Galbraith Interview: Greece and "A Modest Proposal"

James K. Galbraith on The Modest Proposal, Europe and Greece

Posted at Yanis Varoufakis 22 June 2014

In this Q&A with a Greek journalist, on the occasion of the launch of the Greek translation of the Modest Proposal, James K. Galbraith argues that Italy and Greece can play an important role in changing the terms of the European ‘conversation’, so that rational, minimalist solutions like the Modest Proposal can have a chance of saving the Eurozone. He also explains that the Greek implosion was always a political choice by Berlin and Frankfurt; and that if the Troika squeeze is lessened, it is due to SYRIZA’s success – not to the success of the austerity program. Finally, he answers an important question on the Chinese government’s investment strategies in Greece and in the rest of the Eurozone. 

“The Modest Proposal requires a change of thinking, not a change of European Treaties.”

“If Greece has been declared a success, it is largely due to the success of SYRIZA – not of the austerity program”

The Modest Proposal is based on the analysis that the financial crisis can be solved if three institutions, namely the ECB, EIF, EIB and the ESM are utilized in the direction of creating some common ground among European economies, whether that is through issuing eurobonds or with a new ‘New Deal’. However, these ultimately are decisions of political nature and they are rejected by most Northern European countries who feel that they have already done enough for the South in the past 50 years. The sentiment was expressed through the support of eurosceptic parties in the recent elections. Do you find the current turn dangerous for the Euro and the EU? How can this trend be reversed in your opinion?

Yes, it is dangerous. Although I should point out that the eurosceptic party did not do all that well in Germany, which is the decisive nation in these matters.

To begin, it is necessary for the European South to find a clear and confident voice. I believe this process is now underway, both in Italy and in Greece. The foundation of that voice cannot be that the countries in crisis need ‘help’.  It must be that the European project is endangered, that it must be saved, that it can be saved — and that saving it requires a change of ideas and of policy.

Then it will be necessary to open negotiations with the European partners on that change of policy.

Whether public opinion in Northern Europe can be turned in favor of such a change remains to be seen. But a favorable development only becomes possible after political leaders begin to express a new set of ideas and a new direction for action.

In regards to your proposal for a new ‘New Deal’ the criticism goes that growth and stimulus programs have have already failed in the EU (for example during the Delors presidency of the European commission) and that we should focus on competitiveness, instead. What makes you think that it may be a way forward for Europe now?

Our proposal is not for ‘stimulus’. It is for coordinated change in four areas:  the public debt, the banking system, an investment program, and a social-solidarity program. It is modeled in part on the principles of successful stabilization of economic conditions that has occurred in the United States, and that has also occurred ‘within’ the large Northern European economies. It is based on tested ideas and policies.  A ‘competitiveness’ strategy on the other hand is destined to fail, since there is no way that Southern Europe can lower real wages enough to be competitive with the world outside Europe.  On the contrary, cuts in the established institutions of social welfare in Southern Europe are having the effect of destroying the foundations of an advanced economy, making investment less attractive and competitiveness even worse.

In regards to the humanitarian crisis you propose that countries and banks agree to reverse the trend of TARGET 2. That would necessarily require a swift from ‘competitiveness’ to ‘solidarity’ and it would reflect a change in the hearts and minds of the European elites. Can it be decided and implemented without changing the basic principles of the dominant financial and political thinking at the moment in the EU?

No. It does require a change of thinking. Thank you for asking this question. We consider it our task to help make this point clear. As for our proposal to fund food coupons using TARGET2 accumulated interest, may I remind you that these monies do not reflect the North’s competitiveness. The latter ‘rewards’ the core nations through current account surpluses. TARGET2 accumulated interest, in contrast, reflects the euro’s fragmentation; money that cannot be thought of as a reward for business decisions on the part of core country entities.

Mario Draghi recently announced the setting of negative interest rates with the purpose to tackle deflation. Will that be enough to your opinion?

No. The weapons of the central bank in this situation are very weak.

The idea behind negative interest rates appears to be that banks should have an incentive to lend out their reserves.  But banks do not lend reserves. Banks create deposits by making loans, and they make loans only when they have plausible borrowers with good prospects and collateral.  The European Central Bank can quell a panic. It can defeat coordinated speculation against small countries. But it cannot by itself create the general conditions for a resumption of generalized credit expansion. That is why we insist on the role of the EIB and the EIF, and that the capacity of these institutions should be deployed on a large scale.

The president of the main opposition party in Greece, SYRIZA, Alexis Tsipras, calls among else for the remission of a part of the debt. Do you find this demand to be realistic? Can Europe exit the Crisis, without some kind of debt relief for the countries of the South?

The concept of the Modest Proposal is for a mechanism that works through the European Central Bank to help make the sovereign debt of Greece and other crisis countries manageable, alongside measures to help restore economic activity and therefore (eventually) the fiscal capacity of the Greek state.  We believe this proposal to be entirely realistic, especially as it operates within the framework of existing European law. Particularly in the case of Greece, once the debt held by European public authorities has been made manageable, there should be little difficulty in servicing the debt that remains in private hands.

Let me note though that, in these situations, if practical steps are not taken, stronger ones eventually become necessary. A debt that cannot be sustained, will not be sustained.  So matters become more difficult as time passes, without practical action.

In its annual report the ESM insists that Greece is on the right path and on a trajectory of growth as shown in the competitiveness index of the world bank, where the country seems to climb 29 positions in comparison to 2009. You can read the ESM report hereThe ESM is explicit in stating that progress is made due to the fall of the cost of labor in the country.

If the ESM is your authority in these matters, there is not much I can do for you. I suggest that you look at their record on past predictions.

Furthermore, the Chinese PM visited Greece today with the intention to sign agreements of seven billion euros in sectors like railways and infrastructure, tourism and so on. Should these be seen as signs of confirmation that austerity works indeed? If not, what would your interpretation be?

I think the Chinese are showing an interest in earning the good will of the Greek state, and in deepening cooperation of this type in order to assure their larger market access in Europe. They are also interested in diversifying their asset portfolio, at least to a minor extent. I do not think these investments are, strictly, a business proposition for them; almost nothing that China does in the field of foreign direct investment is for business rather than policy reasons. Therefore, very clearly, this initiative can have nothing to do with the supposed success of an austerity program. Rather, it is an opportunity that emerges from the failure of Europe to initiate such investments, which could have been done under the auspices of the European Investment Bank.

The government claims that the bailout program is coming to an end and that no more austerity measures will be necessary in the future. Do you share that view?

On this point, I hope the government is correct. If the government is correct, that would reflect a major change of position on the part of the Troika. And the cause of that change — if it has occurred —  is not far to seek: it lies in the rise of SYRIZA. The most likely hypothesis, is that Greece’s European partners are reacting to the change in the political climate in Greece, and out of concern that they may have a much tougher negotiating partner in the next Greek government.

An implication, of course, is that this change demonstrates that the austerity measures were all along political, rather than economic, in motivation. They were required for domestic political reasons in Germany, especially. Now the German government is safely installed following an election, a larger political motivation arises, which requires that the policy change. And it does change.

Conclusion: economics had nothing to do with the austerity policy, all along.

And finally, did you have the chance to provide advice to the social-democratic government of PASOK and the then PM, George Papandreou in 2009? Did they ever ask for your advice?

I visited Greece several times during the administration of Prime Minister Papandreou. He is an old friend, and as you know the ties between our families go back to the 1940s. My comments to the government consisted mainly in explaining my reasons for deep pessimism about the course of European policy, especially with respect to Greece. The Greek government, at the time, tended to take a more optimistic and hopeful view, for which I do not fault them. But I fear that circumstances bore out my view.