits to the treasury..go figure.

      “Its completely different. the Fed prints it, it is only “spent” when someone chooses to accept it in exchange for something of value.”
      Duh.If you dont accept british pounds or dollars then let me have em.I accept them.Do you know anyone that doesnt accept them?

      “Again, going back to fundamentals. Money has ZERO value in itself. ZERO. If you can understand this everything else will fall into place. Everything will become “untwisted” if you like.”
      Seriously, are you following me?WHen did i ever say that money has value IN itself?What you fail to understand is that the system is not static.You claim that if i get more money in my pocket just by getting it printed it will cause inflation because theres only so much goods/services existing in the economy.But you fail to explain to me why wouldnt this lead to increased output of goods/services instead of rising prices?Especially when it comes to an underutilized economy such the Greek with an output gap as big as 12+% ?
      If everytime demand exceeded supply the prices rose,then we would only experience nominal growth instead of real.Which obviously hasnt happened.

  • The great wonder of the internet is how we can all see and read the thoughts of each other to the point where a self proclaimed “Left wing”, (small w deliberately), Greek economist may at times openly align himself with Margaret Thatcher while at the same time debate with a Feudal Lord.

    That is not meant as a criticism; rather as an affirmation of the reality of the crisis.

    That by such interaction, everyone gets a better idea of what the other thinks and feels about any point in discussion; a (partial), Marxist moves right; a (party hack), Feudalist moves left and the central debate starts to settle upon the real underlying causes of the problem. But then; what IS the real problem?

    One of the very first things the European Community set into stone was to stop the doorstep sale of seeds from plants grown in one’s own garden. Some of you might view that comment as odd to say the least; but let me explain. You see, that was the first sign of the refusal to accept the existence of the common individual’s right to innovate, manufacture and trade under what I call “Free Enterprise”.

    For the economist, (with the very greatest of respects), such as Yanis; such events were mere trifles; totally insignificant events, as all economics is, (as a science), – all about the interaction of economies at the highest level. How else would any economist gain the attention of any major player inside of government where they too never deign to look down to the grass roots of their nations…?

    EVERY single action of the central authorities, both at the national as well as the Supra National, within what one might describe as the Western economic model since the mid 1960’s; has been to eliminate the natural, instinctive, innovative, normal human desires of the poor, ordinary, freely enterprising citizen; removing those rights to grow and sell seeds was but the very first sign of that. And who would have listened to anyone at that low level who might have, indeed, must certainly have, objected? We can be quite certain; no one took the slightest notion of interest.

    Today, we do not have ANY mechanism to re-distribute the savings of the local community back into the local community economy as free enterprise equity capital investment.

    We do not have ANY mechanism to capitalise new free enterprise job creation right down at the grass roots of the Western economic model.

    We continue to suffer a COMPLETE suppression of individual free enterprise.

    EVERYTHING; every thought, every action, every debate; is all about the economic needs of the central authorities. Modern “economics” has destroyed the roots of the seedbed of the Western economies. We must get the debate on track and back to basic principles. What we must have, (and no other remedy will suffice), is to re-introduce free enterprise; right down at the grass roots of every Western nation.

    All that is really needed is; a clear recognition of the necessity; to re-introduce the freedom of the tiny, seemingly insignificant seedling individual; to freely go about their tiny, local, industrial actions; that make for a long term prosperous small local community; in every one of the villages and small market towns spread right across every nation.

    So; why NOT try some new thinking?

  • This is a very good text.
    Every conclusion contains an argument or different point of view that not one of the participants can face in the debate. What were these two disagreements?

  • Now I understand. You have put it plainly. Interest rates and currencies are controlled by the elite, not the whole informal, unwritten, unagreed, undemocratic federation, always and everywhere.

    • Honey – If you could explain it to me “the whole informal, unwritten, unagreed, undemocratic federation, always and everywhere.” – what is this?

  • Reading this it becomes eaven clearer that the Euro needs to be broken up in any number of currencies between 2 and 17. Keeping it will only cause more hate, poverty etc.

    “And yet Germany is single-mindedly working to wreck in practice the banking union which it agreed to in June”

    It is the old misunderstanding if you lock different cultures together. Banking union as never defined, were many other things. like the famous French industry government…

    We need less EU/EURO to have more Europe!

  • Yianis – You seem to continue to dodge the real question. You have Germany, the economic powerhouse and you have Greece with a government that squanders the taxes.

    If I can use an analogy. You have Germany as one business and Greece as another. Both businesses competing in the same environment ie the Eurozone.

    Your solution is for Germans to compensate Greeks for buying German products.

