Varoufakis on Schauble

This is Varoufakis on Schable- my comments are in bold.

The reason five months of negotiations between Greece and Europe led to impasse is that Dr Schäuble was determined that they would. You said he was determined to get Greece out of the Euro. Clearly, if that was his intention, he failed miserably. Negotiations between Greece and Europe did not end in an impasse. You lost.

By the time I attended my first Brussels meetings in early February, a powerful majority within the Eurogroup had already formed. Revolving around the earnest figure of Germany’s Minister of Finance, its mission was to block any deal building on the common ground between our freshly elected government and the rest of the Eurozone.[1] A deal was built. It was based on your side's abject surrender.

Thus five months of intense negotiations never had a chance. Condemned to lead to impasse, their purpose was to pave the ground for what Dr Schäuble had decided was ‘optimal’ well before our government was even elected: That Greece should be eased out of the Eurozone in order to discipline member-states resisting his very specific plan for re-structuring the Eurozone. This is no theory of mine. How do I know Grexit is an important part of Dr Schäuble’s plan for Europe? Because he told me so! Okay, Schauble is a shrewd s.o.b. He played you by saying- 'I'm gonna get you out of the Euro'. You blab this to Tsipras. He throws in the towel. All you have proved you are shit at negotiation.

I am writing this not as a Greek politician critical of the German press’ denigration of our sensible (sic!) proposals, of Berlin’s refusal seriously to consider our moderate debt re-profiling plan, of the European Central Bank’s highly political decision to asphyxiate our government, of the Eurogroup’s decision to give the ECB the green light to shut down our banks. I am writing this as a European observing the unfolding of a particular Plan for Europe – Dr Schäuble’s Plan. And I am asking a simple question of Die Zeit’s informed readers:

Is this a Plan that you approve of? Is this Plan good for Europe?

Dr Schäuble’s Plan for the Eurozone

The avalanche of toxic bailouts that followed the Eurozone’s first financial crisis offers ample proof that the non-credible ‘no bailout clause’ was a terrible substitute for political union. Wolfgang Schäuble knows this and has made clear his plan to forge a closer union. “Ideally, Europe would be a political union”, he wrote in a joint article with Karl Lamers, the CDU’s former foreign affairs chief (Financial Times, 1st September 2014).

Dr Schäuble is right to advocate institutional changes that might provide the Eurozone with its missing political mechanisms. Not only because it is impossible otherwise to address the Eurozone’s current crisis but also for the purpose of preparing our monetary union for the next crisis. The question is: Is his specific plan a good one? Is it one that Europeans should want? How do its authors propose that it be implemented?

The Schäuble-Lamers Plan rests on two ideas: “Why not have a European budget commissioner” asked Schäuble and Lamers “with powers to reject national budgets if they do not correspond to the rules we jointly agreed?” “We also favour”, they added “a ‘Eurozone parliament’ comprising the MEPs of Eurozone countries to strengthen the democratic legitimacy of decisions affecting the single currency bloc.”

The first point to raise about the Schäuble-Lamers Plan is that it is at odds with any notion of democratic federalism. A federal democracy, like Germany, the United States or Australia, is founded on the sovereignty of its citizens as reflected in the positive power of their representatives to legislate what must be done on the sovereign people’s behalf. That positive power is subject to judicial review. A Local Authority can't set an illegal rate, a Govt. can't levy an illegal tax. A sovereign country can bind itself by Treaty not to set illegal taxes or provide illegal subsidies. E.C countries already are barred from setting import taxes or providing export bounties for inter-European trade. It is no great stretch for National Budgets to be brought under the purview of a European body. Greece would have benefited if this had happened 15 years ago.

In sharp contrast, the Schäuble-Lamers Plan envisages only negative powers: A Eurozonal budget overlord (possibly a glorified version of the Eurogroup’s President) equipped solely with negative, or veto, powers over national Parliaments. The problem with this is twofold.

1) First, it would not help sufficiently to safeguard the Eurozone’s macro-economy.
2) Secondly, it would violate basic principles of Western liberal democracy.

