Bert Olivier
Bert Olivier

Read Yanis Varoufakis’s “The Global Minotaur”!

Until recently, Yanis Varoufakis was the Greek Minister of Finance, who resigned after the Greek populace voted overwhelmingly against the imposition of more austerity measures against them in order to service the country’s crippling debt — resigned, because he believed that would give Alexis Tsipras, the prime minister, more negotiating space with the representatives of countries like Germany and France, who had made no secret of the fact that they disliked Varoufakis intensely.

I understand why they don’t like him — he is too clever for them, and too informed about the reasons for not addressing the financial crisis in Greece (and the rest of Europe) decisively; which could be done, as he argues. In the recent book by Varoufakis — a professor of economic theory at the University of Athens (after teaching for many years in Australian and British universities, including Cambridge) and author of several other advanced texts on economic theory, including The Global Minotaur: America, The True Origins of the Financial Crisis and the Future of the World Economy (Zed Books, 2011) — he sets out at length where the financial crisis comes from and how it should be addressed.

Most people know what the Minotaur was; the half-bull, half-human monster on King Minos’s Crete that was pacified by sacrificing Athenian youths and maidens to it, before Theseus of Athens finally slayed it. This explains Varoufakis’s choice of this mythical beast’s name, globally inscribed, for his book. Just as the mythical creature had to be fed with “food” from a polis that recognised Crete’s superior power, so, too, in a globalised world economy, America has played the role of the global Minotaur, which had to be “fed” with endless supplies of products from other countries consumed by American consumers, to keep the world economy more or less “pacified”. The 2008 financial crisis represents Theseus killing the beast; since then, the quasi-equilibrium inculcated by feeding it has disappeared.

I cannot summarise the whole, 236-page-long book here, so I’ll have to provide a thumbnail sketch, making liberal use of appropriate quotations from Varoufakis’s book. Buy it and read it; it is essential reading to people hungry for understanding.

The first quote comes from pages 22 to 23:

“I might have called this book The Global Vacuum Cleaner, a term that captures quite well the main feature of the second post-war phase that began in 1971 with an audacious strategic decision by the US authorities: instead of reducing the twin deficits that had been building up in the late 1960s (the budget deficit of the US government and the trade deficit of the American economy), America’s top policy makers decided to increase both deficits liberally and intentionally. And who would pay for the red ink? Simple: the rest of the world! How? By means of a permanent tsunami of capital that rushed ceaselessly across the two great oceans to finance America’s twin deficits.

“The twin deficits of the US economy thus operated for decades like a giant vacuum cleaner, absorbing other people’s surplus goods and capital. While that ‘arrangement’ was the embodiment of the grossest imbalance imaginable on a planetary scale, and required what Paul Volcker described vividly as ‘controlled disintegration in the world economy’, nonetheless it did give rise to something resembling global balance: an international system of rapidly accelerating asymmetrical financial and trade flows capable of creating a semblance of stability and steady growth.

“Powered by America’s twin deficits, the world’s leading surplus economies (e.g. Germany, Japan and, later, China) kept churning out goods that Americans gobbled up. Almost 70% of the profits made globally by these countries were then transferred back to the United States, in the form of capital flows to Wall Street. And what did Wall Street do with them? It instantly turned these capital inflows into direct investments, shares, new financial instruments, new and old forms of loans and, last but not least, a ‘nice little earner’ for the bankers themselves. Through this prism, everything seems to make more sense: the rise of financialisation, the triumph of greed, the retreat of regulators, the domination of the Anglo-Celtic growth model. All these phenomena that typified the era suddenly appear as mere by-products of the massive capital flows necessary to feed the twin deficits of the United States.”

The last two sentences are a summary of what Varoufakis reconstructs in the preceding and succeeding pages, and bears close scrutiny, given its crucial role as a mechanism that triggered the crisis in 2007-2008. Here, I have to jump to a much later section in the book, where Varoufakis, having painstakingly shown how the 2008 financial crisis has enveloped the globe, concentrates on the crisis within Europe and offers a solution, which European leaders will not, however, implement:

“I shall start by explaining how the twin crises facing the Eurozone — the one involving the indebted states and the other afflicting the banking sector — could be resolved without delay. Europe’s approach has failed because it has both ignored the way the debt crisis and the banking crisis reinforce one another and also turned a blind eye to the deeper cause of the crisis: the lack of a surplus recycling mechanism at the heart of the Eurozone. Here are three simple steps in which effective remedies could be put in place.

