Why Varoufakis might be right
The story unfolding in Greece is fascinating. It isnt really about Greece though- what is happening is a manifestation of the tension that exists in Europe, it could have happened anywhere. The tension arises because we have one currency but many tax systems, fiscal administrations, political boundaries, and economic strengths/weaknesses. It has nothing to do with the potentially percieved laziness or corruptness of Greeks.
Of course, Germany has a right to demand that debts are paid back. Indeed, being able to trust the people you lend money to is am important backbone of the ability to do business together. But at what point do even the staunchest defenders of debt repayment realise that the amount they lent was too much to ever be paid back and that demanding repayment only pushes the debtor further into economic misery, thereby lowering the probability of repayment?
That point may have now arrived. It can be ascertained with a bit of math from risk management 101:
probability of repayment
multiplied by
the amount to be repaid
= the actual current value of the debt.
With the yields of Greek government bonds skyrocketing again, the probablity of default increases, lowering the current value of debt. At some point in a crisis, lowering the amount to be repaid increases the probability of repayment, which leads to a higher actual current value of the debt. The probability is raised by freeing up money initially earmarked for creditors and transferring that money to investments that strengthen the economy.
Following Keynes, the German argument for austerity comes at the wrong time in the economic cycle. Austerity should be applied in good times, not bad times. Following through with austerity measures now only makes a bad situation worse through the mechanism of deflationary pressures. The worst consequence may be the rise of right-wing extermism, where justified economic grievances are vented through the loudspeaker of xenohobia.
The European Central Bank, while playing a much more active role than policy makers, has come to the limits of its toolbox. Quantitative easing has sent yields on government bonds into negative territory, pushing alot of money into the stock markets in search for a decent return. The money flowing to equity markets is not driven by the hope of increased earnings by those companies but rather by the hope to make a return on rising stock prices, which inveitably happen when bonds are no longer interesting investment options. The ECB is merely pumping up a stock bubble, with the real economy dragging far behind.
Varoufakis therefore proposes an entirely different way forward: cancel some of the debt and initiate an investment program to stimulate the economy. In health sciences this would be the moment when the patient gives up the fasting period to rid himself of the toxins in his body, and starts to be given nutrious food to nurture himself back to health. The ECB should buy bonds issued by the European Investment Bank , which the EIB can use to initiate a trillion dollar investment program into the real economy.
In a European context, not having a fiscal union in the face of a monetary union is absurd. It is plainly wrong. If Germany is committed to Europe, following through with a deeper integration is the only way forward. That means cancelling some of Greek debt. That means setting up new institutions or reforming existing ones to prevent similar events from happening again. That means closing tax loopholes and clamping down on tax evasion by the rich.
(Yes, it is only the rich. Only the rich can afford to do the backward tripple flips required to move money between havens. They are ones with the biggest incentive. The poor are the ones that are now paying for the mistakes and crimes of the rich in Greece.)
True European solidarity means holding together in dire times. Dire times mind you, initiated by a financial crisis in the US. In an era of globalisation a unified European Supra-nation is the only chance we have to weather the stronger winds of globalisation. A European Marshall plan is the logical next step towards a unified Europe.