1)  No political arrangement can safeguard any Macro-economy whatsoever. Otherwise, there'd be no subject called Macroeconomics. Instead, under that heading you'd have a notice saying see 'optimal political arrangement for safeguarding the Macro-economy.'

2) If Western Liberal Democracy has 'basic principles' then other truths can be derived from them. If what is proposed violates one or more such basic principle, it follows that it must violate one or more derived ratio such that an illegal action has occurred. Hence the proposal would be struck down as unconstitutional.
The Judiciary acts as countervailing power on the Executive in a negative manner- preventing it from doing certain things. It can also direct the Executive to do certain things under threat of punishment. It can't, however, take the place of the Executive and do those things itself. This does not represent some great scandal for Liberal Democracy. Rather, it is necessary to its existence.

Consider events both prior to the eruption of the euro crisis, in 2010, and afterwards. Before the crisis, had Dr Schäuble’s fiscal overlord existed, she or he might have been able to veto the Greek government’s profligacy but would be in no position to do anything regarding the tsunami of loans flowing from the private banks of Frankfurt and Paris to the Periphery’s private banks.[2]  Why would money flow from Frankfurt to Paris if the fiscal overlord has ordered a fiscal contraction in Greece? Suppose Bankers be crazy, what is to stop the Chairman of the ECB from going on TV and saying so? Those capital outflows underpinned unsustainable debt that, unavoidably, got transferred back onto the public’s shoulders the moment financial markets imploded. Unavoidably, you cretin? Just because you, personally, fucked up as an advisor doesn't mean such stupidity was unavoidable. Post-crisis, Dr Schäuble’s budget Leviathan would also be powerless, in the face of potential insolvency of several states caused by their bailing out (directly or indirectly) the private banks. How fucking stupid are you? Don't you get that bailing out Banks, like regulating them, is the Central Bank's job?

In short, the new high office envisioned by the Schäuble-Lamers Plan would have been impotent to prevent the causes of the crisis and to deal with its repercussions. Moreover, every time it did act, by vetoing a national budget, the new high office would be annulling the sovereignty of a European people without having replaced it by a higher-order sovereignty at a federal or supra-national level. We KNOW the current system can be improved by addressing issues the Plan raises. We don't know it would be impotent but do know that the reasons you have given are utterly specious. Sovereignty is not annulled every time the Executive is barred from an illegal act. Judges don't suddenly turn into Chief Magistrate's of the Republic, taking over from elected officials. Instead, the Executive's menu of choice is constrained in a useful way and so they make better decisions.

Dr Schäuble has been impressively consistent in his espousal of a political union that runs contrary to the basic principles of a democratic federation in your worthless opinion. In an article in Die Weltpublished on 15th June 1995, he dismissed the “academic debate” over whether Europe should be “…a federation or an alliance of states”. Was he right that there is no difference between a federation and an ‘alliance of states’? I submit that a failure to distinguish between the two constitutes a major threat to European democracy.

Forgotten prerequisites for a liberal democratic, multinational political union

One often forgotten fact about liberal democracies is that the legitimacy of its laws and constitution is determined not by its legal content but by politics. To claim, as Dr Schäuble did in 1995, and implied again in 2014, that it makes no difference whether the Eurozone is an alliance of sovereign states or a federal state is purposely to ignore that the latter can create political authority whereas the former cannot. Says who? If Churchill had been killed, who would have succeeded him as head of the Imperial War Cabinet? Atlee? No- Jan Smuts, a South African. Switzerland is a Federal State. The British Commonwealth was an Alliance. Who would have had greater authority within their respective territories, Smuts or the Swiss President? Varoufakis knows shit, talks shit and when called to negotiate for his country in their hour of need, he puts his hands down his pants and pulls out fistfuls of shit which he then proceeds to eat claiming it to be chocolate pudding.

An ‘alliance of states’ can, of course, come to mutually beneficial arrangements against a common aggressor (e.g. in the context of a defensive military alliance), or in agreeing to common industry standards, or even effect a free trade zone. But, such an alliance of sovereign states can never legitimately create an overlord with the right to strike down a states’ sovereignty, since there is no collective, alliance-wide sovereignty from which to draw the necessary political authority to do so. How fucking metal are you? Fuck you think happened in Germany in 1866 and 1870? The Prussian King was the head of an alliance. He became not the Emperor of Germany but German Emperor with perfect legitimacy.

