For most of us, the phrase “global financial order” might sound rather abstract. It might bring to mind the financial instruments that light the fires of the “one percenters” rather than the daily drudgery of commuting to work, picking up the kids and making ends meet. However, as Varoufakis makes clear, our global financial order wasn’t created for financial magicians but constructed from the most basic of economic needs: to ensure that the money we take home from work at the end of the week has value; that it will literally serve to bring home the bacon.
While inflation might not be the great bogeyman of today’s economic environment, it certainly was for the past hundred years. Anyone who lived through the 1920s or the 1970s could see the damage it can wreak. As children, we were all told that money doesn’t grow on trees; the reality is that if it does – if money is printed heedlessly – it turns out to be worthless. We would then soon devolve into having to provide directly for ourselves by means of self-sufficiency and, where possible, barter, swapping apples for oranges over the fence in an effort to make sure we have what we need to stay alive – a “good life” that, it turns out, is not so good after all.
Varoufakis neatly describes how two world wars and the ravages of hyperinflation left Europe without a reliable currency. The immediate solution was to fix European currencies to the dollar and, in turn, to make the dollar convertible to gold. This provided an anchor for European currencies, with the US steering the ship. Unfortunately, as European growth outstripped that of the US, America was no longer able to carry the weight of other currencies and the fixed exchange rate system broke down. It is in the wake of the downfall of this Bretton Woods system that the euro was later born.
Unfortunately, and as Varoufakis brashly explains, both past and current attempts to solve the problem of inflation by fixing currencies have been seriously flawed, and it’s a flaw that John Maynard Keynes, like the mythical Cassandra, knew only too well. Where countries are fixed to one another but expand at different rates, trade imbalances soon arise: exporting successes countered by exporting failures. Without the ability for the weaker country’s currency to adjust downwards, making its economy more competitive, it has to rely on the downward adjustment of wages and prices to do the job, which can be very painful. Alternatively, it can borrow from the surplus economies to plug the gap, but with a potential debt hangover. While you may imagine that eurozone bailouts have helped struggling nations, according to Varoufakis what they have really done is to protect the lenders: the bankers who would have otherwise had their fingers burned by debt default. For countries such as Greece, unable to escape the debt or to devalue, there is seemingly no way out.
Varoufakis persuasively concludes that, ultimately, the euro cannot succeed unless a better way of solving trade imbalances is found: simply leaving it all to the weaker economies to cope with will result in a dangerous deflationary bias. And, paradoxically, that is a problem that can be just as damaging as the inflation that the system was set up to avoid in the first place.
Victoria Bateman is fellow and director of studies in economics at Gonville and Caius College, Cambridge. She is author of Markets and Growth in Early Modern Europe (2012) and a regular contributor of economic commentary for CapX.
And The Weak Suffer What They Must? Europe, Austerity and the Threat to Global Stability
By Yanis Varoufakis
Bodley Head, 336pp, £16.99
Published 6 April 2016