The Joy of Biased Economics

The fact that I have owned Yanis Varoufakis’ book about the euro’s history and crises for three years without reading it is a testament to two things: (1) Buying books and reading books are two completely different hobbies. (2) My own biased worldview wasn’t ready for an invasion from another biased worldview.

But now I have read Varoufakis’ And the Weak Suffer What They Must – Europe, Austerity and the Threat to Global Stability. And I’m glad I did so – with the clash of biases being at the centre stage. It is timely enough, since biases abound the EU of 2020 – about stingy Northerners and profligate Southerners. Challenging those biases from time to time is healthy exercise.

My biases back in the spring of 2015

I remember the spring of 2015 quite vividly. I was working as a stagiaire in Brussels. I was incredibly excited to “witness” crisis summits on an almost weekly basis as Greece teetered on the brink of crashing out of the euro/the EU. The left-wing Greek government was struggling with the conditions imposed upon the country by its bailout creditors. And the main protagonist for five months was indeed Yanis Varoufakis, Greek finance minister and leather-jacket-wearing-rockstar-economist-of-the-left par excellence. He only lasted five months because he was a maverick on a mission: His headstrong nature (coupled with unquestionable academic and intellectual firepower) turned the Brussels establishment red with fury. Ultimately, the 2015 version of me dismissed Varoufakis as a egotistical and irresponsible populist who quit his job when the grand-staging was over and the going got tough.

Why did I do that? If I’m being honest, I was probably influenced quite a bit by the seasoned Brussels bubble folk I worked with. They were all convinced that Varoufakis was a dangerous jester who didn’t care if he caused all of Europe to burn and the EU to collapse. I seemed to see the same alarm bells. I was (still) at my stage of fervent pro-EU – almost federalist – inclination. Anyone at the extreme end of the spectrum who was threatening the middle ground of the EU’s “muddling through” politics seemed exactly that – a threat to European cooperation.

Yet even at the time, I had a vague feeling that dismissing Varoufakis entirely was stupid. The mainstream newspapers I gobbled up daily, such as the Financial Times and The Economist were actually critical of the German-led course regarding Greece. The fiscal discipline and ordoliberalism of Wolfgang Schäuble won support from the Danish organisation I was working for at the time. But much more moderate economists than Varoufakis kept insisting that the bailouts of Greece were being conducted in a misguided way. My studies of the euro had also taught me that its construction was flawed and unsustainable. So yes, I knew that the German course was not quite right. But it was better to stick to the middle ground than to side with this self-proclaimed Greek rockstar of the left.

Varoufakis’ informative account

Happily, I’ve become less dogmatic over the years. That is why it was a joy to finally read Varoufakis’ book and revisit the drama of 2015 with a fresh perspective and an open mind. The Greek economist anchors his tale in his tenure as Greece’s finance minister. But the core of the book is Varoufakis’ biased history of the euro and his criticism of the entire monetary project. From the collapse of Bretton Woods with the Nixon shock of 1971 through the snake-in-the-tunnel, the EMS-ERM, the Maastricht path to the euro’s creation, and ultimately the sovereign debt crisis of 2010-2015 (and beyond).

Varoufakis’ central thesis, which is reiterated throughout his historical account, is that the euro is deeply flawed because it robs the eurozone of a “political surplus recycling mechanism” — that is, policies to lend the net export earnings of surplus economies (Germany, the Netherlands, etc.) to those who buy their exports (Greece, Italy, etc.). Also, the ECB is democratically unaccountable, and the whole EU lacks the democratic legitimacy necessary to conduct monetary and fiscal policy on behalf of its 500 million citizens (before Brexit). Southern Europeans are hardly to blame for German bankers providing them unsustainable cheap loans with which to buy Volkswagen cars and Siemens washing machines.

Clearly, much of the tale is coloured by the author’s own political views. And yet there are many truths in his telling of this tale. I was actually surprised at how informative his history of European (and U.S.) economics is. Varoufakis covers a lot of ground in a style that is very readable and accessible for any layman. It was a joy to have flashes of my economics lessons brought back to life.

Likewise, his central critique of the euro’s construction were not new to me. The framing of everything depending on “political surplus recycling” was a term I had not noticed before. But Varoufakis’s central points have been brought to bear by more mainstream voices as well. And it is a useful book for those who fail to see how much the surplus countries of Northern Europe benefit from the EU in general and the common currency in particular.

The unfortunate conspiracy among the theory

So far, so good. However, both the virtue and the problem with Varoufakis’ book lie with how biased every chapter is.

It is a virtue because an informed reader is never in doubt about reading a particular perspective on the euro’s history and crises. In many ways, I prefer such up-front declaration of purpose and angle than authors who pack their biases in objective-sounding language.

