End of the euro is nigh without radical EU-wide reforms

In the following interview, conducted before his appointment as Greece's finance minister, Yanis Varoufakis offers his insight on the fragile state of the global financial system and the eurozone and warns that continuance of current policies is a recipe for disaster.

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IT'S not often one gets to interact personally with their heroes, so it was with great relish and delight that I grasped an opportunity to engage in intellectual swordplay with one of Europe's leading heterodox economists and political activist in his homeland, Professor Yanis Varoufakis of the University of Athens - courtesy of the new honorary Editor Emeritus of the Journal of Regulation & Risk - North Asia, Professor Steve Keen of Kingston University.

Before moving to the Question and Answer section of this article, it's necessary to give a brief introduction to Prof. Varoufakis for those unfamiliar with his work and personal background; a career greatly impacted by the 2008 financial crisis and subsequent woes of his country of residency, Greece, where presently he's running for election to the Greek Parliament as a standard-bearer of the Greek political reform movement Syriza.

A dual citizen of Australia and Greece, Prof. Varoufakis attended university at Essex and Birmingham in the UK and was awarded his PhD in economics also from the University of Essex. He began his professional career as a university lecturer, influencing undergraduates and postgraduates on three continents.

A prolific author and committed blogger, Prof. Varoufakis has published numerous academic papers and two seminal books on the 2008 financial crisis and its aftermath, these being The Global Minotaur: The True Origins of the Financial Crisis and the Future of the World Economy (London and New York: Zed Books) and Modern Political Economics: Making Sense of the Post-2008 World (with J Halevi and N Theocarakis; London and New York: Routledge).

A leading figure in the heterodox economics movement and vociferous critic of economic and monetary policy conducted after the great financial crisis on both sides of the Atlantic Ocean, Prof. Varoufakis is much in demand by journalists and on the international speakers' circuit. As such, the staff of the Journal and I thank Prof. Varoufakis for taking valuable time out from the Greek election campaign to share his valuable insights.

Chris Rogers: Prof. Varoufakis, since the demise of Lehman Brothers in September 2008 and the ensuing great financial crisis (GFC), it would seem rather obscene that central bankers and monetary policy have been obsessed with 'deflation', rather than remedying the actual causes of the crisis itself. Is this a fair analysis?

Yanis Varoufakis: Central bankers and policymakers were obsessed not so much with deflation but with transferring the losses of financial institutions onto the shoulders of citizens. When this transfer produced deflationary forces, only then did they enter into quantitative easing (QE) territory in an attempt to stem them. Since then, they have been trying to contain deflation without doing anything that might restore a modicum of bargaining power to labour or income to the dispossessed.

CR: Given collapsing global oil prices, an emerging car loan subprime crisis brewing in the United States, slowdown in China and continued economic woes in Japan, together with fears over Greece igniting another round of sovereign debt crisis within the European Union, is it fair to say we may be entering a perfect storm again and a repeat of events similar to those witnessed in 2008?

YV: Whether the next phase of the global crisis will take the form of a major discontinuity or a slow-burning, ever-increasing loss of socio-economic potential is not something that we can predict. What is clear is that, under the current policy mix, the world is facing either what [Larry] Summers described as secular stagnation or another Lehman moment. Not a great set of options...

CR: Turning to the EU and the eurozone itself, would it be prudent for the EU Commission and European Central Bank to countenance the rapid introduction of a two-tier euro, specifically a 'hard' eurozone with federal Germany at its helm, and a 'soft' eurozone headed by France?

YV: If Europe continues the way it is now going, there will be no soft and hard euro. The euro will disintegrate, the result being a deutschemark zone east of the Rhine and north of the Alps and an assortment of national currencies everywhere else. The former zone will be gripped by deflation and the latter by stagflation.

CR: With reference to the second question and your response, is it correct, as many now argue, that the economic and social ramifications of the 2008 great financial crisis are greater in many G20 nations today than those suffered during the Great Depression of the 1930s?