    What is wrong with Greece adopting the same methods as Germany?

    Or to use another analogy.

    There is a horse racing season. One horse is continually beating the others, Germany more prosperous than Greece. You want to handicap Germany to make them more even with Greece so the prize money can be spread around more evenly.

    Unless you believe there is something genetically or geographically wrong with Greece, what is the problem with Greece simply adopting similar training methods to the German horse to make it more competitive with Germany?

    Why is your solution to punish the successful rather than saying the less successful should copy some of the techniques of the successful?

    Surely you agree competition improves governments (through democracy) just like it does in business.

    Why is your answer to penalise a party that is successful rather than saying it is the unsuccessful that should change their methods.

    Please tell me why

    • “What is wrong with Greece adopting the same methods as Germany?”

      I hate repeating myself but i cant help it.Again your problem is that you cant realise that macroeconomy cant be explained by microeconomic examples.You consider Germany as successfull without taking a look at how Germany achieved this “success”.You assume that it is possible for everyone to be like Germany (ie have surpluses) when by definition someone’s surplus is someone else’s deficit.If we all tried to live off exports then NOBODY would manage to live off exports.Germany only managed to create export led growth because everyone else didnt try to do the same thing.Why is this so hard to understand?

      Your examples are perfect demonstrations of fallacy of composition.Germany is not alone, Greece is not alone.You cant imply that Greece can be like Germany without taking into consideration the rest of the economies.What makes you think that Greece is the only economy that tries to expand its exports?what makes you think that Greece will expand its exports and the others will just sit back and watch their market share erode?How can this end up in any way,other than being a race to the bottom for everybody?

    • Crossover – I equally hate to see you repeat yourself. We left this last time at you educating me as to where Austrian economic falls down.

      Anyway, I agree with the Austrian school which says Macroeconomics is fiction. It does not exist. The sources and videos I gave last time illustrate why I believe this to be so.

      I do not want to insult your intelligence but are you aware that the people running the economies of Europe & the USA are ALL believers in macroeconomics. Does this not set off even the smallest alarm bell with you that it might be flawed concept given the state and apparent fragility of these economies?

    • @Richard

      I just explained to you the reason why you cannot treat a whole economy as a household.Im all ears if you can show that we can all have trade surpluses.Im sure you will either get a nobel prize in economics or a nobel prize in astronomy because we need to export to aliens if we all are to have trade surpluses.

    • “Nature is naturally balanced”

      Sure is.But there cant be no balance with no floating rates.And even with floating rates you dont see actual balance,though the imbalances are mostly within sustainable limits thus normal inflation along with growth are able to restore the balances at a nominal level.

  • “Almost in a bid to defy my hosts I have said nothing so far about Greece. The reason is that there is little to say. Greece was the flimsiest, most corrupt, least entrepreneurial part of the Eurozone. These are the reasons why the domino effect started there. But it is not the cause of the domino effect!”

    So how do you convince a German, a Dane, a Finn, or a Dutch person that they should recycle their surpluses in Greece? What impetus would the parasitic, corrupt Greek state apparatus have to reform knowing that, by design, surplus money from the ‘have’ states would continue to flow into Greece, come what may? As a Greek living abroad who does occasional business in Greece, I bristle at the thought of the status quo in Greece maintaining.

    You might convince a German, a Dane, a Finn, or a Dutch person that Portugal, Spain, or Ireland deserve some support because they are the victims of property bubbles no different than Japan’s, or America’s. Things that can befall them too, should circumstances be such. But Greece had none of those things. Greece was simply extremely poorly managed, and the managers are still managing the place.

  • Thanks for “opening it to the public” :). I always enjoy things like that. Yes, as Eleni already said, if we could somehow get audio or some transcript if anyone there had written it, from Lord Lamont, that would be fine, but I guess it’s not easy to find.

    Lord Lamont was one amongst the few who in 1975 favoured Margaret Thatcher – as a thanks he immediately got, as she was in power from 1979 on, good “junior posts”, as I wrote. I have to admit, off topic here, the Thatcher-years always make me shudder…her incredible one-sidedness, the effects she had later, not only in the UK…a bit of a desaster for Europe, really. Well, the 30% richest would, with a reason, if rather a selfish one, strongly disagree.

  • BRAVO BRAVO BRAVO !
    Keep it up Yani.
    You are spot on every single time for the last 3 years.
    Now, you could do our country a great service if you drafted a (secret ?) PLAN B for Grexit and send it to Sturnaras. Cause in 2013 Greece goes bust… (officially)

    • Konastantinos – If I can correct you on one thing. It is not Greece that is on the verge of going bust it is the Greek government. I just hope the Greek government goes bust before it takes down the Greek people because they way things are going I would say that is a very real possibility.

