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).

Overlapping crises: COVID-19, eurozone, refugees

Wolfgang Münchau, who was one of the best commentators on the eurozone crisis in the Great Recession is hearing new alarm bells going off. (Eurozone stability is under threat again Financial Times 03/15/2020)

The last ten years showed that there were two big issues that could blow up the EU: the flaws in the structure of the euro currency and the refugee crisis on the southern border. Both in practice promoted nationalistic attitudes that encouraged anti-EU sentiment. Neither has been adequately addressed. Now the COVID-19 crisis is showing the cost of kicking the can down the road on both issues. The scandalously overcrowded refugee in Greece are particularly vulnerable to COVID-19 outbreaks, which Doctors Without Borders have been sounding the alarm about. (Immediate evacuation of migrant camps in Greece needed to contain coronavirus, says MSF Euronews 03/14/2020)

And that makes both the current refugee emergency and the COVID-19 pandemic more difficult to address.

The "social distancing" that is requiring a massive reduction of immediate economic activity in EU countries, along with the lack of EU-wide fiscal policy to compensate for it, could very well bring a new round of the euro crisis. Which is what Münchau focuses on here:

Taken together, the national policies will constitute a stimulus of sort, but they will end up increasing the eurozone’s internal imbalances. The fiscal deficits of Italy, Spain and France will increase a lot. Those of Germany, the Netherlands and Finland may go up too, but by a lot less. The fiscal gap between the north and the south will widen. ... we are back to arguing about Italy’s solvency, which depends on low bond yields.

In other words, it can set off a new euro crisis. "Italy has not forgotten the reluctance of other EU member states to take in Syrian refugees who landed on Italian shores. Italy will emerge from its Covid-19 nightmare to a different world. It is not good for the EU to antagonise a founding member state."

Yanis Varoufakis talks about the economic repercussions of the COVID-19 crisis in Yanis Varoufakis on the economic and political impact of the coronavirus DiEM25 03/15/2020: