Flashback to a past that’s still present: the Euro’s problems

When I started watching this video conversation (1) between Yanis Varoufakis and Wolfgang Munchau about the euro.

Varoufakis can be quirky. His concept of the present state of capitalism as “technofeudalism” has always struck me a bit hazy, even though he’s addressing real issues with what he call “cloud capital” in the current iteration of the digital age.

But he and Munchau were generally on the mark in analyzing the euro crisis.

The two agree that the euro crisis never really ended, meaning primarily that the problems in the construction of the euro currency remain and can be expected to have new acute phases of crisis

What we mostly remember as the euro crisis took place basically from 2009-2015 and featured a complicated debt crisis that featured countries that were insultingly derided as the PIGS (Portugal, Italy, Greece, Spain). In countries like Germany, France, and Britain, this included a wave of nationalistic contempt for their fellow EU countries.

Sneering at foreigners is much easier than putting a bit of effort into understand something about how a currency zone works. It does require a bit of effort. But currency zones are not new in the world in the 21st century. In a group of countries with separate currencies, there will be country-to-country differences -growing in productivity growth. If a country’s productivity grows more slowly than another’s, the slower-growing country can devaluate its currency in relation to that of the faster one without thereby damaging the weaker country’s internal economy.

Within a country with a common currency, the same process occurs. Some regions have higher productivity growth than others. That imposes “real devaluation” in the slower regions, i.e., wages and salaries fall. In countries like the US or Britain with an “optimal currency area” (OCA), the real devaluation is mitigated by transfer payments from the richer areas to the poorer via the national budget. This is the function of the much-discussed fact that Democratic (*blue*) states pay much more in federal taxes than Republicans (“red”) states. While the red states receive much more in federal funds than they contribute.

Just saying “Lazy Greeks!” is much easier that actually, you know, thinking.

This is why economists tend to consider a common budget for the whole currency zone to be an essential part of an OCA. Otherwise, a currency crisis can set off the kind of xenophobic hostility and contempt that was so evident in the richer countries during the 2009-2015 period.

Another feature of an OCA is common debt instruments for the currency zone. We saw in the previous crisis (or as Varoufakis and Munchau would presumably say), in that earlier phase of the chronic and ongoing euro crisis, that can lead to national debt crises. A country borrowing in its own currency cannot go bankrupt. If the national currency devalues against the dollar or other yardstick currency, the borrowing country can still pay back the debt in its own currency no matter how devalued. Their interest rates may go through the roof. But default is essentially not possible.

What the eurozone has, however, is individual countries borrowing money with bonds denominated in euros. That means, among other things, that an individual country can default on its debt. And absent a common eurozone budget out of which the interest and principal payments will be made, that will force real devaluations for the countries will the slower-growing productivity, i.e., cuts in public and private spending that produce declines in most people’s standard of living.

That risk is still there. And we’ve seen the kinds of economic and political problems that causes.

The last big round brought bitter divisions within the EU. It also overlapped with the so-called “refugee crisis” of 2015-16, which the far-right parties exploited to raise their political profiles. The overlapping messes also led to Brexit.

In the new geopolitical environment, the EU does not need periodic recurrences of the 2009-2015 phase of the currency crisis.

And, in general, if the EU countries are going to develop a more self-reliant defense industry without impoverishing large parts of their citizens, they need to fix the glaring gaps in the euro currency zone. And they need to confine Angela Merkel-style austerity economics to the proverbial dustbin of history.

Notes:

(1) Will the Euro collapse? - Yanis Varoufakis & Wolfgang Munchau - The Econoclasts. UnHerd YouTube channel 11/12/2025. <https://youtu.be/macQgpfG8CU?si=xZs1kGu9DwifkXCe> (Accessed: 2025-14-11).