Yanis Varoufakis is Professor of Economic Theory at the Athens University. He shares for the readers of GRReporter his views on the developments in the rapidly developing economy of Greece and assesses the achievements so far in the context of financial crisis. Varoufakis supports the idea that lower taxes will bring more revenue into the Treasury as well as the reduction of the corporate tax to 15%. He believes that the Memorandum of the financial aid is the wrong way for the government of George Papandreou, but he is certain that the Mediterranean country has to remain within the Euro zone in any case.
Two major proposals concerning Greece were adopted after the Summit in late March this year – to resort to the European permanent mechanism for stability in case of need and the payment term of the financial aid of 110 billion euros to be extended and at lower interest rates. Many economists agree that this is not a great victory for Greece, but an expected development. What is your assessment for those decisions?
It was a sensational failure of the European Union. Generally, those decisions are nothing more than a mistake that has been repeated more than a year now.
What do you mean?
Imagine that the Euro zone is a building that was hit by a major earthquake to define the global economic crisis in 2008. The building or the Euro zone was not built in a way to endure this disaster and begins to fall. The weaker parts like Greece were affected first, but then the problems passed on to other parts. This is a growing crisis that begins to migrate from one sector to another. It started in the banking sector of Europe, transferred to the foreign debt of Greece, and then got to the banking system of Ireland and to the foreign debt of Ireland subsequently.
Excuse me, but Ireland had its own problems with the real estate market.
Look, the problem of Ireland is that it belongs to the Euro zone. The crisis in the Euro zone takes different forms in the different countries. If Ireland was outside it would not have a problem. The same is true for Spain. When the currency is locked, but there is no common economic policy and there is no, as I call it a surplus recycling mechanism within this system, the organisation begins to crumble. We have witnessed this for already a year.
If we look at how Europe has been trying to cope with this problem a whole year, we are going to see no logic at all. On the one hand, we have banking systems that are on the brink of bankruptcy.
Do you mean Greece?
No, I mean the whole of Europe.
But let’s get back to the results of the Summit. There were adopted decisions for a meaningless policy. This is a policy that disregards the real causes of the problem. The crisis was perceived as an ordinary debt crisis and, therefore, they gave the financial aid in return for fiscal consolidation and very stringent economic measures.
As far as I understand you oppose the whole logic of the Memorandum and the financial aid, is that right?
I believe that Europe did not have to push for that decision. Mainly, because it did itself wrong. Europe is currently in crisis that is only growing due to the Memorandum of Greece.
A major problem is that we have a banking system that is like a black hole. The banks in Europe are in panic, mainly because their portfolios are full of toxic derivatives from the private sector and government bonds of countries from the periphery of the Euro zone, which are actually useless.
If a serious stress test is made now similar to the one applied by Treasury Secretary Timothy Geithner in the USA, rather than the one that is currently held in Europe, almost all European banks will go bankrupt. The problem is that they have assets of no real value. If they enter the market to sell them - they will not be able to do it. This leads to fear and if a bank has to give a larger loan to another bank, it will not do it. So, there is no reliable interbank lending. All live from the European Central Bank. Actually, all banks should offer collaterals to be lent by it. However, the banks avail no collaterals and offer what they find and the ECB has nothing to do but to accept them. Take, for example, Ireland. The European Central Bank has given aid in the amount of 140 billion euros to the Irish banking system so far, and their Memorandum of aid is in the amount of 100 billion euros.
That is why I say that the European banking system is a black hole. This hole is the result of the toxic derivatives of the crisis in 2008. There stems the problem of Ireland, Spain and Germany. We should note that Spain and Ireland had problems with the real estate market, because they had given huge loans for major projects and the bubble burst.
Let’s go back to Greece.
The problem in Greece is known. The banks had no toxic investments, but they had plenty of government bonds. When liquidity disappeared after the last global financial crisis, many of the toxic financial products got lost, the prices of real estate dropped and a substantial part of the capital went to New York. The capital always migrates to the dollar when there is a global crisis. Therefore, the value of the dollar increased in 2008, although the crisis began in the USA. Europe found itself in the middle of the liquidity crisis and the European Central Bank tried to hide this problem somehow. When the crisis hit Dubai, then the credit rating agencies panicked. They had forecasted neither the toxic bonds, nor the real estate crisis in Spain and Ireland, etc.