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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

coughlan-varoufakis2The 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 possible 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 ‘floaters’ 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 fluctuations 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 exchanging 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 sterling, 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 millions 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 Eurozone, 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 balance-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 payment 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, Ireland, Greece and Spain.

The deficit countries cannot restore their 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 happening 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 political 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 Product, 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 country, 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 comparable 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 scenario is implausible. History is full of abandoned currency unions. Some sixty disappeared during the 20th century. The USSR broke up relatively 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 sufficient “We”-feeling and solidarity between one another as to make them willing to pay taxes to a common government because it is ‘their’ government? 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 Europeans 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 legitimacy 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 engineering 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 communicate continually with one another. How can there be the “We”-feeling that underpins a people’s allegiance to a common State and government if that is absent? A common language in turn implies a shared national territory, shared common historical experience stemming from living in that territory, a shared culture and all sorts of other mutual identifications and mutuality of interests. There is not and surely cannot be anything comparable to such national bonding in multi-linguistic, multinational, 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


“The 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 vagaries 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 Parliament, 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