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Yanis Varoufakis: The New York Times' article on our Modest Proposal: My reaction
Below, I reprint the article and annotate it meticulously for the purposes both of elucidating the Modest Proposal itself and of commenting on the NYT's take on the train of events surrounding the Greek PM's dallying with this proposal. But before I do this, it is important to make a point about the scope and purpose of the Modest Proposal itself: It was never meant as a plan for salvaging the Greek shipwreck. It is, rather, a plan that Stuart and I have been sculpting, for some time now, with a view to (a) arresting the eurozone's centrifugal forces, and (b) giving Europe a much needed growth spurt. To the extent, of course, that these aims are met, the Greek crisis would be resolved as a matter of course.

Did we think that the men and women in authority (in Greece, Berlin, Frankfurt or elsewhere) would read our Modest Proposal, be struck by its logic, and adopt it forthwith? Of course not. However, we knew (and remain convinced) that the euro crisis is spinning out of control. Our task, as we saw it, was to plant in their minds the seed of a feasible, rational, comprehensive solution which, when the powers-that-be run out of options, may grow and yield a way out of the calamitous impasse. That the Greek PM did not pin his colours on its mast is neither here nor there (even though we would have liked him to run with it). We remain convinced that, at some not too distant point, Europe will have to choose between allowing the euro to disintegrate or adopt policies that echo the essence of the Modest Proposal's three main policies.



Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Thu Jun 9th, 2011 at 04:06:18 AM EST
NYT: Following that logic, the problem of Greece's debt is as much the E.C.B.'s, which is now the largest institutional owner of Greek sovereign debt, as it is Greece's. This reality was underscored this week when the Bank for International Settlements released data showing that European banking exposure to Greece, while high at €121 billion, has been declining as French and German banks have been reducing their exposures. That means, in many cases, that the E.C.B. has been left holding the bag, which helps explain why the central bank is so opposed to any talk of restructuring Greece's debt, or requiring bondholders to share in any losses, something known as a haircut.

YV: Excellently put. Let me just add the following thought: Presently, the eurozone lacks a joint fiscal policy. During periods of normalcy and growth, this is sustainable. But after a meltdown, like that of 2008, a joint fiscal policy is unavoidable. When the institutions for it are absent, the ECB takes it to itself, whether it likes it or not, to play that role. To be more specific, as we speak, the European System of Central Banks (ESCB) is placing the onus on the German Central Bank to finance the Greek Central Bank which, in turn, keeps the Greek banks liquid which, in turn, support the Greek state by buying whatever short term debt it sells. In effect, the ESCB is financing, indirectly, the Greek State. And similarly with the Irish, Portuguese, Spanish, Italian and Belgian banks and states. The result is both bad fiscal policy and bad monetary policy. So, in response to those who may protest that the ECB cannot possibly issue eurobonds (because this would be to cross into fiscal policy territory) I have the following to say: It has already happened! Our Modest Proposal, if anything, limits such practices by taking the ECB out of the business of financing the issue of new sovereign debt and simply having it issue a revenue-neutral conversion loan (effectively financed by the sovereign wealth funds and private investors who will be buying the ECB's own bonds).

Recall, from two years ago: What's left of central bank independence? (Willem Buiter's Maverecon, May 5, 2009)
The modern independent central bank was born in New Zealand in 1989. It had a short life.  The onset of the financial crisis of the north Atlantic region in August 2007 signalled the beginning of the end.  Today, only the ECB still has a significant degree of operational independence left, and it will have to give that up if it is to be effective in the current phase of the crisis. In other words, the ECB is the last central bank to understand that, if it is to play a significant financial stability role, it cannot retain the degree of operational independence it was granted in the Treaty over monetary policy in the pursuit of price stability.

...

Inevitably, when the central bank takes on significant credit risk in its monetary policy management, liquidity management and credit enhancement policies, close cooperation between the central bank and the fiscal authorities is essential.  Cooperation and coordination do not necessarily mean loss of independence. The ECB, unfortunately, often talks as if cooperation and coordination, including binding agreements, between the ECB and the fiscal authorities of the Euro Area would in and of itself constitute an infringement on its independence.  So all it is up for is regular cheap talk with the Ecofin or with the Eurogroup finance ministers.

...

The regulation and supervision of financial institutions and markets is a deeply political activity. Property rights are being assigned, restricted, qualified or taken away.  Banks are stopped from doing things they want to do and forced to do things they do not want to do.  Barriers to entry and exit are created, lowered or removed.  Such activities don't fit the image of an independent, a-political central bank very well.



Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Thu Jun 9th, 2011 at 04:34:29 AM EST
[ Parent ]
Now if only there were a feasible manner in which to clarify and detoxify the muddied and poisoned waters of public opinion in the surplus countries, especially Germany, there may be a way forward that does not involve collapse.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere." (But it helps!)
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Jun 9th, 2011 at 09:47:34 AM EST
[ Parent ]
Sweden is a surplus country outside the eurozone, but unless things are much different two things can be noted:

  1. This is not a major issue. It is a major foreign policy story, but as such is less relevant then the number of JAS planes that will bomb Libya.

  2. Most people do not gloat about Greece. It is more a  "good that we did not join the eurozone and have to take care of that"-sentiment. And "how hard can it be to balance a budget, just do not spend what you do not have".

Public opinion is not against fixing the situation, public opinion is confused about the situation and not very interested.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se
by A swedish kind of death on Thu Jun 9th, 2011 at 12:26:10 PM EST
[ Parent ]
Every country spends what they do not have. Every country borrows. Including Sweden.
by Upstate NY on Thu Jun 9th, 2011 at 12:29:52 PM EST
[ Parent ]
First the money is created, then it is spent, then taxes are collected. This stops working when the spending stops benefiting the country as a whole, is disproportionately siphoned to offshore havens and into the pockets of oligarchs who use it elsewhere. But that contradicts the political mandate, from the money elite, that capital has to be free to move internationally, especially when there is no effective means to regulate that capital beyond nation's borders.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere." (But it helps!)
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Jun 9th, 2011 at 02:23:10 PM EST
[ Parent ]
Yes, you're right. I was merely pointing out that every country runs a deficit.
by Upstate NY on Thu Jun 9th, 2011 at 05:33:46 PM EST
[ Parent ]
Unless it wants to beggar its private sector or has a large trade surplus.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere." (But it helps!)
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Jun 10th, 2011 at 12:36:16 AM EST
[ Parent ]
And I generally agree with what you said about deficits.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere." (But it helps!)
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Jun 10th, 2011 at 12:38:07 AM EST
[ Parent ]
..into the pockets of oligarchs who use it elsewhere.

It does not matter where they use them. It matters where they get them. If oligarchs use their money locally, that's good only if the oligarch incomes suddenly disappear. That's not the case.

by kjr63 on Fri Jun 10th, 2011 at 04:05:35 AM EST
[ Parent ]
Every country spends what they do not have. Every country borrows. Including Sweden.

Indeed. But Sweden repays more than it borrows. The national debt falls by about 5 % a year, and will be wiped out in less than 10 years, maybe in 6. If we still have a right-wing government when that day comes, the cashflow currently used for debt repayment will be redirected into tax cuts on a truly epic scale, dwarfing the ones we've seen since 2006.

:: ::

Unless the Swedish real estate bubble pops and the 500 % of GDP banking system have to be saved, but let's ignore that possible nastiness for the sake of the argument.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Sat Jun 18th, 2011 at 12:37:28 PM EST
[ Parent ]
That is not sustainable.

Public debt = high powered money.

Reduction in public debt therefore requires either (a) a reduction in the demand for money, (b) an increase in the proportion of bank money in the economy or (c) a foreign surplus.

(a) and (b) are, of course, not sustainable, since (a), if sustained, would return you to a barter economy and (b) invariably leads to bankers trying (and failing miserably) to do economic planning that they really should leave to engineers.

And we can't all be running a trade surplus...

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Jun 18th, 2011 at 12:42:11 PM EST
[ Parent ]
Good thing then, that Sweden runs a foreign surplus... which can be invested in productive investments in foreign less developed countries, which usually have a much greater need for capital investment than is the case in Sweden.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Sat Jun 18th, 2011 at 12:59:46 PM EST
[ Parent ]
Can be. But, judging by the recent Swedish financial escapades in the Baltic Rim, usually isn't.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Jun 18th, 2011 at 05:36:45 PM EST
[ Parent ]
In the 90ies Sweden instituted high unemployment, complete with independent national bank and all. Together with the classical MUD-approach to unemployed - blame them for their misery, cut benefits - this worked wonders to keep wages down and surplus up.

If surplus was invested wisely it would end being surplus and instead turn into useful goods and serices, so it was handled by financial gamblers who gambled on short-term profitable, long term dodgy debts.

Short story: Sweden is Germany, but much smaller. And not in a currency union.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Sun Jun 19th, 2011 at 08:33:37 AM EST
[ Parent ]
Just to put into context with Greece, Sweden went from labor participation in the mid 70s to participation in the workforce in the upper 60s.

In Greece, it is now under 50%, and of course for those under 30, it is far lower.

I'll let Mig speak to Spain, and I note that Ireland has resumed exporting its most famous product, its own unemployed, as long as Dubai is taking them, I guess.

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Sun Jun 19th, 2011 at 09:01:22 AM EST
[ Parent ]
Public opinion....is confused about the situation and not very interested.