This is why the difference between a federation and an ‘alliance of states’ matters hugely only to you, you ignorant fuckwit. For while a federation replaces the sovereignty forfeited at the national or state level with a new-fangled sovereignty at the unitary, federal level, centralising power within an ‘alliance of states’ is, by definition, illegitimate, and lacks any sovereign body politic that can anoint it. Rubbish. The German Emperor was perfectly legitimate. Too much so, for the good of the Germans. Nor can any Euro Chamber of the European Parliament, itself lacking the power to legislate at will, legitimise the Budget Commissioner’s veto power over national Parliaments. Now you're just making things up.

To put it slightly differently, small sovereign nations, e.g. Iceland, have choices to make within the broader constraints created for them by nature and by the rest of humanity. However limited these choices, Iceland’s body politic retains absolute authority to hold their elected officials accountable for the decisions they have reached within the nation’s exogenous constraints and to strike down every piece of legislation that it has decided upon in the past. Really? Iceland is not a 'Rule of Law' country? Anyway, it has just 300,000 people.  In juxtaposition, the Eurozone’s finance ministers often return from Eurogroup meetings decrying the decisions that they have just signed up to, using the standard excuse that “it was the best we could negotiate within the Eurogroup”. Unlike M.Ps returning from Westminster who bring back Hospitals and Factories and flying Unicorns for their constituents coz. the UK aint in the Eurogroup so everybody can have anything they want without any need for tiresome negotiations.

The euro crisis has expanded this lacuna at the centre of Europe hideously. An informal body, the Eurogroup, that keeps no minutes, abides by no written rules, and is answerable to precisely no one, is running the world’s largest macro-economy, with a Central Bank struggling to stay within vague rules that it creates as it goes along, and no body politic to provide the necessary bedrock of political legitimacy on which fiscal and monetary decisions may rest. Which is why you guys are desperate to stay in the Eurozone. The alternative is talking monkeys like you shitting on everything in Parliament.

Will Dr Schäuble’s Plan remedy this indefensible system of governance? If anything, it would dress up the Eurogroup’s present ineffective macro-governance and political authoritarianism in a cloak of pseudo-legitimacy. Legitimacy is a good thing, especially if it is 'pseudo' from the p.o.v of a loony toons like you- okay, maybe this kraut aint so bad. The malignancies of the present ‘Alliance of States’ would be cast in stone and the dream of a democratic European federation would be pushed further into an uncertain future. You are stupid, your dreams are toxic. Their being pushed into the future is a good thing.

Dr Schäuble’s perilous strategy for implementing the Schäuble-Lamers Plan

Back in May, in the sidelines of yet another Eurogroup meeting, I had had the privilege of a fascinating conversation with Dr Schäuble. We talked extensively both about Greece and regarding the future of the Eurozone. Later on that day, the Eurogroup meeting’s agenda included an item on future institutional changes to bolster the Eurozone. In that conversation, it was abundantly clear that Dr Schäuble’s Plan was the axis around which the majority of finance ministers were revolving.

Though Grexit was not referred to directly in that Eurogroup meeting of nineteen ministers, plus the institutions’ leaders, veiled references were most certainly made to it. I heard a colleague say that member-states that cannot meet their commitments should not count on the Eurozone’s indivisibility, since reinforced discipline was of the essence. Some mentioned the importance of bestowing upon a permanent Eurogroup President the power to veto national budgets. Others discussed the need to convene a Euro Chamber of Parliamentarians to legitimise her or his authority. Echoes of Dr Schäuble’s Plan reverberated throughout the room.