  • Dear Yanni,

    I just listened to the Samaras interview after the summit. It sounded as if they have committed on the modest proposal.
    1) OMT will go on, IMF objections will be “politically resolved”
    2) Banking union will be on the table by end of the year
    3) EIB is being given 60 bn/ yr for 3 years (he didn’t say where the 50% national contributions will come from, but he did mention the structural fund will be unlocked… somehow).

    I am eagerly awaiting your expert analysis.

    • Will never happen. They all mean something dufferentwhen they talk about it.

      No German in his right mind would leave his funds with a German bank when the risk would to be pooled with the ClubMed banks.

  • In reply to Martin :”Wasn’t part of the problem that Germany (and other “surplus nations”) invested TOO MUCH in Greece etc in the first place?”

    Martin I’m not sure if you are familiar with the nature of German economic activity in Greece.The main thrust of their activity was in the securing of lucrative ,overpriced government contracts,via shady dealings with less than ethical Greek politicians.The other thrust was becoming a major shareholder in government owned profitable state monopolies e.g. OTE, but without attempting to modernise,reform or invest in their infrastructure.There was NEVER ANY investment in ANY productive Greek enterprise.I consider this policy cynical opportunism-not investment -so I stand by what I wrote previously.-

    • Plockton – “There was NEVER ANY investment in ANY productive Greek enterprise.” – You mean by government? Because I would say the average Greek business man or woman should get some sort of prize for operating in such a hostile environment and where they prop up the people that are creating that same environment

  • Μr Varoufakis

    it seems that the European banking union that You predicted will never happen has been decided in the last eurogroup. It will be implemented gradually from the start of the new year and by the beggining of 2014 it will cover all 6000 european banks. Do you still believe that Germany will not allow a european authority to supervise its banks?

    • I hope you are right. But I have no doubt you are wrong. They will, indeed, ensure it does not happen. At least, that it does not happen before the Spanish bank recapitalisation costs are lumped onto Spain’s national debt.

    • Dimitris – What Yanis proposes is what is going to happen. Whether Yanis knows it or not he is a key spokesman for ECB, the EU and the International banks in Europe. Again, I obviously respect Yanis but he believes in the same economic theories as the people who caused the problems and his solution is also the same as theirs.

  • @Richard

    My poor fellow because you happened to see some BMWs and Mercedes in Germany does not mean that they are avid consumers.Just take a look at the data showing their average wage compared to GDP over the past decade Your economic arguments (like VSS’s) are grounded in pre-European (that is pre-1945) nationalistic views of political economy – which are now redundant.Your standpoint could perhaps be justified if you were either a pound sterling cheerleader or an avid reader of Der Bild.Some people just never see the economic brick wall when it hits them.

    • Plockton – “because you happened to see some BMWs and Mercedes in Germany does not mean that they are avid consumers.” Okay, what data are you using to say Germans are not as avid at consuming as Brits? Please state your source

    • Crossover – “With Richard you will even have to provide sources to prove that the sun rises from the east.” – God forbid someone might have to backup something that they state is fact. And to highlight why this is so important let me address the source you give.

      You gave a graph without any context which meant I had to find out where the graph had come from which was here http://libertystreeteconomics.newyorkfed.org/2012/05/euro-area-spending-imbalances-and-the-sovereign-debt-crisis.html

      And the original source of the article is this http://www.newyorkfed.org/research/current_issues/ci17-5.pdf

      Now if you had taken the time to properly analyse the article you would have noticed that on page 5 of the report there is a table which shows Germans were second only to the Irish with regards to the level of household debt as a percentage of income. And this figure shrank to second from bottom with only Greece being more thrifty than Germans. Hardly the sign of country in which consumption is a moral sin. Just as well someone ask for sources.

      But in the interest of peace and to show I have no preconceived opinions here is a graph which sort of backs up your argument but I’m still not sure if the French or the Italians consider consumption more of a moral sin that Germany http://www.economicsinpictures.com/2012/02/household-debt-as-percentage-of-gdp.html

    • Dear Crossover
      Interesting statistics. As one might expect, German private real consumption spending rose a lot less in the years 1999 to 2011 than that of Greece and most other countries of the “periphery”.
      Remarkably for me, Portugal was relatively modest in terms of consumption increase.
      While Greece stood out with an increase of 60% in the years 1999 to 2008. That was a bit much of an increase, don’t you think? It appears so – at least in hindsight…
      By the way: It is really not that easy to compare these kinds of statistics and then come up with “the truth”. Germany in the 1990ies for example had increased its salaries a lot (in part due to political reasons by pushing up salaries in formerly communist eastern Germany) so probably by 1999, the situation of Germany was quite a lot less favourable than that of Western Germany in, say, 1989. So I believe a lower increase in the period from 2000 was bitter for German consumers but necessary. Anyway, there is no doubt that German private consumption has only grown very moderately in the years from 2000 – and that that of e.g. Greece has grown by far too much.
      No rocket science to see what may be right for the next few years: German consumption may rise a bit more and that of e.g. Greece a lot less – or, actually, fall.

