“There is something rotten in our financial kingdom.”
Ninety seconds in and former Greek finance minister Yanis Varoufakis already has the packed auditorium audience in the palm of his hand. It might be the penultimate session of the Pensions and Lifetime Savings Association’s investment conference, but nobody is going home yet.
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Yanis VaroufakisVaroufakis—described as a “rock star economist” since his
sudden emergence with Greece’s left-wing Syriza party at the height of its debt
crisis—knows an economic disaster when he sees one. Over six years from 2009,
he saw—and at times directly fought against—a crippling austerity program
enforced by the ‘troika’ of the EU, the European Central Bank (ECB), and the
International Monetary Fund. It wiped out almost a third of Greece’s economic
output.
The same political thinking has caused today’s environment of “financial repression,” negative interest rates, and poor yields, Varoufakis argues—the very things the delegates have spent more than two days trying to get their heads around.
The bad news: It is going to get worse, he says.
Varoufakis likens the creation of the Eurozone to the introduction of the gold standard in the 1920s, as both systems fixed the exchange rates of various countries. A flood of capital washed through from countries running surpluses to those running deficits, but as soon as anything went wrong the money rushed straight back out again.
Gripping the podium with both hands, Varoufakis gazes intently out at the investment professionals before him. “When you try to solve this problem through internal devaluation”—austerity, in other words—“then economies crash and very soon you have deflationary forces flooding the surplus countries. Negative interest rates ensue, then negative growth rates ensue. We’ve seen all this before.”
There are a few nods around the room from those who know their economic history.
“Why do you think Greece is a basket case?” Varoufakis continues. “We had the strongest growth rate, along with Ireland, between 1998 and 2008. It was all Ponzi growth, based on this flood of capital.”
“By voting to get out you will give Brussels a bloody nose, and I will be very pleased to see that. But you are not escaping the vortex that the disintegration of the EU is creating.”We are living through “our generation’s 1929,” he argues. Asset bubbles have burst, and capital has rushed out of the previously growing southern European states. “The common currency fragmenting in the 1920s was the gold standard, now it’s the euro. And very soon after that, proud nations turned against one another. We are reliving this moment.”
Varoufakis reiterates this dark hint at a violent future as he explores the potential dismantling of Europe’s common currency. This would create a two-speed Europe, he argues, broadly split between north and south, with high unemployment in both areas. “No one can escape this post-modern version of the 1930s.”
Despite his now-global fame, Varoufakis was Greece’s finance minister for just six months at the start of last year. During that time he gained notoriety for his outspoken nature and his damning verdicts against the troika’s plans, and his talent for a soundbite is still evident, as he describes Brussels—the centre of the EU’s bureaucracy—as a “cesspool of anti-democracy.”
Sir Tim Berners-Lee, inventor of the internet, was a speaker on day one. The man in charge of a small “basket case” economy for half a year has stolen the show.
And so we come to the one word the whole audience wants to hear from the rock star economist: Brexit.
“I would like to make a plea: Stop thinking of the EU as a given,” Varoufakis says. A few eyebrows are raised, and some delegates sit forward, expectantly. “The EU is disintegrating, ladies and gentlemen, as we speak. My problem with Brexit is that it would speed up the disintegration. That disintegration would cause a vortex in the heart of the continent from which Britain cannot escape whether it’s in or out.”
The solution, we are told, is for the European Investment Bank to invest heavily in start-ups and green technology—a form of QE that is more direct than the current program employed by ECB president Mario Draghi. The barrier, however, is politics.
“This is what we need to change in Europe,” Varoufakis says. “Britain made a very wise decision to stay out [of the Eurozone], but you are not disconnected from it. By voting to get out [of the EU] you will give Brussels a bloody nose, and I will be very pleased to see that. But you are not escaping the vortex that the disintegration of the EU is creating.”
He concludes with a rallying call sure to get the British audience on his side: “I believe we should stay together and try to do something very simple: Democratize the EU. As Winston Churchill said, it’s a terrible system, democracy, but it’s the best shot we have at injecting a little bit of rationality in European economics and politics.”
Exit stage left, to rapturous applause.
You can view Yanis Varoufakis’ speech in its entirety on the Pensions and Lifetime Savings Association’s YouTube channel.
Related: ‘Brexit’ Fears Mount for Asset Managers, How to Avoid the Next Sovereign Debt Crisis, Grexit More Likely Than Not, Asset Managers Say