The Eurozone After Brexit – Die Zeit (in English and German)

20/07/2016 by

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For the German language version, as published in Die Zeit on 18 July 2016, click here. For the English version (as I wrote it originally)…

The euro has failed, both as an economic and a political project. Moreover, its failure is tearing the European Union apart. Can Europe respond creatively to stop this deconstruction?

By Yanis Varoufakis

Brexit would not have happened if the Eurozone had not failed so spectacularly. Its impact on the EU’s future will hinge on whether the euro’s economic and political failures can be reversed. But they will not be reversed by codifying in some new Treaty the features that led to its failure.

Economic failure

The euro’s economic rationale was that it would help our economies converge. That, by eliminating the danger of devaluation and the transaction costs of doing cross-border business, investment would flow efficiently throughout the Eurozone leading to a convergence between per capita incomes, employment rates and the state of public finances. Unfortunately, the opposite happened on all fronts.

As the ECB admitted in July 2015, the euro pushed the Eurozone economies further apart. A 2013 International Monetary Fund report demonstrates that capital flows from Eurozone creditor countries (e.g. Germany) into the non-Eurozone EU member-states (e.g. the Czech Republic, Poland and Hungary) took the form of productive direct investments whereas flows into Eurozone member-states (like Portugal and Greece, where FDI investment inflows peaked before the creation of the euro) were, mostly, bank loans that inflated bubbles.

The euro’s main effect was merely to replace the risk and pain of devaluation that afflicts creditors with the risk and pain of nominal income losses that fall on the shoulders of the weaker Europeans.

Political failure

Perhaps the worst manifestation of the Eurozone’s political failure is the type of question its leaders pose at difficult moments.

When a major crisis hits the United States, as in 1971 or 2008, Washington decision makers gather around the table to answer a simple question: “How shall we stop this crisis from consuming us?”

But when the euro crisis hit the Eurozone, its decision makers posed a very different question: “How shall we pretend that the ‘rules’ of the Eurozone are still valid now that they are unenforceable?”

The answer to the second question, the one Eurozone leaders pose, is never a good answer to the first question, the one American officials ask. Indeed, the ‘European question’ points to answers that cause the crisis to deepen.

Take for example, the determination to maintain the pretense that the Greek debt does not need to be restructured before Greece starts recovering sufficiently to repay it. Or the fantasy that Italian banks can be re-capitalised, and their non-performing loans cleansed, in the context of a banking union that exists in name but not in substance. These are two examples of how Europe favours the subterfuge that the ‘rules’ are valid over the actual resolution of debt and banking crises. The result is not only unnecessary suffering for Greeks and Italians but also terrible repercussions for Germans, e.g. negative interest rates eating into their pensions and savings.

When the hope of stability, convergence and shared prosperity is replaced with the reality of instability, divergence and the demise of pan-European pursuits, it is no great wonder that most Greeks, Italians but also Germans, from both the Left and the Right of the political spectrum, turn hostile to the single currency, indeed to the EU that spawned it.


While Britain mercifully stayed out of the euro, the traditionally difficult relationship between the British public and the EU has been made far more difficult as a result of the euro crisis’ mishandling.

For many months prior to the UK referendum, representing DiEM25 (the Democracy in Europe Movement, inaugurated in February 2016), I campaigned in England, Scotland, Wales and Ireland arguing against Brexit. My call to British audiences, coming from one that could not be accused of blind faith in the EU’s institutions, was: “Let’s stay in the EU to democratise it so as to make possible the adoption of rational policies that restore the dream of a shared pan-European prosperity”. Alas, wherever I went, two rejoinders came from my audiences: “How can you ask us to vote to stay in the EU given its hideous treatment of your government, and your person, in 2015?” And, secondly, “We cannot afford to permit as much EU-sourced immigration as we now have.”

These two rejoinders contain the kernel of the reason why Brexit won. Many British voters were turned off the EU by the Eurozone’s gross authoritarianism which is necessary to keep imposing failed policies. And they were turned off by an influx of EU migrants into Britain as Spaniards, French, Italians and Greeks (in addition to eastern Europeans) sought an escape from the Eurozone’s stagnation.

What now?

Since Brexit won, I observe two types of reaction in the EU’s major capitals:

  • Business-as-usual responses, founded on optimism that the turbulence caused by Brexit will deflate anti-EU ‘populist’ parties, helped by the harsh treatment of the UK to deter similar secessions
  • Moves toward a political union reflecting Wolfgang Schäuble’s ideas for a trade-off where Berlin will agree to a small Eurozone-wide common budget in exchange for the Eurogroup President’s right to veto national budgets.

My great fear, as a Europeanist, is that the EU cannot survive either of these two responses. Business-as-usual cannot deliver, even if the Brexit turmoil stems the centrifugal forces for a while. As for the minimalist political union favoured by Dr Schäuble, the Bundesbank and even the Banque de France, it is pure illusion to think that a macro-economically insignificant Eurozone budget can (a) stabilise Eurozone economies caught up in a vicious tailspin and (b) convince a majority of Europeans to support the necessary new Treaty.


Put differently, today the Eurozone needs a large-scale, macro-economically significant investment program that no politically feasible fiscal union can deliver today. To save the EU, we need to deploy existing institutions, and within existing Treaties, in a manner that breaks radically with current policies. Technically this is straightforward. Politically it requires a pan-European political movement, like DiEM25, to confront existing prejudices and widespread anti-democratic practices.

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