Austerity (Yanis Varoufakis)

I first discovered Yanis Varoufakis, the left-wing author and economist who briefly served as ministry of finance for his native Greece in 2015, upon reading Talking To My Daughter About Economics. This was a short and popular introduction to the history of economics, which whilst unquestionably partisan, it was nonetheless an enjoyable read. Varoufakis is better known for his recantation of the Greek financial crisis and general critique of modern financial capitalism, from his works And The Weak May Suffer What They Must?, and Adults In The Room. Austerity is a short (a little over 100 pages) polemical summation of Greece’s treatment at the hands of the Eurozone countries and the ECB in the wake of the financial crisis. Whilst this book is about as one-sided a description of the crisis as one is likely to find, the facts chime with other accounts, and Varoufakis’ indignation is clearly justified. 

In Stephanie Kelton’s The Deficit Myth, she argues that government treasures issued by countries as reliable as the USA are equivalent to interest-paying money - essentially that perfectly safe and liquid bonds for all intents and purposes, are money. This helps explain why prior to the financial crisis, collateralised mortgage bonds, given triple-A ratings, caused a bubble. If a firm is able to aggressively loan to households, and turn these loans into ‘money’ the risk of which is deemed virtually zero (and regardless isn’t housed on the books of the lender - so the risk for the lender really is zero), a money-machine is created until such time as the truth - that loans are in fact not perfectly safe - becomes evident to all involved. The machine helps expedite its own demise by fishing for the raw materials it requires - the home loans - in ever shallower waters. Thus the loans are increasingly risky the longer the money machine is allowed to exist. 

Varoufakis recounts how, adding to the “de-risking” effect of collateralised debt, from 1998 there emerged a second supposed opportunity for easy money for the banks of central Europe. Since the Eurozone member states believed that the Euro would need to be permanent in order that it be stable, there was (and is) no provision for how a country could ever exit the Euro having adopted it as a national currency. Therefore reasoned the banks of Germany and France, lending to countries in the Euro no longer held any currency risk (previously, Spain may devalue the Pesata against the Deutschemark in order to restore competitiveness). Since Germany was a net exporter to countries like Spain, Italy and Greece, money was far cheaper in Germany (owing to its abundance), and so French and German banks had a bonanza lending to the Southern countries as well as Ireland - earning high returns, whilst creating a credit-fuelled construction boom in the borrower nations. It also helped that unlike in say, Britain, these countries generally had low levels of indebtedness prior to the banks' battle for market share. As long as PIIGS countries (Portugal, Italy, Ireland, Spain) experienced high growth, this increased indebtedness wasn’t a concern. And so when the financial crisis hit in 2008 and a worldwide downturn ensued, the money machine immediately became exposed for the folly it was. 

In 2010, for every 100 euros of income a Greek worker made, the state owed 146 euros to foreign banks. By 2012, after intervention and loans from EU countries and the ECB, that 100 euros earned had shrunk to 79 euros, while the debt had grown from 146 euros to 156 euros. The story of the utter failure of all parties involved to help the Greek citizenry out of the mire can be told in purely technical terms; in addition though, Varoufakis alleges more sinister motives by the bureaucracy in Brussels, and the politicians in the northern states. 

The primary folly of the policy response to Greece’s evident bankruptcy in 2010, was, according to the author, to identify it as a liquidity problem. Since there was no possibility of Greece paying back it’s loans, it would ordinarily face one of several options - firstly, it could declare it’s inability to pay and negotiate a ‘haircut’, in which creditors would accept reduced repayments (say 25 cents on the Euro). Alternatively an indebted country could ask for a bailout from creditor nations. In the case of Greece, neither was an option. The Eurozone had strict rules prohibiting member states being bailed out (intended to encourage good practice in the first place), and equally strict rules prohibiting debt default. French and German politicians had been vocal in their opposition to the large U.S. stimulus packages as a response to the financial crisis, lamenting the recklessness of American banks. Now they were in a position where Greek (and the other PIIGS) default on loans to their domestic banks would be disastrous for the German and French economy, but politically, it would be untenable to ask for taxpayers at home to pay the debts of a foreign country. The Greek state was highly inefficient at tax collection, and riddled with corruption and inefficiency so they argued, and had to put it’s own house in order. Varoufakis makes no mention of this accusation or the degree to which Greece itself can be blamed for it’s position in 2010; nevertheless, whatever truth there is in such accusations, the scale of the problem eclipses tax evasion as a root cause. 

The position in which Greece found itself from 2010 to 2015, was one of deferring any real solution to the problem, whilst simultaneously inflicting massive pain on the Greek population. Ordinarily a country in Greece’s position would slash interest rates and devalue the currency, making its goods and services cheaper abroad and stimulating domestic demand. Since Greece was in the Euro, it had to accept the Eurozone’s interest rates (artificially too high for Greece), and it’s exchange rate with countries both inside and outside the Eurozone remained unchanged. In the absence of the option of monetary stimulus, the only option for Greece would be fiscal stimulus, where the government runs a deficit in order to stimulate demand and grow the economy. Unfortunately, the loans from EU countries and the IMF came attached with stipulations of an austerity programme, forcing the Greek government to cut spending and raise taxes, supposedly in order to pay down debt. This is a classic folly. By taking money out of the economy, demand shrinks, causing the economy to contract, making tax receipts smaller; having the opposite of the intended effect. The fallacy of treating a country like a household, where income and expenditure are independent variables couldn’t be better illustrated than by the Greek example. 

