Economist and former Greek minister of finance Yanis Varoufakis offers a personal take on the euro - what's worked, what hasn't and why we all need to be wary
If you think the point of monetary union is to increase the interdependencies between our economies, trade and foreign direct investment, think again.
The greatest success story in terms of meshing together economies applies to those such as Poland, Hungary, the Czech Republic and Germany - countries that do not share the euro. If you look at the relationship between the German, Portuguese, Italian and Greek economies, the incongruities and imbalances between us have been deteriorating from the first day we created the euro.
Peter Navarro, the head of the National Trade Council of President Trump, came out with a rather interesting accusation recently. He accused Germany of effectively being a currency manipulator through its policies in Europe, which depress the euro and so enable Germany to be the kind of mercantilist power that it is - complete with 9% current account surplus.
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Two points here are interesting - the first being you have a new administration in the US that is not particularly well-known for its rationality, humanism and sense of decorum. At the very same time, you have a statement coming from one of its functionaries that is completely spot-on. This is our fate - when those who are, as somebody said, bonkers, say sensible things, we are in trouble.
What has also been interesting from my perspective is watching the way Dr Wolfgang Schauble, the federal finance mnister of Germany, and European Central Bank (ECB) president Mario Draghi responded to this Navarro criticism.
The disparity between the responses of the two men should make us sit up and pay attention. Schauble's answer was - ‘Oh, it's not Germany's fault - it's the fault of the ECB. The ECB is keeping monetary policy very loose. This is causing the euro to fall and therefore we have a higher current account surplus than we should'. So Wolfgang is pointing the finger at Mario.
For his part, Mario comes out, not to support the German position or economic policy in the eurozone or fiscal policy or industrial policy or policy regarding trade. No he comes out to support himself.
To say that the ECB had no alternative - which is actually true, given the disparities between, let's say, Germany and Italy, to continue with quantitative easing (QE) after the US had finished with its own QE programme - in order effectively to keep the euro together.
So the incapability of our politicians, technocrats and bureaucrats in Europe to tell a story that is coherent in response to an accusation that comes from the other side of the Atlantic is, I think, quite revealing.
Now, in Europe - before the 2008 credit crunch and collapse - we had the surplus countries like Germany, Austria and the Netherlands, with net savings and the current account surplus, and around 3% of a budget deficit. In the periphery, meanwhile, you had positive net investment because of all the huge capital flows from Germany in particular and France, going into places like Greece, Ireland, Spain, and so forth.
Of course, the capital flows that were necessary from the surplus to the deficit regions in order to accomplish this seeming equilibrium were unsustainable. They built up huge bubbles in Spain, Ireland and Greece, and parts of Italy. And then, when those collapsed, we ended up with unsustainable debt after the bail-outs of banks and states.
The response to the crisis was … what? Germany introduced into its own constitution a balanced budget amendment. This, remember, is the country with the highest level of net savings in the history of the world - the history of capitalism - since the 11th century.
At the same time, Schauble was imposing austerity upon the countries of the periphery that were now deleveraging massively and shrinking, due to the bursting of bubbles created prior to 2008. That is, internal devaluation - the idea that, in order to regain competitiveness, you have to reduce prices and wages in such a way as to simulate the devaluation of the currency that you no longer have.
But what does that do? If you take the eurozone as a single macroeconomy, it means the whole of the bloc is pushed into a new situation - a new disequilibrium - where the current account of this eurozone macroeconomy in percentage terms is around 3.5%.
But, because it is a very large economy, the actual current account makes China's current account surplus look like a walk in the park. And that is destabilising for the US, it is destabilising for the UK and it is destabilising for the global capitalist economy. That is where Navarro is right.
The fact the ECB has to respond to this real economic situation by printing money and continuing to prop up Italy, in particular, in order to keep the euro together is simply a symptom. It is not the cause - regardless of what Dr.Schauble says.
This article is an edited version of a section of a speech Yanis Varoufakis gave in March 2017 at Artemis's investment roadshow in Scotland. See also: Why this was no time to try and check out of the EU
Professional Adviser has secured two copies of Yanis Varoufakis's latest book - And the Weak Suffer What They Must? - to give away to the first two advisers' names drawn out of the editor's metaphorical hat at noon on Wednesday, 24 May 2017. Just email your name to [email protected] with 'Yanis Book Offer' in the subject line. Professional Adviser's normal terms and conditions apply.
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