Thursday, 26 November 2015

Varoufakis speaking at Sydney University

Yanis Varoufakis, the former finance minister of Greece, blessed University of Sydney with his presence today talking about the Eurozone and economic crisis, a talk hosted by the Political Economy department within the university.

Charmingly, with lots of metaphors and comical stories from his hectic 7 months in the spotlight of the Eurozone debt crisis, Varoufakis delivered a talk to a very leftie audience. Surprisingly, most of the audience consisted not of university students from the political economy department eager to overthrow the neoliberal agenda, but random elderly and Green party sympathisers. I thought leftie students were in on this revolution?

Naturally, the talk was more political and narrative than economic, which I guess was to be expected but nevertheless unfortunate. There are pages and pages of critique I can put against what Varoufakis presented, but I’ll restrict myself to a few below. Most interestingly, though, is how many of the processes and components of his arguments fits perfectly within an Austrian approach to the Business Cycle.

1) Trade Balances - The Hydra that Never Dies

Like many economists and commentators, placing emphasis on current account balances as a conductor and cause for the Eurocrisis has become quite quite popular these days. Varoufakis uses the now almost-classical argument: “OMG, how much oranges and feta cheese does Greece have to export to pay for even one Volkswagen? Unequal trade etc”. Somehow it tends to strike a point with most audiences, regardless of its ludicrous and incorrect statements. No, Dr. Varoufakis, it is not impossible and we do it all the time. It’s called division of labour.

Let me play with some back-of-an-envelope calculations to illustrate. A Volkswagen costs about €25 000, the equivalent of some 125 000 kilo of oranges. In 2012-2013 Greece exported 330 000 tons of oranges, valued at some €66m, capable of financing the costs of about 2 500 Volkswagen (assumed same prices). Not that far away from the few thousand Volkswagens sold in Greece last year. Besides, it’s remarkable how people always use olives or oranges as a proxy for Greek exports – when all citrus fruits share of Greek exports doesn't even amount to 1 percent - in other words, their impact is negligible. German cars, however, amount to some 13-18% of German exports (and so are essential) of which Volkswagen alone is responsible for a fifth (3-4% of all German exports). When you are comparing Volkswagen with Oranges you are simply not comparing like with like in terms of relative economic value for that country's exports. Try using refined petroleum, tourism or even olive oil as comparisons and see what happens.

Besides, some 70% of Australian Exports are raw materials (coal, iron ore and crops rather than oranges and olive oil, but the comparison is the same; low-value unprocessed materials - or what my permabear friend calls 'dirt') and cars happen to be one of its biggest imports as opposed to the Greek case, where cars hardly even show up in trade statistics. If the Greek-German trade imbalance story has any merit to it whatsoever, Australia should be in much worse a state than Greece is, since the examples used for Greece applies even moreso for Australia. Since this lovely country is flourishing, there must be something wrong with this argument, professor.

Trade balances are nevertheless beside the point. I run massive trade deficits with Woolworths – and even bigger trade surpluses with my employer. There’s no vague spectre-like imbalance in our business with one another that causes a crisis. Same goes with my house. Or my suburb. Or my city, state or country. Trade balance arguments are red herrings. On this, see Debelle at the RBA or economist Don Boudreaux's work.

Varoufakis' argument was made by economist Bibow in an article I had the great misfortune of reviewing for my macro class. When I took a look at the export statistic to see for myself, I found that such arguments are not even sufficient; the numbers don’t add up. Most German exports don’t go to Eurozone countries, and the intra-union imbalances are much smaller than these economists argue about, when corrected for that. I.e., what Varoufakis (and Bibow, Stockhammer etc) says cannot be true. Greek debt is not a necessity for German export-led growth or its trade surplus. Indeed, most German exports go to China, US, the UK. But when did these people let facts stop them in their crusades against evil corporations and neoliberalism that apparently governs the European Union?

Varoufakis furthermore mentioned the Ponzi-like situations were developers in southern European countries borrowed money to construct, build and invest as part of the Surplus Recycling Problem and when their refinancing from now-constrained banks dried up, they could not complete their projects. Actual bankruptcies, falling economic activity and plunging GDP were the results. But he never stopped to ask why these developers and business took on unsustainable loans in the first place. Later on in the talk, he admitted that it takes two to tango, but never realized the damage that does to his case. What could possible have induced entire sectors to willingly take on so much debt that it could (and would) risk their operations and businesses? Answer: Money, interest rates and Austrian Business Cycle Theory

2) Weird Stuff on Bankruptcies

His idea of bankruptcies is slightly off; bankruptcy is not a state, identifiable by simple accounting measures. As long as there are investors willing to put more money into a loss-producing venture (or creditors willing to lend to a debtor state) bankruptcy will not occur. Bankruptcy is not a state, it’s a decision. What Varoufakis refers to when he says that Greek was bankrupt in 2010 is that its finances were unsustainable given current growth; debt levels were growing faster than GDP and there was no means to repay it. This is, of course, not true. There are many ways to solve the Greek debt crisis, but it so happens that the options that would solve it are politically and ideologically unthinkable from leading politicians and anti-austerity economists. Let markets and individuals play out, stop regulating everything from health to working conditions, and taxing us to death. After all, the insight that markets and individuals left alone yields prosperity is hardly new (Easterly), neither among economists nor historians (McCloskey).

3) Solutions

Varoufakis made clear that he is reluctant for Greece to leave the euro – not only for the debt-deflation issues that it will cause, but for the practical problems of replacing one currency with another (stamping now-foreign currency of euro to serve as drachma, the great imbalances between people who managed to get their euros out of the banks and those who didn’t, the production period it would take for the new currency to be freely available etc).

Instead, his solution was to democratise the European Union, suggesting a fiscal union to overcome the difficulties of a non-integrated monetary union (see OCA literature or even Krugman). EU is apparently not transparent enough, it is ruled by corporate interests and the political class keep power for themselves. Sure, that’s a premise a lot of people accept – but do you really think creating a much bigger political power source would solve the issue of having politicians run the show for their own interests? Hardly. If your problem is power-and-money-hungry politicians, you want to decentralize power and decision-making. Not centralize it.

Overall, I'm happy to have seen Dr. Varoufakis in person, having listened to his amusing stories of recent events and learned more about his take on things. That they're horribly wrong doesn't mean there are no valuable things to learn from him.

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