Europe under pressure - Yanis Varoufakis on the state of the Eurozone

we live in interesting times that way and by interesting what I mean these times when the past is no longer a good predictor of the present or the future indeed I mean look at today's sell-off week that began in Asia and which continued here in Europe or what happened what was it 18 days ago when the markets launched themselves into a stage jump and the crowd disappeared under normal circumstances the good scenario would prevail and what is a good scenario that at long last we are seeing some wage growth especially in the United States this is going to put upward pressure on interest rates a bond yields are going to go up as pumpkins go up the the price of bonds is going to go down quantity demanded of bonds is going to increase there will be a capital shift from equities to the bonds and therefore there's going to be a correction so all is good in the best of all possible worlds this is not unfortunately what is happening or at least I don't think it is if you can convince me that we have a normal standard correction I'll be a very happy person here in Berlin for many years now we have been witnessing an aberration a weird correlation between price the price of equities and the price of bonds and I very much fear that this correlation is going to continue during the downturn as well as it was continuing during after and the reason is fund managers will tell you this there are a lot of people out there holding portfolio laden with bonds that yield negative rates so we have that kind of portfolio and the price of bonds comes down there is a very heavy chance that there's going to be a sell-off so those of you who suffer at economics microeconomics in in in college or in the universities that you attended you'll remember the different good a good whose price goes down at the same time as demand goes down and if this happens the great worry bringing my discussion my talk to Europe now the gate worries that if this happens the European periphery is fragile banks are going to be in serious trouble because what keeps them going is the repo market liquidity coming out of wrappers so if those bonds begin to disappear from those portfolio that are now providing liquidity to let's say Italian banks we are going to have a major squeeze at the time when the single supervisory mechanism of the European Central Bank is already putting a different kind of regulatory pressure on those banks for instance with non-performing loans and there is the talk in town not this town but further south in Frankfurt of the winding down of the quantitative easing program which is keeping Italian public debt and Italian banks afloat speaking of the European Central Bank it's um it's quite interesting and quite worrying to read the minutes of the last meeting of its executive board when they are talking about the probability of outcomes shifting towards the downside and what they are particularly worried about the combination of the rising Europe a hard Europe and increasing well increasing volatility because let's face it in the last decade the eurozone suffered not perhaps not a great depression but a large depression my country suffered the Great Depression it is still in a great depression but we had a serious depression here in Europe and in an attempt to restore something out of it the financial engineering was complicated but the idea was really very simple through QE push the euro down and at the same time make it safe for investors to invest in the eurozone both in the private and the public sector that was a strategy behind QE really now there is a great deal of talk and celebration of the recovery in the eurozone and there is no doubt that there is a strong secular recovery in the eurozone but it is important I think to take a closer look at events leading to this recovery and at the nature of this recovery now when we discovered well some of us knew it before that we discovered that the eurozone architecture was very flimsy and it was as if we had created a system that was designed to produce a death embrace between insolvent banks and insolvent states the reaction you know what the reaction was it was a combination of extending and pretending what I call an exercise in fraudulent bankruptcy concealment take the Greek bailout for instance take you know the LTRO programs of the ECB that's what he was trying to cover up extending and pretending a bankruptcy hoping that it will be resolved somehow in the future with fiscal consolidation or as we know it in everyday language very serious degrees of austerity not just in the periphery but also in countries like Germany where you have a significant surplus while at the very same time there are large sways of this country that are condemned to under investment in infrastructure in Social Protection and so on now this combination of socialism for the financial sector allow me to say with you know harsh austerity for everyone else one of the few things we gonna be snow is that if you push the budget deficit to zero and indeed to a surplus position in an environment in a money market environment where there is a substantial excess of savings over investment it's a tautology this is not a theory it is a tautology that you're going to end up with a very large current account surplus so whereas in 2010 2011 the eurozone had a more or less balanced current account today we have something like 400 billion euros worth of a current account surplus in a sense Europe is contributing to the destabilization of the rest of global capitalism but of course we Europeans you don't care about but we do care about Europe we should care about Europe we have no right not to care about our own neck of the woods the combination of the collapsing imports of countries like Italy Spain Greece