It is a problem because, far too often for my liking, the book reads like an account of a conspiracy theory. Diabolical Germans and hapless southerners. The Bundesbank in particular is made to seem like Europe’s Machiavellian institution par excellence, thwarting German and French governments at will. In the meantime, the French and the Italians are happy to surrender all political initiative as long as they can be “bribed” with bureaucratic positions in the EU’s purposefully undemocratic institutions. In the end, leaders in Southern Europe almost seem completely blameless for their countries’ subsequent troubles.

Many such points are taken too far – in terms of both content and language. It is a shame because the hyperbole shakes the credibility of the over-arching story and analysis, much of which is quite spot-on. Yet this is inherently part of “the Varoufakis way”. He is a provocateur and I think he deliberately takes things to the extreme to make his point. The problem – in my eyes – is that this approach quickly starts preaching to the choir who happily gobble it up (left-leaning, euro-sceptic readers – the book was a bestseller in the UK prior to the 2016 referendum, for instance) and is all the more easily dismissed by those it actually needs to persuade (centrist, europhile people like myself).

Nevertheless, as long as one is aware of these biases and exaggerations, The Weak Suffer What They Must? is full of good and insightful points. Such as the role of American financialization initiated by Paul Volcker in the 1980s on Europe, and the problematic consequences of the euro’s early “fair weather” phase of growth and unsustainable lending by European banks from North to South.

The actual style of the prose is nothing special. It is, as mentioned, full of hyperbole and often contrived metaphors. The language is not difficult, but nor is it particularly flowing. Still, it is as readable as any run-of-the-mill pop science book. And that is no small feat given the quite complicated subject matter.

Back to 2020: Has Europe learnt something from Varoufakis?

I thoroughly enjoyed the book, I must say. And yes, all of the bias and accusation is part of the show. Because some preposterous statements really made me stop reading and literally question myself, “Could it really be that it happened like this? Did De Gaulle played it like Varoufakis explains it?” And I would look things up and often (though not at all always) be confirmed, whereupon I had to make a little “Ha! Ok then!”. That’s more than I can say about many other books on similar topics that all to often just retread stuff I’ve read before. Of course, at other times, I could flat-out tell that he was misleading the reader or made an analysis I simply disagreed with. But that is how it is with biased accounts, and it’s fair enough.

And yes, it also fixed some of my own youthful biases. Varoufakis states a very credible commitment to being truly pro-European. He is more pro-European than I am, actually. Because he literally advocates for a European federation, which I just don’t see happening. So this is one more bullet in the ammunition box of “stop framing the debate as for and against Europe”. He has a different vision for the European project than Schäuble and Merkel did in 2015. And it is flawed in many ways, but just because he rejects the euro in its current construction does not make him anti-European. That is an important lesson for any young pro-EU activist out there.

Finally, I actually also think that the EU as a whole has shifted its perspective from the dark days of 2015. I was actually quite surprised when France and Germany jointly unveiled their post-coronavirus recovery fund of €500bn. The German government even crossed the fiscal Rubicon of common debt. A German friend of mine told me that this remarkable policy shift is not least due to German companies making it clear that economic recovery of Southern Europe was in their interest.

In a way, this really shows that Northern Europe (with Germany as a far more important an actor than the so-called Frugal Four of the Netherlands, Austria, Denmark and Sweden) is ready to admit the huge benefits of the Single Market and the common currency. And with Merkel going along with Macron’s baby step towards fiscal union, a lesson from Varoufakis’ book seems to have been learned: More robust surplus recycling – or at least some sort of fiscal component – is needed if the eurozone is to function more properly. (Not claiming any causality here; I doubt Merkel will point to good old Yanis as the one who made the chancellor change her mind – but there is some correlation).

It seems that in the EU of 2020, the decisive voice of Germany has indeed moved away from the tone of 2015. And in Varoufakis’ framing that is a move away from the tone of the Athenians during the Siege of Melos in 416 BC, where the famous Thucydides quote stems from:

“[…] right, as the world goes, is only in question between equals in power, while the strong do what they can and the weak suffer what they must.

Thucydides, The Peloponnesian War, 5.89.1

Contrary to Thucydides’ world of classical realism, in the deeply interdependent world of today, it is simply far more difficult to let the weak suffer without serious expense to the strong. It is positive that some leaders of Northern Europe acknowledge this. Convincing the regular citizens on the streets of Amsterdam, Copenhagen or Vienna will be far more difficult, however. That is why I am still a skeptic.

Nevertheless, the first step towards change is exactly a willingness to challenge our own biases. I was happy to do so in the entertaining and polemic company of the egotistical Mr. Varoufakis. I have not been converted to his particular creed. But I am left with a more nuanced perspective on the world. It is something I can recommend to friends all across the political spectrum.