    • @Richard

      Household debt by itself doesnt explain consumption.Why would the German private sector need the same amount of debt as say the Greek private sector, while they run an external surplus and a small budget deficit?Which means that the German private sector gets added net financial assets from 2 sides (government and extenal sector).

      And excuse my comment, but you would be the only one to argue that the German economy doesnt have weak domestic demand.

    • @Martin

      you are absolutely right about the greek private debt skyrocketing.Actually its the private debt that helped sustain large external deficits while during the same period government debt remained stable, until 08 where the large budget deficit was a result of the automatic stabilizers due to the recession.

      I found a very interesting analysis on this topic a few days ago: http://kkalev4economy.wordpress.com/2012/10/20/looking-into-the-greek-euro-era-from-a-sectoral-balances-approach/

      and also this: http://kkalev4economy.wordpress.com/2012/10/22/greece-goods-imports-exports-and-reer/

    • Im sorry i misread the reply regarding household debt, and my reply above might sound nonesense.

      “hardly the sign of country in which consumption is a moral sin.”
      Well actually i didnt claim that Germans consider consumption a sin and thats why they dont consume (however if you translate debt in German one of the words you get is the equivalent of sin).The only reason Germany has weak domestic demand is the deflationary policy they imposed during the 00s.Add to that,that Germans in general are considered as big savers and you get an explanation for what you see on the graph.

  • Again when Cuba was cut off from Soviet capital (energy) flows it did not stop dead for lack of token money.

    How absurd !!!!!

    Another example of whats really happening in Spain.

    http://www.panoramio.com/photo/74586978

    A energy crisis yet these units must make a profit , which means more leakages of domestic demand……

    es.wikipedia.org/wiki/Tranvía_de_Vélez-Málaga

    “Suspension of service since June 3, 2012 – the tram has stopped working due to lack of budget for maintenance”

    which means they cannot find the tokens for LABOUR – not energy , they are force feeding us oil and the medecine is not good for us , its good for them

    Read more at http://www.nakedcapitalism.com/2012/10/greek-society-unravels-under-austerity-measures.html#LIvcRVA8KTIsxmq7.99

    • Welsh_Biker – It will be interesting to see how they go about it. This has the possibility of ending very badly, or they could simply bury any bad news and say everything is Aok. Personally, I predict this is the last we will hear of it.

    • Its 2012.
      41 years since we abandoned gold backed currencies.What you posted has nothing to do with Germany reintroducing a metal backed currency.

    • Biker did not say gold backed currency, he said saound currency. I guess he meant something like the DM was, which was also not gold backed in the end.

      It certainly helps credibility to have lots of gold if you want to introduce a new currency. Let´s hope the germans do this, then we have more alternatives in Europe to put our savings. – Noone inhis right mind wants to hold his savings in EUR.

  • Yanis,
    Thank you for an informative evening at the Greek Community Club in Lakemba, Sydney last night. Really enjoyed your talk. It is rare to hear someone who can merge recent sociopolitical history with economics in such an informative and energetic manner.

    A real shame about the questions that were put to you afterwards though – apart from the first one or two, in my view, the remaining questions were unfortunately from an older crowd with inflexible ideologies that were framed 3-4 decades ago. The world has evolved and changed since then and we must move on.

    If you could please pass on the following feedback to the organiser it would be greatly appreciated:
    – A big thumbs up for organising your talk
    – We really should be using talks such as yours as a reason for the next generation of Greek Australians to get together and learn from each other. You may have noticed about 95% of the crowd were retirees.

    My experience is we have an educated 2nd generation of young(er) Greeks between mid-20’s and mid-40’s and there is nowhere or no reason for us to collaborate. (Two exceptions (1) Unless you are a strong supporter of the Church and the Orthodox spirituality is you prime motivator, or (2) the Annual Greek Festival).

    If this continues to be the case, there are many Greek Australians of our generation who will simply assimilate into the Australian ethos (a good thing), but at the expense of losing much of our Greek heritage (a bad thing).

    Hopefully some food for thought. My thanks again to yourself and the organiser.