and the excess savings in the surplus countries like Germany like Holland like Austria drove this current account surplus now in this country the the government and I know that I've I've heard this in my ear from you know the German Finance Minister it is not our job to manage global demand or eurozone aggregate demand that is the line that one gets which of course is completely understandable even if it is inevitable that the response to this is maybe you don't think it is your job to manage aggregate demand in your neck of the woods in your neighborhood outside your borders but then if you do not manage aggregate demand you are going to end up having to finance the bailouts that are an inevitability when the bubbles burst caused by the outflows of capital from Frankfurt to the rest of the eurozone idea I would say it is also your job to invest in the infrastructure that this country needs so that political monsters like the alternative or Deutschland to devote rise up but that's not for me I'm not a German politician this is for Germans Germany's political elite to decide amongst themselves now going back to the effect of quantitative easing which was essential for the recovery that we now observe if if you if you think about it carefully quantitative easing which began if you remember in March 2015 but it was foreshadowed and therefore factored in the markets since the famous Mario Draghi speech in London in the early summer of 2012 the I will do whatever it takes to save the euro speech effectively what the this combination of that great pronouncement and Huey did was to make it again safe to invest in the eurozone in public debt in private assets here in the heart of Europe it made it safe but ladies and gentlemen I'm going to put forward the hypothesis that he did not make it profitable safe and profitable are not the same thing if you look at the outflow and inflow of capital and treat the eurozone as a single economy which you should actually for macroeconomic and macro financial purposes you'll find that since 2014 there was a 1 trillion euro outflow from the eurozone that went into the bond market in the rest of the world at the same time non-european since 2015 have ceased completely under strike they have not been purchasing fresh eurozone or European assets within the eurozone we have experienced considerable asset price inflation as it is out of QE which of course you don't need me to tell you that generates engenders a great deal of you know zombie corporations and initiates share buybacks that push prices of equities up artificially while depressing interest rates and therefore seriously angering the proverbial Swabian housewife who abandons increasingly angular miracle with the results that you have this very interesting contradiction of a country where everybody is in surplus the federal government corporations and households and still the political establishment the two main parties or three main parties are crumbling and in a state of crisis that is the reason which is underlying the mishandling mismanagement of Europe's depression by means of a combination of financial and fiscal policies that acted as cortisone are on a cancer patient if you allow me a vulgar metaphor there is a recovery but look at the composition in the national accounts of our great European countries of that recovery it is coming out of consumer spending six substantial increase in consumer spending and net actuals if you look at fixed capital formation in the eurozone it is stagnant so this is a recovery based on consumer spending private debt look at Spain the vast proportion of Spain's very fast recovery is due to an increase in the same category that gave rise to the bubble that burst pushing Spain in at home and that category is of course private debt similarly in Ireland look at the level of private debt rising another boom and bust cycle is in the offing is this the kind of recovery that we want by which to get out of the depression of the last ten years I submit to you that it isn't it is a kind of recovery which lacking investment in the things that our societies need and which would boost productivity which is not rising let us not make the mistake of come of confusing competitiveness with productivity competitiveness is a zero-sum game productivity is a variable sum game it is productivity should be maying aiming at but we are not going to get it without investment we can get competitiveness through a race to the bottom in terms of wages in terms of conditions but we are not never going to get productivity through this so you have all the political balance sheet you have the repercussions of staking and fixed capital formation that are low-quality jobs in the leading countries of Europe sitting Lehigh unemployment in my country and in other such countries like Italy a substantial increase in the percentage of the workforce which is precariously employed and therefore cannot make long-term plans that would entail some kind of increase in spending on durables and houses on education or investment in human capital and you have pension funds in countries like Germany being absolutely annihilated by the very low interest rates and that is toxifying our politics and poisoning our democracies it is not the refugees the refugees the other the foreigner whether he's a Syrian or a Jew or a Greek or a Portuguese is always the the other that is targeted during periods of macroeconomic deflationary forces and mismanagement now on the economic balance sheet of this recovery I'm afraid it is not sustainable it is not sustainable because firstly as I said before it is predicated upon an increase in private debt an increase which was the reason why we had serious problems in countries like Spain and Ireland and at the same time it is predicated on maintaining a value