Short cuts may not work

Chris Gray reviews: Yanis Varoufakis, 'And the weak suffer what they must?', Bodley Head 2016, pp336, £11.89

Margaret Thatcher made two errors regarding Europe. The first - a common one among British politicians and commentators - was to imagine that a single European market was possible without something resembling a single European state. Tariffs can be lowered and quotas abolished without affecting the sovereignty of national parliaments, but a single European market requires a lot more: it demands a single rulebook. This means that member-states lose all power to set particular quality standards, environmental controls tailor-made for specific habitats or protection for workers and pensioners from cross-border races to the bottom. A single market may not need a single currency, but it needs a single federal-like state to function properly. But, then again, if a single federal-like state is in place, then we might as well have a single currency too (p121).

Varoufakis’s book is subtitled Europe, austerity and the threat to global security. The analysis deserves scrutiny. The title is a clause from Thucydides’ History of the Peloponnesian war, taken from the famous passage concerning the island of Melos, which had rebelled against Athenian rule and was about to suffer the consequences.1 His book is especially valuable because it analyses in detail the economic consequences of the Bretton Woods settlement of 1944, which inaugurated the period in which the USA operated as undisputed capitalist hegemon.

The plan put forward by Keynes at Bretton Woods involved creating a new world currency (the ‘bancor’) with exchange rates fixed between it and national currencies; there would be a tax on bancor surpluses run up by individual countries participating, under the auspices of the new International Monetary Fund. The US authorities were opposed to both these ideas - especially the notion of a tax on surpluses: they insisted that the dollar would be the world currency, in effect, and that the US would unilaterally decide what to do with any surplus it earned. As Varoufakis notes, “America owned the surpluses and would recycle them herself, without petitioning a group of bankrupt Europeans for their permission to do so” (p27).

The emergent system worked as long as the US was effectively able to recycle its surpluses. However, once this became inoperative, the US pulled the plug. Varoufakis notes:

The moment men like Paul Volcker saw that political surplus recycling was beyond the American economy’s capacity, they brought the whole system down - with the 1971 Nixon shock. For they understood the fallacy that Europe refuses to grasp: if you set up a free trade, free capital and single currency system without a political surplus recycling mechanism, you will end up with something like the 1920s gold standard (p137).


The result is to force adjustment on economies in deficit, whose populations suffer as a consequence. (This seems to be why Keynes denounced the gold standard as “barbaric”).

As Varoufakis explains, the system worked as long as recycling between the US and Europe operated:

As long as America sold enough stuff to Europeans, the dollars that America was sending to Europe (as aid, to purchase European goods or even to fund US military bases on the continent) were steadily repatriated …

Things began to go awry, as Keynes had predicted they would, when America began to spend consistently more money on European and Japanese goods than foreigners were spending on wares made in America. At that moment, when American surplus turned into deficit, the net stream of dollars reversed its flow, feeding into an ever-expanding euro-dollar lake. By the late 1960s, that stream had turned into a torrent; the euro-dollar lake was larger than the Caspian Sea, and the Bretton Woods system came under siege (p32).


The European Union, as it became, was, according to Varoufakis, spirited into being by “le défi americain” - the American challenge: in a new world of fluctuating exchange rates some way had to be found to cohere the various west European economies into a functioning whole (pp71-72). Hence the various expedients, such as the 1970s ‘snake in the tunnel’, the European Monetary System and, last but not least, the creation of the euro zone. Varoufakis’s remarks on all three are highly instructive, but the key target of his analysis is the decision by western European politicians to put economic cooperation before political unity. Varoufakis writes:

If the custodians of Europe’s monetary union were crypto-federalists, as Thatcher feared and Mitterrand hoped, why is a European federation further away today than it has ever been? François Mitterrand, and probably German chancellor Helmut Kohl too, knew that the common currency would spearhead unsustainable flows of money from the surplus to the deficit countries (sic - CG). They could see that a large-scale crisis was inevitable. But they hoped that the crisis would create the political momentum towards a federal Europe. It did no such thing (p101).


Meanwhile in 2008 the US lost the ability to stabilise the world economy via America’s trade and federal government budget deficits (p217). The result was that the euro zone got into huge difficulties.

Varoufakis’s policy solution to all this can be found in an appendix (pp249-57). He buttresses it with three principles, designed to complement the French revolutionary slogan of ‘Liberty, equality and fraternity’:

1. No European nation can be free as long as another’s democracy is violated.

2. No European nation can live in dignity as long as another is denied it.

3. No European nation can hope for prosperity if another is pushed into permanent insolvency and depression (p233).


The policy prescriptions on pp249-57 are extracted from A modest proposal for resolving the euro zone crisis by Varoufakis, Stuart Holland and JK Galbraith, which was published in July 2013. A key sentence runs: “Europe cannot wait for federation” (p251).

He goes on to say:

If crisis resolution is made to depend on federation, the euro zone will fail first. The treaty changes necessary to create a proper European treasury, with the powers to tax, spend and borrow, cannot, and must not, be held to precede resolution of this crisis.


What, then, do the authors propose?

1. Recapitalisation of failing banks should be handed over as a task from national governments to the European Stability Mechanism.

2. The European Central Bank should offer member-states an opportunity to convert their ‘Maastricht compliant debt’.

3. A “pan-euro zone investment-led recovery programme” amounting to eight percent of euro zone GDP, to be administered by the European Investment Bank and its investment fund.

4. “We recommend that Europe embark immediately on an emergency social solidarity programme that will guarantee access to nutrition and to basic energy needs for all Europeans, by means of a European food stamp programme modelled on its US equivalent and a European minimum energy programme” (p254).

I do not see how socialists can be opposed to any of this, but it appears that the elites who run Europe are dead set against such plans - otherwise they would have implemented them by now. And if they did implement them they might well produce a watered-down version. It appears unlikely that the mass of Europe’s population will eagerly demand any of the above except perhaps point 4, but in that case why be satisfied with half-measures? Why not push for point 4 as part of an EU-wide programme including such things as enhanced powers for the EU parliament, an end to legislation by inter-governmental treaty, a European Constituent Assembly, a basic income for European citizens, etc, etc?

As Yanis Varoufakis says, Europe is too important to be left to its clueless rulers (p195). History is showing nasty signs of repeating itself:

In 1929 all the burden of adjustment was forced upon the weakest debtors. Such a policy cannot succeed since the resulting deflation poisons debt dynamics and mass joblessness poisons democracy (p235).

Be warned: demand a Socialist United States of Europe.

Chris Gray


1. The 17th century English political philosopher, Thomas Hobbes (1588-1679), described Thucydides as “the most politick historiographer that ever writ”. This was because Thucydides’s description of class struggles in ancient Greece at the time of the war between Athens and Sparta in the second half of the 5th century BCE struck him as analogous to the current English civil war, which was raging as he wrote.