And the Weak Suffer What They Must? Europe’s Crisis and America’s Economic Future | Yanis Varoufakis

Summary of: And the Weak Suffer What They Must? Europe’s Crisis and America’s Economic Future
By: Yanis Varoufakis

Introduction

In the gripping book ‘And the Weak Suffer What They Must? Europe’s Crisis and America’s Economic Future’, Yanis Varoufakis delves deep into the consequences of a common currency without political integration. By analyzing Greece’s economic plight and the restrictions imposed by the Maastricht Treaty, Varoufakis dissects the structural flaws of the European monetary union. This summary provides an insight into the aggressive lending tactics employed by trade-surplus nations like Germany, how the euro currency affected the economies of member countries, and the inherent fault lines of the Maastricht Treaty. As we journey through these critical elements, you’ll discover how these factors contribute to the ongoing European Union crisis and its connection to America’s economic destiny.

The Cost of a Common Currency

Thucydides’ statement comparing the strong and weak serves as a cautionary tale for the consequences of a common currency without political integration, as seen in the euro zone. The 2008 global financial crisis and resulting credit crunch snowballed, leading to insolvency of banks in European periphery countries. The weak nations’ calamities are as much a result of aggressive bank lending by the trade-surplus countries as of profligacy in the periphery country. The Maastricht Treaty eschews “political surplus recycling,” prohibiting fiscal support for social programs, resulting in Greece facing harsh penalties, accepting new loans in amounts insufficient for debt payments. Strain on social obligations includes defunding hospitals and pensions, making Greece’s dilemma at the heart of Europe’s continuing crisis. The US has played a crucial role in the euro’s creation and the European crisis. The future fortunes of the US continue to be linked to Europe’s, and the Maastricht Treaty’s structural flaws remain as a warning of the cost of a common currency without political integration.

The Euro Zone’s Fair-Weather Recycling

The book explains how fair-weather recycling, the pattern of high-income opportunities and investments flowing to booming periphery countries, has caused trade imbalances and financial vulnerabilities within the euro zone. These countries, such as Ireland, Spain, and Greece, were lent to by German banks who recycled the euros earned from exports. However, this financial system faltered when the 2008 financial crisis hit, as struggling euro nations had limited response options due to the inflexibility of the euro. The book argues that examining the paradoxical functions of the euro zone and understanding its limitations is crucial to preventing future financial crises.

Harsh Austerity Measures and the Euro-Zone Crisis

How the euro-zone crisis originated from aggressive lending by northern European banks and the harsh austerity measures imposed on countries such as Greece by ECB, IMF and the European Commission.

The euro-zone crisis is often blamed on southern European countries for their spendthrift ways and lack of fiscal responsibility. However, this view conveniently ignores the role that aggressive lending by northern European banks played in causing the debt boom. In 2009, German banks alone had a €704 billion exposure to Greek, Irish, Spanish, Portuguese and Italian debtors. The result of the Greek bankruptcy was a real risk of German and French banks going under. To prevent this, Germany and France arranged a loan to Greece in 2010, but it was insufficient to resolve the crisis.

The 2012 loan to Greece by purchasing its “100-euros bonds whose market value had declined to less than 20 euros,” earmarked 91% of the loan to repay French and German banks in full. This debt purchase essentially divided the losses among all euro-zone nations, including other periphery states. The loan came with harsh austerity requirements that strong-armed the government into defaulting on promises it made to its people in areas such as pensions and medical care while forcefully discouraging it from defaulting on its bonds and bank debts.

The oversight troika comprising the ECB, the International Monetary Fund (IMF) and the European Commission (EC) temporarily suspended bank payments pending the Greek election. Afterward, payments resumed. In 2015, Greece had to accept additional private bank debt of more than €50 million, while its citizens’ access to basic necessities deteriorated.

The Greek conundrum has its origins in the Maastricht Treaty, which contains a “no-bailout clause” that blocks political surplus recycling from providing for the maintenance of social safety nets and the restructuring of insolvent banks. It stops the ECB from writing down its members’ debts and allows no interest rate relief. Further, debtor countries can’t default on their bonds. The clause forbids the ECB from making loans to member states’ governments or to insolvent banks. Additionally, member nations can’t lend to each other. The no-bailout clause is unworkable. But in 2010 and 2012, Greece received loans to repay the banks in full. The loans indirectly broke the Maastricht rules by having Greece sign IOUs that were passed along to the ECB. The IOUs come from the European Financial Stability Facility, an entity that can issue bonds to raise money for failing euro-zone members.

The troika bent the rules only so far as to “provide just enough liquidity in order to repay” the ECB and IMF. Otherwise, it imposed severe austerity on distressed countries amounting to the “dismantling of basic social welfare provisions.” The austerity rules were not bent to help the people of Greece. Thus the Greek crisis spread to Ireland, Portugal, Spain, and Italy.

In conclusion, the euro-zone crisis originated from aggressive lending by northern European banks and the harsh austerity measures imposed on countries such as Greece by the troika. The Maastricht Treaty’s “no-bailout clause” is unworkable, but the loans received by Greece broke the Maastricht rules and came with draconian austerity requirements. The failure to consider the ROI of helping the people of Greece has led to the spreading of the Greek crisis.

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