Yanis Varoufakis, the new finance minister of Greece, has been dubbed a “rock-star” by newspapers as he begins negotiations with his European partners over securing a new bailout deal for the country. But what do we really know about his views on the problems facing both Greece and Europe as a whole?
Varoufakis is a keen student of game theory — the analysis of competitive, strategic decision-making situations where the outcome of one participant’s choice depends on the actions of other participants. He even wrote a book on it.
Although the narrative of “a master game theorist taking on Europe’s elites” is tempting, it tells us little about how he actually views Europe’s core problems, and what we might expect him to push for. Instead, his work on the euro crisis in recent years might be more illuminating.
In an interview I did with him in 2013 he told me that the greatest trick eurozone leaders had pulled was convincing the world that Europe’s problems were really those of individual countries within the monetary union:
They are prepared to spend quite a lot of money in order to remain in denial about the systemic nature of the crisis. In the case of Greece, for example, they have spent a huge amount of money failing to fix the situation but what they have succeeded in doing is convince people that it is fundamentally a Greek crisis.
So what does he think are the central problems facing the single currency? Basically, he believes that giving Greece aid in the form of debt creates a debt burden larger than the Greek economy will ever be able pay off.
In a 2013 paper he listed some of flaws in the euro’s design:
(a) a monetary union whose very design removed internal shock absorbers while, at once, magnifying both the probability and the magnitude of a future crisis,
(b) a political response to the (preordained) crisis that involved the creation of toxic bailout funds which accentuated the crisis,
(c) the underlying macroeconomic imbalances which are in fact deepening, thus rendering the European Union’s fiscal and monetary strategies logically incoherent, and
(d) a European Central Bank whose decisive intervention to offer medium term financial stability came at the price of reinforcing long term disintegration.
The paper claims that the interplay between these factors helped to drive Europe’s crisis and, more importantly, that the previous efforts made by politicians and the central bank to alleviate the region’s economic woes have in fact exacerbated the underlying problems. That is, the price of supporting a country in trouble is deepening the fissures between creditor countries and the recipients of the aid.
This explains the reluctance of the new Syriza-led administration to continue with the plan agreed by Greece’s previous government with the Troika (the European Commission, the European Central Bank and International Monetary Fund) and their refusal to accept €7 billion in bailout money the country was due to receive. In his analysis, accepting that money would simply be prolong or worsen the problems that his country and the eurozone currently face.
But Varoufakis also has a theory of how Europe can save itself from repeating the mistakes of the past. He calls his manifesto — the Modest Proposal.
In it he and his co-authors propose a European New Deal which would provide the much-needed support for the region’s economy but also, crucially, “fall entirely within the constitutional framework to which European governments have already agreed”. The key elements are:
- recapitalisation of struggling banks directly on a case-by-case basis by the European Stability Mechanism bailout fund, rather than having to go via national governments,
- investment for small and medium firms in struggling states financed through existing European bodies such as the European Investment Bank (EIB) and the European Investment Fund (EIF), and
- guaranteed access to nutrition and to basic energy needs for all Europeans, by means of a European Food Stamp Programme.
Though Varoufakis will clearly be focusing on the immediate requirements to secure a new agreement for Greece as he meets with the ECB today, it is nevertheless interesting to see how he views the ultimate solution to Europe’s rolling crisis. In the end it comes down to whether there remains sufficient commitment to the euro project by both creditor countries and recipients of aid to prove the trust necessary for further integration.
As he told me in 2013: “It’s clear that European leaders are pinning all their hopes on a global recovery lifting them up, but I don’t think that’s really possible. I think they will be seriously disappointed.”
Whether you agree with it or not, his work clearly demonstrates that Varoufakis is at heart an optimist about the single currency. He just thinks that the people charged with ensuring its future could be doing a much better job.
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