And The Weak Suffer What They Must? - Europe, Austerity and the Threat to Global Stability

Published by The Bodley Head, 2016

Yanis Varoufakis is, as the jacket informs us, the emerging rock star of Europe’s anti-austerity uprising.  In early 2015, as the Finance Minister of Greece’s radical Syriza led Government, Varoufakis defied the European Central Bank and the formidable German Chancellor Angela Merkel.  He resigned as Finance Minister when Greece voted to accept bailout and austerity in a referendum in July 2015.  So I was looking forward to an inside account of that exciting five months, when Greece defied the European establishment, refusing to accept either disastrous alternative, austerity or Greece leaving the Euro.

But this is not that book, that book apparently is coming.  Instead it was largely written before Varoufakis became Finance Minister, and is a critical history of the world’s currency system since 1945.  Varoufakis’ critique turns out to be highly relevant to his insistence that there was an alternative for Greece in the summer of 2015, and that ‘the weak suffer what they must’ was not inevitable.

Varoufakis’ book is above all a book of political economy, a work that explores that crucial ground where politics and economics meet.  It begins with Bretton Woods, an international conference held near the end of World War II, which set up the currency system that operated until 1971.  The Bretton Woods system was simple; all other major currencies had fixed exchange rates relative to the US dollar, and the dollar itself was tied to gold.  While occasionally there would be substantial readjustments (eg UK devaluations in 1949 and 1967) the system by and large offered a stable environment for international trade in the early post war period.

It worked because the main country that then had a surplus on its balance of payments, the United States, was prepared to re-cycle dollars earned from exports back to the deficit countries.  The US did so massively, through the Marshall Plan and private investment in Europe and Japan.  US willingness to do so was essentially political, spurred on by the emerging cold war.

But by the early 1970s the US surplus had evaporated, and a weakening dollar firmly attached to gold could not be sustained.   In August 1971 Nixon unilaterally suspended the link, killing Bretton Woods.  New surplus nations, pre-eminently Germany and Japan, emerged, with no political commitment to re-cycling.

The Euro, which took years to negotiate before it finally emerged in 2000, was essentially a project designed by the French to tie the German currency into the wider European political project.  Everyone knew all along that currency union without substantial political union was courting disaster, but while the UK stood aside, the main EU states went ahead, armed with a simple faith that a political accommodation would turn up if there was a problem.  And smaller weaker EU economies like Greece were dragged in, partly by populations anxious to subject themselves to what they saw as competent economic control.

So, recycled German Euros, were lent to Greek banks, governments and individuals, which caused a boom until the 2008 crash.  Then the priority for the European Central Bank was to save the mainly German lending banks, so the attitude was no default, no debt write offs and only very limited re-scheduling coupled with austerity.  Greece was treated harshly not least to encourage others, like Spain, Portugal and Italy with similar problems.

Varoufakis considers that the blame lies with irresponsible lending before 2008 and the lack of political solidarity after 2008.  Hence his opposition to the austerity route; it was not the fault of the Greek people.  Equally, he argues that leaving the Euro was pretty much impossible for Greece; it would take quite a time to re-create a new currency, and in that time all Greece’s money would flee to safe havens in Euroland.

But Varoufakis’ central point is essentially the same as the one emphasised by Mrs Thatcher; a single currency without a democratic state to back it will not work.  She didn’t want the European state, and so opposed the currency.  Money cannot be de-politicised, it is above all a subject for political economy, not just economists and central bankers.