To the extent that Sweden exports to EU countries it is likely to become concerned as this situation continues unresolved, as it will plunge all of Europe into one degree or another of recession as the money supply again severely contracts. I don't think Sweden will be able to create enough krona to fill the hole.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere." (But it helps!)
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Jun 9th, 2011 at 02:29:28 PM EST
[ Parent ]
Of course, when it becomes a domestic issue, the public will be interested. But it is not treated as such at the moment, it is a foreign/economics pages issue.

For good or bad, the public is not interested. If this is the same way in other surplus countries, then the public is neither helpful nor in the way of a solution. I do not think the problem is public opinion, I think it is financial elite opinion, which dictates political elite opinion.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Thu Jun 9th, 2011 at 02:46:56 PM EST
[ Parent ]
"how hard can it be to balance a budget, just do not spend what you do not have".

As we know from national accounting it is much easier to balance the budget if you are a net exporter. But it is not too surprising that this concept has not filtered down to the level of those exposed only to an introductory course in economics.

Not to criticize you, I am sure you are attempting to accurately report public opinion, but having no concept that things are more difficult when a country is a net importer makes it easy to blame those in deficit countries for having weak characters when the truth is a bit more complex.

  • Not every country can be a net exporter by simple logic.

  • How well would the surplus countries do without the deficit countries as markets?

  • How honestly and effectively have the deficit countries been treated by those who have capital to invest locally?

  • How does the control of government by wealthy elites in your own country compare with the situation in the deficit countries?

  • What has your own country done to improve the regulation of international capital markets?

Again, these questions are not so much for you as for the average Swede.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere." (But it helps!)
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Jun 9th, 2011 at 03:21:27 PM EST
[ Parent ]
Ah, you are overestimating the public debate.

Trade? Who mentioned trade? This is a debt-crisis (tv said so), so it must be caused by Greek government taking on to much debt, in effect failing to balance the budget. So then they have to pay the money back, right? Now that that is settled, what is happening with the king and the strip-club visits 30 years ago?

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Thu Jun 9th, 2011 at 04:40:38 PM EST
[ Parent ]
And this fact, combined with similar facts in other countries, combined with self serving ideas of monetary and political elites is why noble experiments can end up on the rocks.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere." (But it helps!)
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Jun 9th, 2011 at 05:05:33 PM EST
[ Parent ]
The simple step the Greeks could take is to cancel all arms contracts.
by rootless2 on Tue Jun 21st, 2011 at 05:48:11 PM EST
[ Parent ]
One thing that does become clear from Varoufakis' response to the NYT article is the extent to which he sees Papandreou and Papaconstantinou as having served primarily as weather vanes through this storm. He makes a convincing case. Hard not to like the guy, given his sense of humor combined with his understanding of the seriousness of the situation.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere." (But it helps!)
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Jun 9th, 2011 at 10:08:37 AM EST
[ Parent ]
If you read Spanish, you may find this profile in a Spanish newspaper amusing...

Expansion.com: Entrevista al economista Yanis Varoufakis: "Grecia no puede escapar de la suspensión de pagos" (08-05-2010)

Tiene pinta de monitor de gimnasio, pero es uno de los economistas con más influencia en la política griega. De 2004 a 2007 fue asesor de Yorgos Papandreu, que al llegar al Gobierno le ofreció un puesto en el Gabinete. Dijo no: "Soy un economista, no un político".

Además, guarda notables diferencias con la visión financiera del primer ministro. Y desde entonces (octubre) se ha centrado en su labor docente y divulgadora. Autor de varios libros y conferenciante a nivel mundial, es director del Departamento de Política Económica de la Universidad de Atenas. A sus 49 años, Yanis Varoufakis prefiriere recorrerse, en camiseta, las calles de Atenas que depender del elefante de granito que es la burocracia helena. Trae consigo un mensaje nada halagüeño: «Grecia no puede escapar del default», asegura en una entrevista con EXPANSIÓN.

Interview with the economist Yanis Varoufakis: "Greece cannot escape bankruptcy"
He looks like a gym instructor, but he's one of the most influential economists in Greek politics. From 2004 to 2007 he was advisor to Yorgos Papandreou, who on reaching the Government offered him a cabinet post. He declined: "I'm an economist, not a politician".

In addition, he keeps notable differences from the financial vision of the Prime Minister. And from then (October [2009]) he has concentrated on his teaching and popularizing work. Author of several books and worldwide speaker, he's director of the Department of Economic Policy at the University of Athens [actually, director of the University of Athens Doctoral Program in Economics]. At 49, Yanis Varoufakis prefers to traverse, in his t-shirt, the streets of Athens than to depend on the granite elephant of Greek bureaucracy. He brings with him an unpleasant message: "Greece cannot escape default", he claims in an interview with EXPANSIÓN




Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Thu Jun 9th, 2011 at 10:20:54 AM EST
[ Parent ]

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