Judging from that Eurogroup conversation, and from my discussions with Germany’s Finance Minister, Grexit features in Dr Schäuble’s Plan as a crucial move that would kickstart the process of its implementation. A controlled escalation of the long suffering Greeks’ pains, intensified by shut banks while ameliorated by some humanitarian aid, was foreshadowed as the harbinger of the New Eurozone. On the one hand, the fate of the prodigal Greeks would act as a morality tale for governments toying with the idea of challenging the existing ‘rules’ (e.g. Italy), or of resisting the transfer of national sovereignty over budgets to the Eurogroup (e.g. France). On the other hand, the prospect of (limited) fiscal transfers (e.g. a closer banking union and a common unemployment benefit pool) would offer the requisite carrot (that smaller nations craved).

Setting aside any moral or philosophical objections to the idea of forging a better union through controlled boosts in the suffering of a constituent member-state, several broader questions pose themselves urgently:

• Are the means fit for the ends? Yes, because those means got shot off you.
• Is the abrogation of the Eurozone’s constitutional indivisibility a safe means of securing its future as a realm of shared prosperity? You're just babbling nonsense here.
• Will the ritual sacrifice of a member-state help bring Europeans closer together? Yup. That and a barbecue with lots of beer.
• Does the argument that elections cannot change anything in indebted member-states inspire trust in Europe’s institutions? Yes! It eliminates political risk.
• Or might it have the precise opposite effect, as fear and loathing become established parts of Europe’s intercourse? Fear and loathing, for you, we will always have with us.

What conclusion can we draw from Whatthefuckis's cri de coeur? This Schauble guy- an Accountant of some sort- got the measure of Whatthefuckis and played him like a hillbilly banjo. The result- Greece can stay in the Euro, if it grows up. Otherwise it can leave and no one will shed a tear. 

Final Score

Boring Accountants- 1 , 'Brilliant' Economists- 0

So, no change there then.

Comment by Yorick's bones-

Yoricks bones18 July 2015 at 04:02

I understand that times are troubled and discussions get heated. I am in principle not interested in the heat, but in the arguments that (should) drive discussions. You seem to have some, and I would like to ask you some questions about them:

(1) Do you think Varoufakis is wrong, or that he is lying? Not necessarily pertinent, but interesting.

(2) Do you also think all the nobel laureate economists (I can think of a couple) who have supported him are wrong? Or lying?

(3) Do you think that Schäuble, whose interests are at least as vested as those of Varoufakis (being more than the latter a man of politics), is being more truthful, or just more economically savvy?

(4) Or do you think that the Americans' interests in the case of the Greek crisis are as vested as the Germans' or the Greeks', if less obvious? Then what would you say they are?

(5) The way I see it, many economists have been saying that the measures that have been proposed in the current deal have historically been proven to be inefficient, if not ineffectual, in their task of cleansing and repairing the Greek economy.* Do you think the measures proposed will actually help the Greek economy recover?

* (6) I am taking the cleansing and repair of the Greek economy to be the aim of these measures, because a healthy and functional economy is a requisite for the servicing of a debt, which in turn is the creditors' alleged goal in this whole affair. Is that not so?

REPLY to a comment by Yorick's bones-
Thank you for your comment
I appreciate the distinctions you make. We visualize Econ Policy as facing a menu of feasible choices. A particular pick may be advocated for many different reasons- some specious, some normative purely, some 'strategic' (i.e. disingenuous), some purely alethic. Furthermore, the advocate of a particular pick may have a compelling 'white box' theory- i.e. the guy saying pick x, has a convincing explanation of why picking x will set off a series of plausible events such that the objective y is achieved- whereas an opponent of x may only have a 'black box' theory backed by empirical evidence of a regularity. Finally, Econ (to Yannis's disgust) can't do interpersonal comparisons. There is no way to know whether Bill Gates getting richer is better for billions of people than a patent troll attorney engaged in a nuisance value legal case against him.

This means that any policy prescription can have some  sane honest advocate
Econ as a subject is aware that there is no objective method to 'mechanically' distinguish strategic from alethic responses. This problem of 'Preference Revelation' is why Politics can't be reduced to Economics. Rather there is a supervenience relationship characterized by multiple realizability.

