Interview with the Greek economist Yanis Varoufakis: ‘economics is a religion’

By Alex Katsomitros

Yanis Varoufakisis an outspoken economist who considers his discipline a religion, not a science. Having lived and taught in Britain in the tumultuous ’80s, Australia in the ’90s and his native Greece over the last decade, he knows a lot about crises, their causes, and their consequences. Alex Katsomitros spoke to him about the Greek government’s catastrophic handling of the economy, similarities with Britain and why economists must accept some of the blame for the financial crisis.

The British government has announced huge cuts in public spending while Greece has already axed public expenditure, hoping to reduce the country’s deficit. Has this has been successful?

It depends on how you define success. In one sense, the Greek government succeeded by persuading the Eurozone and the IMF to stave off what would have bankrupted the country. On the other hand, the Greek government created the circumstances for a long-term catastrophe for Greece and Europe.

The credit crunch was a major shock for global capitalism. Even though we thought that this was an Anglo-Saxon crisis, it turned out that the European banks were replete with toxic derivatives. The European Central Bank rushed to the rescue of the banks and replaced the ashes of the derivatives with freshly minted public money. The banks were saved, but the state debt of countries such as Greece ballooned. Then the banking sector that almost perished in 2008 found a new way of making money by betting that some of the weaker links in Europe would snap.

The weakest link was Greece. The Greek government tried gallantly to drum up support amongst its European partners. Germany, but not just Germany, was very unwilling to understand this was a problem that went beyond the borders of Greece. The whole problem dragged on for many months, before countries like Germany came to bail-out Greece in a display of how not to run a bail-out. If you really want to bail-out a country, you don’t wait until the problem worsens so much. Secondly, you do not expose the problem to the markets, which were very eager to take advantage of it by shorthselling against Greece and by betting against the capacity of the Eurozone to react.

Let’s look at how the bail-out was designed: Germany demanded that the IMF be involved and usury interest rates would be imposed on Greece. Add to that the conditions under which they gave the loan: they gave the money at relatively high interest rates, but Greece had to take measures that made the country weaker. The macroeconomic fiscal policies imposed upon Greece are bleeding the economy dry; we will be losing up to 5% of GDP every year.

During the Geoffrey Howe budgets of 1979-1983 Howe and Thatcher turned cuts into an ideology, but Howe never reduced spending during his tenure at 11 Downing Street. All he did was to reduce the rate of increase in spending. Throughout that period only in one year, 1981, was there an actual reduction of a mere 1% and that paltry budgetary cut had the disproportional effect of boosting unemployment from 750,000 to 4.5 million people. In Greece, we have -5% growth and the government is being forced to effect cuts of 8-10%.

Already unemployment has shot up from 8% to what I estimate will be 18%. Let’s say the IMF and Europe don’t care for unemployment in Greece, that they only care for the debt and the deficit. But if you kill those who are supposed to pay for the debt, you are not going to reduce it. So this package is bound to fail according to its own criteria.

During the bond crisis, we were told that had we imposed upon ourselves the policies that Ireland enacted without any external pressure, we would have avoided the crisis. Now look at the mess Ireland finds itself; they have expanded the debt, reduced the productive basis, increased unemployment, and reduced their country to a very sorry state which is inciting its population to migrate once again. And to what effect? The deficit is up to 32% and the debt is rising.

What about Britain?

In Britain there is a revanchist government which was buying its time while it was in the wilderness of opposition. It utilised the fact there was a major crisis in 2008, which caused the Brown administration to borrow effectively another GDP in order to bail-out the City. Now the Coalition are seizing upon the opportunity of the deficit, which is large but manageable. That is what they always wanted to do, to slash and burn the state. Not the state in general, because Mrs Thatcher and the Conservative Party have never been inimical to the British state; they have been inimical to anything that the British state does in order to assist the weak that do not fall within its constituency.

This is one of the terrible legacies that the Eurozone-Greece deal has left behind; it has provided David Cameron and the Camerons of this world with an excuse to exact revenge upon the weak, those who did not benefit when their constituency went to town with their exploitation of the financial and real-estate bubble.

There is a debate in Britain over similarities between the British and Greek economies. You know both economies very well: What similarities are there?

There are clear similarities and clear differences. Luckily, given the current state of Europe, Britain is not in the Eurozone. This is an amazing shock absorber. Secondly, despite the deindustrialisation under Thatcher, Britain produces today goods and services of decent quality, whereas Greece produces next to nothing. Also, even though I am the last one to support Tony Blair, prior to 2008 the deficit and the debt-to-GDP ratio were very low, whereas during the same period they were very high in Greece.

Having said that, I think that there are some striking similarities. First, both countries had been living beyond their means. Britain started doing that when it decided to close down its major industries in the early ’80s. The way that the Thatcher regime produced its economic miracle was by creating bubbles. The first one was the real estate bubble, hotly pursued by the City. House prices rose very fast, finance was liberalised, mortgages were given very easily, and a large amount of social housing was converted to private housing. People saw the value of their houses skyrocketing and on the basis of that they borrowed more money, thinking they were rich. That created a consumer-driven bubble.

At the same time, the City created its own bubble in the early ’80s by taking advantage of the fact the US were attracting a huge amount of capital from the rest of the world. A lot of it went through London. Britain had a very impressive growth rate even if it was being deindustrialised. In 2008 all chickens came home to roost and essentially the City went under.

