7 4 July 2016
INTERNATIONAL
T
he colourful former Greek Finance Minister
Yanis Varoufakis’s new book, ‘And the Weak
Suffer What they Must?’, provides insightful
reading for those who want to understand
how the EU and the euro-currency have
reached their present pass.
Varoufakis shows in his book how the EU ‘project’ is
now held together more by fear of the effects of the pos-
sible disintegration of the Eurozone, which could bring
down the entire EU with it, than by positive values of
solidarity and international feeling, regardless of the
result of the UK's referendum. His book is also a highly
readable treatise on international
economics.
Economists can be divided into ‘float-
ers’ or ‘fixers’. Floaters believe that
currency exchange rates should be
allowed to float up and down vis-a-vis
one another in response to the fluctua-
tions of trade and movements of people
and capital into and out of countries.
Fixers believe that a country’s currency
exchange rate should be fixed in relation
to another currency, or a basket of other
currencies, or a precious metal like gold.
If exchange rates are fixed, the real
economy of people making and exchang-
ing real goods and services must adapt
to suit the fixed exchange rate – and not necessarily at
a full-employment level. The policy priority must be
maintaining the fixed exchange rate. The price of
money, that is the rate of interest, must be geared to
upholding that rate. By contrast, if the policy priority
aims at maximising output and employment in the real
economy, the exchange rate must be allowed to float in
order to balance the continually fluctuating payments
in and out. Exchange rates can then be more or less let
look after themselves.
As to floating exchange rates: the only period in the
95-year history of the Irish State when it effectively
floated its currency as against tying it to the pound ster-
ling, the Deutschmark or the euro, was 1994 to 1999,
before the euro was instituted. Those were the years
when Ireland had average economic growth rates of 8%
a year; and the resulting highly competitive exchange
rate underpinned the ‘Celtic Tiger’.
A currency exchange rate after all is just one of mil-
lions of prices - the price of a country’s currency in
terms of other currencies. It is folly to make a fetish of
it. As with all prices, the rational course is to let them
move up or down in line with supply and demand for the
goods and services they relate to. Exchange rates are
always fixed for political reasons. They can never be
more fixed than in a monetary union such as the Euro-
zone, for which the common currency was meant to
provide one of the bases of an EU superstate under
Franco-German hegemony, and which was established,
notionally at least, to last for ever.
Varoufakis' book shows that when 19 countries with
different growth rates, levels of development and
resource endowments, and therefore with different bal-
ance-of-payments requirements, are locked together
with one currency, the euro exchange rate at any
moment of time will suit some but not suit others. It will
encourage export booms, high growth-rates, and pay-
ment surpluses in the stronger economies
- pre-eminently Germany and the countries of Northern
Europe. These are counterbalanced by import surges,
low growth-rates and balance-of-payments deficits in
the Eurozone “PIIGS” countries - Portugal, Italy, Ire-
land, Greece and Spain.
The deficit countries cannot restore their
Fixers
and floaters
Yanis Varoufakis says the euro was
a mistake but – implausibly - if the
Eurozone and EU broke up now, the
ultra-Right could benefit
A currency exchange
rate is just one of
millions of prices, the
rational course is to
let them move up or
down not fix them in a
monetary union such as
the Eurozone
REVIEW
by Anthony
Coughlan
BOOK
July 2016 7 5
competitiveness by devaluing their national
currencies, for they no longer have them to
devalue. They can only compete economically
by cutting pay, profits and pensions, perhaps
for years on end. This must happen and is hap-
pening in the absence of a fiscal and political
union alongside the monetary union, that is, a
cross-Eurozone tax and spending union that
would recycle the economic surpluses of the
richer countries to the poorer, just as happens
between richer and poorer areas of a single
State through its national taxation- and income-
transfer systems.
There is no such transfer mechanism in the
Eurozone because it is not, or is not yet, a politi-
cal union, a proper State. There clearly cannot
be an EU fiscal union when total EU spending in
any one year is just 1% of overall EU Gross Prod-
uct, and when any proposal to raise this by even
a fraction would cause a big row between the
contributory and putative beneficiary Member
States. By contrast national State spending by
Eurozone members is, depending on the coun-
try, between one-third and one-half of national
GDPs – and typically allocates 12% or so of GDP
in each country to social security transfers, 8%
to health care and 7% to education.