of the euro squeezing it below its equilibrium level equilibrium given the current account situation something that I don't believe that the European Central Bank can continue to do because the European Central Bank is caught between a rock and a hard place the rock on the one hand is the great pressure from the surplus countries to wind down QE because QE is destroying the pension funds and it is creating political problems in the surplus countries and the hard place which is that the wind-down of QE is going to push the euro up and undo the recovery that now everybody celebrating even those who are asking for the wind-down of QE now QE has to be won done because QE has not succeeded in producing a sustainable recovery but to call for its winding down without replacing it with a genuinely therapeutic policy is the height of irresponsibility you will allow me to say now it is clear that we need reform in our institutions in our policies at the center level we have in the eurozone we have countries with fiscal space but with nothing really to invest in because they demand for investment is very low and then we have countries with no physical space and great deal of investment funding demand but demand that that goes unnoticed or neglected and we have no way of centrally recycling surpluses and deficits in a way that we can have equilibrium in the area or in a space of fiscal policy and in the money markets and the investment markets this is a political failure it's an institutional failure of the European Union and what causes me a modicum of despair I should say is when I read the Great and the good texts and proposals on how to overcome this problem know that President Manuel McCrone stabled several proposals about common budget effectively what I call a federation light which will be so light that it will be macro economically significant and which has already been rejected by both the today and the SPD in this country even though they would like to adorn this rejection with very kind words or emanuelle and then I read the more technical text of the proposed solutions to the institutional dearth or to the institutional malignancies of this kind and that is when I thankfully I don't have my chair because I would have lost it when I did every time I read these reports it is if you want there these are texts on that should be taught in the best business schools economics departments as well as within corporate training programs as how not to do things now listen it at least the most fate the one proposal where it seems that both the French elites and the German elites are converging they are agreeing other thing the miracle they've agreed on something and if agreed on the following they realize that it is a problem not to have a safe asset that the banking system can use as collateral in the repo market in all sorts of different operations that's correct we always lacked a European safest so what do they do they take the two most toxic financial instruments and they asked they suggest that these are combined to produce a safe asset what are the two most toxic of the last decade financial instruments CEOs and sovereign bonds of eurozone member states we have this very interesting arrangement in the eurozone where we have a central bank without the state to have its back and we have States without a central bank to have their back so we have sovereign bonds which you know very well what they almost did to Europe in 2010 beginning with my country the domino effect and we have a CDO idea so is B's European safe bond is the talk of the town and this is the great solution that is being touted I'm only mentioning it because it is as if our both technocrats and politicians we're not around in the last ten years that they missed what happened in last 10 years I allow me to read some I've written something down here from one of those texts that proposes the European safe bonuses safety will be achieved by some combination of diversification and seniority and financial intermediaries will be purchasing listen to this standardized portfolio of synthesized bonds I'd like the Bourbons who forgot nothing and learn nothing a combination of sitios and unsafe assets will never produce a safe asset now they may be interesting innovations if we had other really hardcore safe assets let's face it Mario Draghi's point of easing program created a synthetic but rock-solid proxy for Euro bonds the bonds that are now on the books of the European Central Bank considered as a body a safe asset simply because they see the central bank is behind it it is the reason why we have stabilization the eurozone why the Euro still exists is this body of bonds if this is wound down without something to replace it that will restore the equilibrium in the money market and in particular between savings and investment we are going to have a situation where simultaneously the repo market will be hit Italian sovereign bonds are going to suffer and fragile banks throughout the periphery and some of them in the center in the metropolis if you want of the eurozone are going to be in trouble so there is no doubt that we need think very carefully about how we're going to go back to a dynamic macroeconomic equilibrium in the eurozone we have not done that to have a dynamic equilibrium we need to have a serious reduction in the eurozone's current account surplus which may involve an appreciation of the euro we need to wind down quantitive easing because of the ill effects it has on our politics on the pension funds on the distortions in the equity market but at the same time we need at the political level and I'm speaking as a something of a politician we need to end this stale and added debate between the two camps call them France and : Germany you know for heuristic purposes of their liquidation is on the