YV: It is not useful to make such comparisons. While it is true that the crisis transmission mechanisms are more poignant now than then, let us not forget that 1929 set in train the process leading to the carnage of the Second World War: hardly a minor repercussion.

CR: Back to European matters and the development of a nascent banking union within the EU. Do you believe it wise of political and economic policymakers to concentrate on a 'banking union' when centrifugal forces within the EU are growing, rather than dissipating, presently?

YV: A banking union would be a godsend. It would break up the death embrace between insolvent banks and insolvent states. Alas, we created a banking union in name so as to ensure  it  never  happens  in  practice. And so the said death embrace continues.

CR: Is it not the case that recent US unemployment figures (December 2014) and the third-quarter 2014 GDP growth figure of 5% seem a little unbelievable, particularly given most statistical analysis that demonstrates all gains and more since the 'supposed' US recovery have accumulated within the top 5% at the expense of the average Joe on Main Street?

YV: If you look at the US labour market closely, you find that the number of Americans wanting a full-time job and not having one has remained more or less constant over the last few years. Employment growth has not kept up with labour supply which, in the United States, rises faster than in Europe. As for income growth, it is no great wonder that, courtesy of low investment and QE, asset price increases and share buybacks boost the income of the top 1% further, while wages are languishing on a filthy floor. And so macro data prosper while most people suffer.

CR: Since late 2014, and continuing during the first weeks of 2015, we have heard many Cassandra-like voices warning of a Greek exit from the eurozone should left-of-centre political parties gain power in late January's parliamentary election. Is this view overstated and fear-mongering, no less?

YV: It is pure fearmongering for the purposes of dissuading Greek voters from voting for Syriza. It is that cynical. The powers-that-be know that Grexit [Greek exit] would unleash destructive powers that they cannot control. So they are bluffing, hoping that Greeks will fall for this piece of terror a second time - after 2012. It looks as if they cannot fool the Greek voters twice.

CR: An economically prosperous EU would seem essential for the wellbeing of the global economy, given this assumption. What exactly are EU policymakers and the constituent member national governments thinking about in hailing austerity as a panacea, rather than implementing a massive fiscal expansion similar in impact to that of Marshall Aid nearly 70 years ago?

YV: You are making the wrong assumption that EU officials are in the business of promoting shared prosperity. I wish that were true. No, they are in the business of perpetuating their bureaucratic authority within an institution that was designed as a democracy-free zone and as a mediator between various powerful, oligopolistic vested interests for whom austerity is a golden opportunity to maximise their social power over the rest of society. And if gigantic unemployment and a humanitarian crisis is the result, so be it...

CR: A new Bretton Woods agreement and re-imposition of capital controls would seem more beneficial, rather than all the supposed 'free trade' orthodoxy we keep hearing about from both sides of the Atlantic. Would you agree?

YV: Capital controls have even been adopted by the IMF recently as essential shock absorbers and stabilisers. A new Bretton Woods agreement would need to configure what I call a global surplus recycling mechanism that prevents bubble-creating financial flows during the 'good' times and limits the extent to which the burden of adjustment falls on the shoulders of weaker nations and citizens during the 'bad' times.

Politically, the trouble is that, unlike in 1944, today there exists no equivalent to the then United States to convene such a conference and underpin the resulting agreement. Only the G20 can do this collectively. But with Europe in a state of comic idiocy and with the United States ungovernable, the prospects are dim.

CR: May we thank you for sharing your engaging and somewhat controversial answers with the Journal of Regulation & Risk - North Asia and bid you luck in your effort to seek elected office in Greece on 25 January. I - and the staff at the Journal - look forward to following your career, regardless of the outcome of the election.                                                         

Chris Rogers is Editor-in-Chief of the Journal of Regulation & Risk - North Asia, from which this interview is reproduced (Vol. VI, Issue 4, Winter 2015).

*Third World Resurgence No. 293/294, January/February 2015, pp 24-25