“The first step would be for the ECB (European Central Bank) to make the continuation of its generous assistance to the banks conditional on having the banks write off a significant portion of the deficit countries’ debts to them. (The ECB has ample bargaining power to affect this, as it is constantly keeping Europe’s effectively bankrupt banks liquid.)

“Step two would have the ECB take on its books, with immediate effect, a portion of the public debt of all member states, equal in face value to the debt that the Maastricht Treaty allows them to have (i.e. up to 60% of GDP). The transfer would be financed by ECB-issued bonds that are the ECB’s own liability, rather than being guaranteed by member states. Member states thus continue to service their debts, but, at least for the Maastricht-compliant part of the debt, they pay the lower interest rates secured by the ECB bond issue.

“Finally, the third step brings into play another venerable EU institution, the European Investment Bank (EIB). The EIB has double the capacity to invest in profitable projects than does the World Bank. Unfortunately, it is underutilized because, under existing rules, member states must advance a proportion of the investment. Given the awful state in which they find themselves, the Eurozone’s deficit states cannot afford to do this. But by granting member states the right to finance their contribution to the EIB-financed investment projects by means of bonds issued for this purpose by the ECB (see step two above), the EIB can become the surplus recycling mechanism that the Eurozone currently lacks. Its role would be to borrow, with the ECB’s assistance, surpluses from European and non-European surplus countries and invest them in Europe’s deficit regions.

“Summing up, the first two steps would make the debt crisis go away, and the third would underpin the Eurozone by providing its missing link – the mechanism that it never had and the lack of which caused the euro crisis in response to the Crash of 2008. But if I am right about all this, why does Europe not take up this suggestion, or something along these lines? The answer lies in the preceding pages, but it is perhaps time to spell it out. If the euro crisis were to be resolved quickly and painlessly, Germany (and the other surplus eurozone countries) would forfeit the immense bargaining power that the simmering crisis hands the German government vis-à-vis France and the deficit countries.” (Varoufakis, pp. 209-211)

I don’t have space to elaborate on the last sentence. This is just to whet the appetite of readers who would like to read the whole book. Follow this link to a wonderful recent interview with Varoufakis, where he talks about Greece today.

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    • Bert Olivier

      I forgot to thank David Bell for pointing me in the direction of Varoufakis’s work – thank you, David!

    • Henri Lyons

      Yes he’s too clever for them! What all of them?
      Of course he knew best. Everybody else was wrong. That seems to be s communist trait.
      And there you have the brilliant arrogance of thosd who think they know best.. Brilliant enough to take the whole country with him on his populist flight of fancy right to the brink of disaster.
      So he has a solution, a magic solution that will ” make the debt go away”. But as clever as he is, he will never be able to explain how a state can afford to spend more than it can produce without borrowing from others who have produced wealth to spare without expecting to pay it back and moreover demand more while simultaneously spitting in the lender’s face and telling it you have no intention of changing your wasteful ways.

    • Toni Benoni

      the man pissed his country away with his academic bs. he lives off his dads millions. the greeks chse a child to represent them in an adult cobversation.

    • Bert Olivier

      Toni and Henri – Read the book, if you can understand it.

    • Bert Olivier

      An interesting post that confirms the need to rethink Greece’s situation:

    • Henri Lyons

      As an afterthought, I see your hero, man of principle, yesterday voted FOR the bail out deal he had ferociously fought.
      Perhaps latterly realizing what damage he had done. I look forward to his next book to see how he rationalists that.

    • Richard

      I listened with interest to the interview, the link for which you kindly pasted into the body of your piece. I have not yet read the book, so perhaps I misconstrue the arguments. In any event, the main thought that occurred to me whilst listening was that what Varoufakis speaks about primarily is what is happening in the short-term, and how to overcome this particular crisis. But to properly understand, we need to look at the longer-term, which is rather a different matter. There we see Greece’s chronic economic problems that predate the Eurozone having been created, and Italy’s similarly chequered economic history. These are symptomatic of problems other than an overbearing and unfair ECB. What he proposes as a solution would in effect simply translate into an endless transfer of money and largesse from successful states to unsuccessful states. This is how empires are run, by and large (if you look at South African history, Britain used to subsidise the Cape government, for instance, when necessary), and this would mean the Eurozone would in effect become a modern German Empire, nothing more.

      The idea of Greece being a debtor-state in a way similar to the US is not really valid, surely? The US is extraordinarily creative and hard-working, and of course has a much smaller social net (welfare) system than the EU. The costs of doing business in Greece is surely much higher, and the people much less productive.