The extension of Mrs Thatcher, Gordon Brown, borrowed huge amounts of money to rescue it. The result was the ballooning of the deficit and the debt. But still, Britain started at a much lower rate of debt than Greece. Even today it’s not high, around 70% debt-to-GDP ratio, whereas it used to be 40%. That is the biggest rise since the fall of the Empire, but in absolute terms it is not unmanageable.

There is not a smidgen of evidence that the UK is facing the problems that Greece is facing. British bonds are trading at an all-time low, unlike the Greek ones, which have shot up. Actually the price that Britain has to pay to borrow in the open market is falling and it was falling even before Cameron came to power.

And there is a last similarity. By imposing the cuts, the Coalition Government is undermining the very flimsy recovery of the real economy. It is my estimation that Britain is going to enter into a period of renewed recession, which is going to make the debt worse in the long run. But we have to wait to see to what extent the government is going to effect the cuts it announced.

Surprisingly enough, the US have adopted a Keynesian policy, whereas Europe has favoured cuts. This is not what we saw during the last decades. How do you explain this shift?

Historically, if we look at what has happened since World War II at moments of crisis, it is not very different from what has happened since 2008. The greatest Keynesian since 1946-1947 was Ronald Reagan, who under the guise of a Thatcherite, neo-libertarian agenda brought the US out of the 1979-1981 crisis through a massive Keynesian stimulus of the American economy. At the same time, Europe was trying to keep its books balanced. What’s happening today is not very different.

After Lehman Brothers collapsed, the Bush and Obama administrations printed as much money as necessary in order to prevent global capitalism from collapsing. It is my estimation that the American government made available about 15 trillion dollars, which is more than 25 % of global GDP, in a few months. This is a lesson from 1929: if you want to stop the banks from failing you need to dig deep.

Europe did the same for its own banks. The difference was that the Obama administration publicly stated it would try to stimulate the economy by spending a significant number of billions of dollars. Europe was very timid. When Obama visited Paris he invited Nicola Sarkozy and Angela Merkel to join him, but Merkel turned him down immediately. Her reason was simple and parochial: Germany’s recipe for economic growth since the ’50s has been to maintain its trade surplus vis-à-vis the rest of the world. If the German government tried to stimulate the economy by throwing money to its consumers, that would perhaps increase imports, which would undermine the surplus strategy.  That is the ‘beggar-thy-nation’ strategy that Keynes admonished as a great contributor to the Great Depression.

So, Barack Obama pursued his own stimulus package but it was about one third of what it had to be. That’s why the American economy is unable to overcome its recessionary forces. Moreover, the stimulus package did not go directly to the economy; quantitative easing is a monetary policy, not a fiscal one, so the money went straight to the banks; banks don’t lend it out and the money doesn’t circulate as it should do. The result is the global economy is not managing to overcome the deficit of demand; there is simply no demand to satisfy supply. The US and China have been quite gallant in the way they have faced the crisis. Europe is a free rider, trying to abscond from the global effort to manage the crisis. What we have is a global economy teetering on the verge of another recession.

Some public figures and economists have pointed towards the events which led to the Second World War as a warning for today. Is there a credible danger there?

Yes, I think so. In the history of capitalism there has only been one crisis like the current one, in 1929. What happened then is that the big states, UK and America, failed to coordinate their responses to the crisis. Instead, they adopted the ‘beggar-thy-nation’ policy. First, they tried to devaluate their currencies. When that failed, they turned to tariffs, which reduced the size of the global pie. What happened was a war of all against all, the result of which was the Second World War.

Now this is what we have so far. In 2008, the G20 coordinated its policies very quickly to save the banks, but failed to do the same for the missing aggregate demand. The next step has been the currency war, as we see today. Now we can hear talk of tariffs in the US against the Chinese. Who knows where this spiral is going to end? Already in Europe we have racism returning at an institutional level; the French government has been expelling EU citizens, thus breaking the laws of the EU and the sanctity of the common borders. At the same time Chancellor Merkel is pronouncing multiculturalism to be dead. Here in Greece we can see a rise of chauvinism and racism. My greatest worry is what will happen when the dollar is threatened as a reserve currency because of the loss of significance of the American economy vis-à-vis the emerging economies. I have no idea how violently the American right will respond to that once in power, and they will be in power one way or another. So yes, a huge economic crisis, when not addressed rationally and cooperatively, has a great capacity for destruction. 

You have been critical of your own craft and colleagues. Do economists bare some responsibility for the current economic crisis?

Absolutely. Seismologists are pretty useless, in the sense that they have never managed to predict an earthquake. But if an earthquake takes place in Haiti and you want to find out why, a seismologist can explain which Teutonic plate moved, why it happened in Haiti and not in New York and so on. So it’s a real science, even if its predictive power is pathetic. I wish I was a seismologist, not an economist. Seismologists are not to blame for earthquakes but we economists have been arming the hand of the villains of the peace for the last 30 years with the confidence and the theoretical cover by which to effect their policies, both at the macroeconomic and the microeconomic level.

Economics is not a science, it is a fundamentalist religion with equations, which make it sound scientific. As Joan Robinson used to say, ‘those who understand economics are very dangerous because by embellishing all their lies with equations they make sure that nobody can challenge them’. So the only reason for studying economics is to stop economists from deceiving us.


Yanis Varoufakis is Professor of Economic Theory in the Faculty of Economic Sciences of the University of Athens. He has taught at several British universities, including the University of Glasgow and Cambridge University. His latest book, The Global Minotaur: The True Origins of the Financial Crisis and the Future of the World Economy, is published in September (2011) by Zed Books. 


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