2.04.2015

How Greece Plans to Solve the Euro-crisis

Europe is trembling - rather the Germans are, and all those behind the austerity policy promoted by Merkel. Why? Because Greece has just voted in a totally new party very much on the Left (Syriza) and a dashing young man (Alexis Tsipras, the new Prime Minister) determined to put an end to austerity at any cost.

The fear rose when everyone saw what minority party Tsipras took on board to control the Greek Parliament: ANEL, a tiny rightist party led by Panos Kammenos, a product of the conservationist establishment but a man who is just as determined as Tsipras to stop austerity and relaunch the Greek economy.


Then, to negotiate with Europe a reset of the Greek debt, the new government picked as Finance Minister an unusual economist Yanis Varoufakis:


Born in 1961, he is a maths and economics graduate of the Universities of Essex and Birmingham and has taught in several universities in Britain and 12 years in Australia (U. of Sidney - he has dual citizenship, Greek-Australian). He has Stirling credentials: he is a professor of economics at the University of Athens and a Visiting Professor at the University of Texas.  But there are also some bizarre sides to his personality:  he has worked as a consultant for the Valve corporation, a video-game maker. Why work for an American corporation? It seems he was interested in placing Valve's organization in the context of theories of the firm and broader economic thinking. He was particularly intrigued by the concept of a "flat" corporation (no hierarchy) where decisions are taken, as he put it in this article, as a result of a "successful ‘spontaneous order’ based not on price signals but, rather, on decentralized, individuated, time allocations."

What makes him stand out, however, is the firebrand book he wrote,  The Global Minotaur: America, the True Origins of the Financial Crisis and the Future of the World Economy (Economic Controversies), published in 2013. The book lays out his understanding of both the Great Recession that began with the 2008 financial crisis and human society in general.




As Gary Dimski of the University of California, Riverside, wrote:
"In the most comprehensive guide to the contemporary economic crisis yet written, Varoufakis traces out the path from post-war US economic supremacy to the current predicament. This book's provocative thesis, written in lively and impassioned prose, is that which neither the US nor the EU nor any other nation can now restore robust global growth. Whether you agree or disagree, this book's lively and impassioned prose will engage you both heart and mind, and hold you in thrall to the last word. The Global Minotaur is a masterwork that registers for all time the challenge of our time."
One quote from that the book, picked out by several Goodreads readers, gives an excellent sense of how the man thinks:
"... toxic derivatives were underpinned by toxic economics, which, in turn, were no more than motivated delusions in search of theoretical justification; fundamentalist tracts that acknowledged facts only when they could be accommodated to the demands of the lucrative faith. Despite their highly impressive labels and technical appearance, economic models were merely mathematized versions of the touching superstition that markets know best, both at times of tranquility and in periods of tumult."
So this is the kind of convictions - the market does not always "know best" - that Varoufakis will bring to the European negotiation table.

This morning, as I write (4 February), Varoufakis is presenting to the European Central Bank his proposal, one that he shared yesterday with the Italian Finance Minister Pier Carlo Padoan, a fellow economics professor (at Rome's Sapienza) and visiting professors to various universities, including Tokyo, as well as OECD's Chief Economist since 2009. Varoufakis' proposal was briefly reported in the Italian press (see here). Clearly, Varoufakis has attempted to put on his side Italy and France (that he visited the day before).

The main points are simple and clear: Varoufakis is going to ask the European Central Bank to give back to Greece the €2 billion  it made on Greek bonds  (yes, servicing the Greek debt has been very lucrative to creditors in spite of the "haircut" they took two years ago - a very small haircut in fact); and he asking that Greece be given the green light to issue new short-term bonds and the  ability to survive financially till June. In return, Greece commits itself not to take any unilateral decisions and maintain the balance of the State budget nicely "positive". And the implication of that is that the new Greek government cannot abandon all reforms that have been started by its predecessor and may well have to initiate new ones.

Tomorrow, Varoufakis will meet the German Finance Minister, Wolfgang Schauble, a close adviser of Angela Merkel:


Will he understand? I can't imagine what the meeting between the young Greek firebrand and old Grey Wolf will be like. Are Germans capable of understanding that if they don't give up on austerity, they are killing off Europe (and their export markets with it)?

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