Furthermore, the loans Greece was taking on to pay back debt were going immediately to French and German banks, meaning that despite those banks obvious recklessness in lending in the first place, their domestic politicians were shielding them from any losses, at the expense of the Greek people. So over a period of years, the IMF, Eurozone countries and the ECB precipitated a transfer of wealth from domestic taxpayers to domestic banks via Greece, without at any point reducing Greece’s overall debt - in fact increasing indebtedness because of the detrimental effects of enforced austerity, and an absence of a sovereign monetary policy. 

This state of affairs can be blamed at least partially on the misguided ideas of those who favoured fiscal responsibility. However correct they were to be against piling up mountains of debt during a boom, austerity during a recession is no less of a perverse act. More troubling is the suggestion by Varoufakis that the austerity imposed on Greece was intended as a warning to the likes of Italy and Spain, by ECB bureaucrats against debt default or fiscal recklessness. In a telling anecdote, upon becoming finance minister Varoufakis cancelled an order of 750,000 euros for two armoured BMWs for his ministry, as well as consultants costing ‘tens of millions of euros’, whilst simultaneously overturning the redundancy of a few dozen cleaning staff. Officials in Brussels were, he says, enraged by the symbolism of keeping on the cleaners, regardless of the net gain from the cuts he made. That some measures were about punishing Greece or ‘warning’ other states is of course difficult to ascertain, but his anecdotes are convincing. A more important issue than the suspect motives of bureaucrats in Brussels, is their lack of democratic accountability. The aim of making what is unquestionably a political process apolitical is the great weakness of the European project, and the smaller, economically weaker states are the losers in such a process. Search the video ‘Vincent Browne versus ECB official’ to see an example of the author’s point. 

Surprisingly, Varoufakis tells of meeting the British Chancellor George Osborne in 2015, and of how cordial their meeting was. Osborne and the Conservative government at the time preached austerity as the solution to the enormous public debt in Britain, so one would expect the pair to be at odds. That they weren’t has two explanations. Firstly, the austerity being implemented in Britain was virtually non-existent compared to Greece. During his first 2 years as Chancellor, from 2010-2012 Osborne actually increased government spending by 6.9%. Secondly, and more importantly, was the overall policy mix in the United Kingdom compared to Greece. One may can pursue an expansionary fiscal and monetary policy up until the point of excessive inflation, or do the reverse up until the point of a slump. Osborne’s ‘Austerity’ consisted of (very slight) contractions in fiscal spending, with expansionary monetary policy, in full cooperation with the Bank Of England. In effect, fiscal spending was held so that interest rates could remain near zero - interest rates being especially effective in a country such as Britain with high home ownership. Certainly, this policy mix was driven by ideology (both tax policy and commitment to low interest rates had a redistribution effect in favour of the rich), but it was ultimately an expansionary one (many commentators feel that in hindsight both Britain and the U.S. were wrong to fear inflation, and that a continuation of a stimulus policy would have led to a stronger recovery).

The point though, is that British austerity was fundamentally different to what happened in Greece. 

In Greece there was no inflationary offset from monetary policy. In fact, the intention of the austerity in Greece could be described as a ‘real devaluation’ - meaning that the intention was to restore competitiveness by a fall in real prices and wages in the economy. This sort of ‘adjustment’ harks back to the doctrines of classical economists. When countries were committed to the gold standard, it was impossible to devalue a currency, and so painful downward adjustments were expected to restore equilibrium in an economy. That fact that this didn’t happen, or when it did the process was slow, distortive and destructive, is why Keynes found so much success with his General Theory. Wages are ‘sticky’ and tend not to adjust downwards easily, and anyone with fixed nominal debt is ruined by downward price adjustments. As Varoufakis says, if austerity in Greece was to truly lead to the necessary price adjustments, “no sane investor is attracted to a country whose government, banks, households are all insolvent at once.” This is a serious problem with a common currency between very different countries. If a state in the U.S. had a slump, people could leave far more easily to another state where wages were higher, keeping the currency's real value constant across states. The language, legal and cultural barriers in the Eurozone mean far lower mobility of labour occurs, and so a natural adjustment is not nearly as likely.

Like Talking To My Daughter, Austerity is enjoyable and easy read, containing surprisingly deep economic insights in a short and narrative-filled book. This is not a socialist critique of finance capitalism, but a nuanced assessment of the European politico-economic state of play. Certainly, one comes away from it feeling that to have entered the Euro would have been catastrophic for Britain. The toxicity of political manoeuvring would be even worse were an economy the size of Britain (unaligned as it is with Germany's trade cycle) also had to campaign for changes in interest rates. Many of the more outrageous claims (for example, German & French ousting of Italian and Greek heads of state) would I think, seem like exaggerations had I not read the more sober and comprehensive Crashedby Adam Tooze and The End Of Alchemy by Mervyn King, both of which corroborate almost everything the author says here. To get a more comprehensive overview of the financial crisis, it would be better to read Varoufakis other books, but as a readable introduction, Austerity is a great way to spend a few hours.