      At issue is actually the existence of Europe as a single entity, with Germany being the main driver. Who pays the piper plays the tune, as the adage has it, and so the caravanserai is kept moving in one direction (apologies for mixed metaphor). In the US, it is easier to move funds about as necessary between states because there is a common nationality (even in countries like Britain, where funds flow between England and Scotland, it is not quite as easily accepted) but in Europe it is really only the Germans who see themselves as European first-and-foremost, and that in the position of nett contributors.

      The only real way to resolve this in the longer term is to allow countries with very divergent economic behaviour to leave the Eurozone. Quite how this will be allowed, given the level of indebtedness Greece has, for instance, is quite uncertain, as Varoufakis says. Greece’s acceptance of the terms required of it to remain in the Eurozone shows that the idea of a politically united Europe is still stronger than any competing ideology, even in debtor states.

      The idea of floating bonds is interesting, but would there be a market for them: buyers would look at the dynamics of the Eurozone, note what I have outlined above, and not see much scope for a profit. After all, it would all be rather predictable, surely, with Germany paying out to the others? I would certainly not invest in such a scheme, for instance.

      This is fundamentally a political problem, not an economic one. The infant was deformed at birth, and even with the best surgery, cannot really be saved.

    • Bert Olivier

      It seems to be the beginning of the end for capitalism, for cery complex, but apparent, reasons:

    • Bert Olivier

      Richard, thanks for that wonderful, and as usual constructive, comment. You should try and get the book (online), though, because the diagnosis of the causes of the global financial problem and the mechanism proposed by Varoufakis in the book make a lot of sense to me. Granted, Greece should never have joined the Euro, but the disaster that’s hit the country is NOT only due to their mismanagement. It has its origin in what Varoufakis calls the “global minotaur”.

    • Richard

      I read this piece, but must say I did not find anything in it that supported the thesis presented in its title. That information technology is changing the way we do things, certainly, but that can be argued validly simply to be making markets more efficient. People have been doing things for free for centuries – look at charities, soup kitchens, David Cameron’s calls for the “Big Society”, blood and organ donation, as just a few – but this has not changed anything fundamentally. In many parts of the world, people do not donate organs or blood for free, they charge for it. Immigrants into Europe and America from Africa, Asia, and other developing regions do not much participate in free donation. This includes their descendants, even though they are schooled along with their host population. In other words, the desire and carry-through of donation and money-free activity is dependant on having surplus, not being money-poor.

      The problem is not that capitalism is irreplaceable – I don’t believe it is irreplaceable – but rather that capitalism efficiently fulfils the primitive human need for hierarchy. In the Soviet Union, the hierarchy of the Party became the paramount way to express power-ranking; in militaristic societies, the extent of climbing the armed forces’ hierarchy, and so on. People are motivated by this, it cannot be wished away.

      One of the ways in which we can be protected from capitalism’s more rapacious inclinations is through deciding what is “added value” and what is not. For instance, when the human genome was sequenced, Craig Venter in the US tried to patent it, but his British opposite number, Sir John Sultan, refused to allow this. Sequencing the genome does not involve doing anything other than recording it. Should one manipulate it in some way, “add value” in other words, then you can argue you are doing something and can charge money for it. In this way, people who actually do something creative and active can be rewarded for their enterprise. You can read something of the issue between Sultan and Venter here:

      But then, of course, what does one do with mineral rights? Oil-producing countries have a right, under international law, to charge for their produce, much like food-farmers can charge for theirs. They are not likely to waive their ability to extract exchange.

      I think the piece conflates too many things, and is star-struck by new technology. When the printing-press was invented and used, information became more readily available. It helped in the democratic process, but it didn’t change human nature. That seems to me to be the issue here.

    • Maria Marquez

      @Henri: If you had read the post thoroughly, you would have noticed that it is no magic solution that will make the debt go away. It is sound economic reasoning that brings him to the solution he offers, just as it is sound reasoning that unveils the reason why Germany would not accept the solution. Your capitalist prejudice shows.

    • pgs

      one thing to do for all those supporting the extra-gvt faction of syriza is to give them 15% of their income

    • Alastair Newman

      Yes Richard, but what is human nature? We have a period in European history when the expression of Man to God was replaced by the expression of Man to Man (the Age of Enlightenment to the Age of Reason). As Gould put it, “the moment when expression moved from Church to Theatre” There is no divine or singular mechanism for resolution here and I feel that Varoufakis has attended to this. But as history reflects our changing object of expression, so too does our human nature discern what is appropriate for a Greek and ECB solution. Which one is de rigueur as present?

    • SD

      The country can do fine if it does not have to pay aall these billions to the banksters

    • SD

      He did not . Check and see and understand what he voted yes for