What social or historical forces exist or can
be imagined that would establish a surplus
recycling mechanism between the richer EU
countries and the poorer that is in any way com-
parable to that which exists inside each national
State?
Germany’s voter-taxpayers will not wear even
the slightest move in that direction. Neither
would citizens in any of the other EU surplus
economies - Austria, Holland, Finland or
Sweden – however loud the calls for sacrifice
for the sake of a common “Europeanness”.
Varoufakis draws on his experience as Greek
finance minister interacting with the other
finance ministers of the Eurogroup to describe
these design flaws of the euro. While he accepts
that it would have been better if the euro had
never been set up, he fears that if the Eurozone
were to break up now, and possibly with it the
whole EU, it would have disastrous economic
consequences and benefit Europe’s ultra-Right
politically.
In my opinion this economic-disaster sce-
nario is implausible. History is full of abandoned
currency unions. Some sixty disappeared
during the 20th century. The USSR broke up rel-
atively amicably in 1991, with one State being
replaced by fifteen new ones and fifteen new
currencies replacing the old rouble. Moreover,
the USSR was not just a currency union but had
been a tightly-knit fiscal and political union for
70 years. I remember landing in Prague Airport
in 1993 on the day the Czechoslovak crown was
replaced by separate Czech and Slovak crowns.
No one seemed specially bothered.
Yanis Varoufakis calls for “a democratic
Europe”. But how can you have a democracy
without a DEMOS, that is, a people with suffi-
cient “We”-feeling and solidarity between one
another as to make them willing to pay taxes to
a common government because it is ‘their’ gov-
ernment? Or welcome those taxes financing
transfers to deserving others as ‘their’ fellow-
citizens? Or induce minorities freely to obey
majority rule because it is ‘their’ majority?
This is the basic weakness in Varoufakis’s
intellectual position. He writes: “Student
exchange programmes are the best example of
a Brussels-guided process cultivating the
promise of instilling a European identity among
Europe’s young”.
The EU has made strenuous efforts to foster
an artificial European identity in ways like this
when the cultural and other links that Europe-
ans share cross-nationally are in no way
comparable in strength or character to those
that bind nation States together. History shows
that the democracy that alone can give legiti-
macy and “good authority” to a stable State in
the modern world exists only at the national
level. It will surely be a long time before student
exchanges and similar top-down social engi-
neering projects make young people willing to
live for, not to mind die for, ”Europe”.
At a minimum, national identity requires a
common language, so that people can commu-
nicate continually with one another. How can
there be the “We”-feeling that underpins a peo-
ple’s allegiance to a common State and
government if that is absent? A common lan-
guage in turn implies a shared national territory,
shared common historical experience stem-
ming from living in that territory, a shared
culture and all sorts of other mutual identifica-
tions and mutuality of interests. There is not
and surely cannot be anything comparable to
such national bonding in multi-linguistic, mul-
tinational, multicultural Europe sufficient to
underpin a supranational democracy, any more
than there can be in geographical Asia, Latin
America or Africa.
Anthony Coughlan is Associate Professor
Emeritus in Social Policy at Trinity College
Dublin.
“T
he Franco-German axis is the European Union. While no one will ever admit this, in
truth the other member states merely add liturgical sanctification to whatever the
German and French leaders decide... The European Union’s genes were geared from
the outset – from 1950 – towards the depoliticization of political decisions. Europe’s elites
wanted a mega-bureaucracy in cahoots with large, oligopolistic business without the vagar-
ies of federal democratic politics. In this vein a ‘Europe of States’ was set up in intentional
opposition to a ‘Europe of citizens’. Brussels was built along the lines of ‘We the governments’
to preclude the ideal of ‘We the people’. This mega-bureaucracy was invented to serve a cartel
of large businesses seeking common rules and industry standards in perfect freedom from
any parliament with real power over its actions. It is no accident that the European Parlia-
ment, once instituted to give the European Union a semblance of democratic accountability,
lacked the capacity to legislate”.
Yanis Varoufakis, And the weak suffer what they must?, Bodley Head, London, 2016, €17.50
What social or
historical forces exist
or can be imagined
that would establish
a surplus recycling
mechanism between
the richer EU countries
and the poorer that is
in any way comparable
to that which exists
inside each national
State?
VAROUFAKIS ON THE EU

Loading

© 2015 Village Magazine

Back to Top