one hand and that this is and the integration is on the one on the other hand by liquidations I mean the economists and politicians who are promoting as a solution to the architectural problems of the eurozone mechanism by which to bail in investors to bail in even deposit holders in banks think Cyprus effectively the liquidations approach of President Hoover in 1929 if a bubble burst liquidated now as a Greek and the former finance minister I wish we had applied that in 2010 in Greece I wish that our great and good both in Athens and in Washington the IMF and in Brussels and in Frankfurt had said the Greek state is bankrupt let's accept it let's embrace his bankruptcy let's not extend and pretend his bankruptcy by means of the largest loan in history but when you do that you have to have mechanisms by which to absorb the shocks from the liquidation so the integrationists usually the French we're arguing for a common budget for fiscal mechanism by which to recycle surpluses and and deficits they have a point what we need is a combination of a means of effectively declaring bankruptcy and embracing it while at the same time integrating our fiscal capacities and our investment plans across Europe in order to make sure that the liquidation does not lead to a happened after 1929 9 the United States of America so allow me to finish with what I think is the way to proceed yes qe must be wound down but it must be replaced by a new policy for boosting investment directly and how can we do this through an alliance of one of the most sterling institutions we have the mean pound sterling I mean brilliant the European Investment Bank and the European Central Bank because you know what we actually have a real euro bond the bonds of the European Investment Bank what we need is a lot more of them with Mario Draghi or whoever replaces him to be standing behind them in a secondary market and by which to fund European recovery and green investment programme to the tune of some like 5% of GDP say 500 billion across Europe in order to take the excess liquidity which is causing all the deflationary forces within Europe and put it directly into the investments that Germany needs Italy needs we all need today I read that several cities quite wisely in this country are considering a ban on diesel cars well how about investing into a massive switch from diesel to electric cars here in German something that unfortunately the car makers in this country have not done themselves how about creating at long last the green energy union that we need in order firstly to have green energy and secondly to decouple ourselves and free ourselves emancipate ourselves from Vladimir Putin these are all things that are kind out to be done the liquid is there we have some like three trillion euros doing nothing or actually doing all the wrong things as they are sloshing around in the financial sector it is simply a question of pushing it into the road that leads to the investments that can recalibrate and re-equilibrate our macroeconomics in on this country if we are not doing it we're not doing it because of a substantial political failure at the level of politics which then feeds into political monsters in all our countries every single election in Europe these days whether it happens in Austria in France in Greece or in Germany for that matter is creating paralysis it is creating this content and it is pushing good intelligent Europeans to believe that there can be no solution from our political systems nothing contributes more to hopelessness and to toxic politics than that conviction and now let me branch out away from Europe or begin with the margins of Europe before going beyond Europe but a couple of minutes one word brexit what a disaster on both sides you have Michel Barnier the chief negotiator of our European Union who is not mandated to negotiate on anything that London needs he's not even if he wants to even if he wants to discuss what Theresa May wants to discuss regarding the the substance the substance of the long term arrangement between the European Union agree United Kingdom but yet does not have the Monday to do this here's a Monday to tick all the boxes on the form that he has been handed yeah and you have a London government for which the national interest is the last thing on the radar screen the only thing they care about is how to survive another day and how to manage this almighty civil war within the cabinet a mutually advantageous agreement for the people of Britain and the people of Europe is not on the radar screen either of Brussels or of London another example of a massive political failure I'll deal with brexit very very briefly we have two options here everything else is noise either a WTO are at best a Canada agreement which will be detrimental to the interests of both the peoples of the United Kingdom and the peoples of Europe or a Norway style agreement with several ad add-ons which is what I have been trying to push Jeremy Corbyn towards seems to have accepted the customs union which is too little and I'm afraid it's going to prove too late but it's better than nothing and finally just to finish off Donald Trump how clever is it and presence embarking upon the largest boost of the federal government budget deficit at the very same time to be antagonizing and threatening with a trade war an entity that old owns one-third of US Treasuries I leave it to you there I'm looking forward to receiving questions from the floor thank you [Applause]

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Keywords: SuperReturn, Private Equity, Investment, #SuperREturn, SuperReturn International, SuperReturn International 2018, Yanis Varoufakis, Europe Under Pressure, Economics, Europe, Eurozone

Id: bUQ0QHz_EpA

Length: 30min 11sec (1811 seconds)

Published: Wed May 30 2018