The former and controversial Greek finance minister, Yanis
Varoufakis, has written an interesting but somewhat frustrating book. Its main
theme is that the breakdown of fixed exchange rates anchored by the U.S. dollar
under the Bretton Woods System in the early 1970s led the Europeans to take
steps to form a monetary union, which eventually led to the creation of the
euro. While this worked for a while, the euro was a deeply flawed idea. At
first, banks were pushing loans in the periphery countries because their view
was that the creation of the euro reduced risk. However, when the economies of
these countries were hit by the 2008 financial crisis, the bubbles created by
this excessive lending burst. The European Union (EU) had no good way of
dealing with this, and the policy decisions were being taken behind closed
doors by the Eurogroup, an unofficial but powerful body of the finance
ministers of the countries of the Eurozone. Varoufakis argues that this way of
making decisions has no democratic legitimacy.
When it comes to the euro and its flaws, Varoufakis is, of
course, correct. He points out that the EU is not like the United States, where
major fiscal policy is made at the federal level. The lack of a banking union
and European-wide deposit guarantee fund also compounds the problem. As
Varoufakis points out, if banks in Nevada, for example, run into problems, say
because the real estate market there has collapsed, there is no insistence that
the State of Nevada come up with the money to deal with the insolvency of banks
located in Nevada. The FDIC does this.
In addition, Varoufakis puts much of the blame on inept policy
to deal with the aftermath of the 2008 financial crisis on Jean-Claude Trichet,
the Frenchman who was President of the European Central Bank from 2003 to 2011,
and German Finance Minister Wolfgang Schäuble. The tight money policies of
Trichet were certainly a mistake, and Schäuble continues to appear to be both
undemocratic and wanting to make an example of Greece in order to frighten
other countries to follow his preferred policies.
Varoufakis does not consider how much the system was to
blame for the economic distress in the periphery and how much it was due to bad
decisions by political actors, though he makes a convincing case against both.
Also, he appears to go easy on Mario Draghi, the Italian who succeeded Trichet.
Varoufakis clearly admires Draghi, but it was the ECB under him which increased
the pressure on Greece by refusing to allow the Bank of Greece to make further
collateralized loans to Greek banks on June 28, 2015, thus creating a cash shortage
in Greece and long lines at ATMs. It is not clear whether this was something
Draghi wanted to do or whether he was pressured to do it. (My discussion of
this and other matters relating to the Greek crisis can be found here.)
When he discusses the United States, Varoufakis makes some
errors that do not matter that much to his argument but are annoying nonetheless.
For example, he identifies Medicare as being in place at the time of the
Bretton Woods negotiations. Also, he states that “after 1965, the New Dealers
and their successors lost every domestic battle they fought against the
resurgent Republicans.” Ask any Republican whether they think this is true.
More importantly, I think Varoufakis mischaracterizes Paul
Volcker’s intentions. He makes a lot of a
speech that Paul Volcker made in November 1978 at Warwick University when
he was still President of the Federal Reserve Bank of New York. This speech is
not a model of clear writing, but, as I read it, Volcker’s main point is that
the Bretton Woods system eventually became unsustainable and needed to be
replaced. He argues that there was no replacement which could guarantee that
there would be no future crises, “but,” he states, “a crisis can also be
therapeutic – it forces a response.” Varoufakis, though, claims that what
Volcker is really saying is that “if America cannot recycle its surplus, having
slipped into a deficit position back in the mid-1960s, it must now recycle
other people’s surpluses” through financial intermediation. I do not see where
Volcker says that in his speech.[1]
Moreover, Varoufakis argues that the primary reason Volcker
raised interest rates when he became Chairman or the Federal Reserve Board was
not to slay inflation but to preserve American dominance of the international
system. He claims that the “Warwick speech had given the Europeans ample
warning” (p.77). This is unpersuasive. Anyone who remembers the end of the
Carter Administration and the beginning of the Reagan Administration knows that
inflation was the primary concern. And U.S. economic dominance is not what it
once was. In short, Volcker was trying to solve an immediate and serious
problem.
In general, while Varoufakis’s discussion of American
policymakers from the New Deal on is unconvincing, his analysis of the problems
with the euro are on point. But that leaves the question of where Europe goes
from here. With all its faults, Varoufakis believes in the EU; he is currently
involved in convincing U.K. voters to vote for remaining in the EU. He ends on
a hopeful note, making reference to a statement Gandhi made when asked about his
thoughts on Western civilization – “It would be a very good idea.” Similarly,
Varoufakis thinks that European Union would be “a splendid idea” and he thinks
that Europeans can “pull it off” (p.251). The problem is nothing in his
analysis supports his hopes.
[1]
It would add to understanding if both Varoufakis and Volcker had made clear their
definition of “deficit” or “external constraints of the balance of payments.”
In the last half of the 1960s, both the U.S. trade balance and current account
balance (goods, services, income (investment and compensation), and transfers (including remittances)) were not in deficit. They may be referring to a balance of payments measure in use then but not much
discussed today, the basic balance, which includes long-term capital flows as
well as current account transactions. They may also be referring to the
official reserve transactions balance, which includes everything except changes
in a country’s official reserve position. Nowadays, when someone says balance
of payments surplus or deficit, this usually refers to the current account
unless the context clearly indicates otherwise.