I interpret your first sentence as equivalent to the above- and agree.
Turning to your questions.
1) Varoufakis is a Game Theorist who tried to be a 'Conviction Politician' rather than a tactician. This means 'Kavka's toxin'  has salience. Varoufakis signals he is willing to take poison at time t and it is plausible to think that he is prepared to die by taking that poison even though he knows he won't have to take the poison and will get a million dollars as a result.
If Kavka's toxin, or Newcombe type problems predominate, then a general solution lies in the trade off we make between devoting cognitive resources to alethic investigation as opposed to imperative valency. Mahatma Gandhi faced a Kavka's toxin problem. He had to be a loyal seditionist otherwise he lost obligatory passage point status between the British and the Revolutionaries. He resolved the quandary by devoting a lot of resources to imperative gestures (spinning cotton, making salt) and none to alethic investigation (he could easily have found out that the cotton he was spinning was negative value added or that sea salt was more expensive than the taxed commodity). We can forgive Gandhi because maybe he lived at a time when Brown people believed the White Man was chosen by God to be his Master and thus bound to be superior.
What about Varoufakis? He is saying 'I am swallowing Kavka's toxin (i.e. my tactics are suicidal for my country) for the sake of a Democratic Politically United Europe which will make systematic transfers from Rich to Poor regions so as to equalize real incomes and Life Chances'.
If we give Gandhi the benefit of the doubt, why not Varoufakis?
The answer is Gandhi gave up Law, he condemned its practice, long before he did silly things like spin cotton and try to make salt. Varoufakis was an economic adviser to the Greek Govt. and still is a practicing Economist- i.e. he can't avail of Gandhi's way of winning the Kavka's toxin challenge. He can't adopt a hypo-mechanist, hyper-mentalist position since his profession commits him to hyper-mechanist, hypo-mentalist alethic investigation as opposed to mystic rapture.
Is Varoufakis 'lying' or deluding himself or just incompetent? To answer that question- which involves identifying the Muth rational demarcation procedures relevant to distinguishing 'lie' from 'self-delusion' and relating this to competence under cognitive trade-offs- we first need to establish whether Varoufakis is 'wrong'- i.e. is his 'dream' Muth Rational? Would all agents, having the same information set and possessing the correct theory, identify Varoufakis's claimed objective as a Rational Expectations Eqbm, robust to hysteresis?
No. Not at all. Varoufakis's 'democratic Political Union' isn't incentive compatible. It falls at the first hurdle to be the Muth Rational 'correct' theory. Varoufakis knows this. Ergo he is acting in bad faith to all.
2) Krugman & Stiglitz & so on don't believe in Varoufakis's supposedly morally prescriptive dream for Europeans, but they do believe in a specific 'bastard Keynesian' policy prescription and interpret everything in that light. Thus, if claiming Varoufakis is right causes the Eurozone to start printing money like crazy and if this causes aggregate demand to rise, then that's a good thing because all 'austerity' is simply the result of collective stupidity- the paradox of thrift. These people are wrong and sometimes they do tell lies but essentially they are commodities in themselves. Varoufakis isn't yet a commodity in himself. His income still mainly derives from actions as an agent, not a principal.
3) Schabule is an Accountant- not a good one and thus a run of the mill politician. He is associated with quite large scale transfers as well as the abject failure of Privatization type initiatives. His perceived ascendancy would tend to cause the Euro to depreciate- which is good for Germany because it increases sales to the rest of the World while paying less, as a proportion, to poorer members. Thus, in this round, the stupid Accountant won and the 'brilliant' Economist lost.
4) America is concerned that its own Corporate investments, supply chains, and intellectual property rights are protected and appreciate more than proportionately. It has shown it can bend the IMF to its will- so it is effectually  hegemonic and has indeed extended the Roosevelt Corollary to the Monroe Doctrine to Europe. America has always pretended to be a bailiff but actually told other countries to forgive debts owed to them by others- which is why there were no formal, as opposed to de facto, Second War Reparations- but made sure that any haircut for its Govt. was associated with a more than proportionate gain for its Corporations. Nothing in this current Crisis has changed that- which is why the Euro has fallen against the dollar despite low oil prices.
5) No measures have been suggested that will help the Greek economy to recover. However, if that economy shrinks enough, Greece has no alternative but to recover in much more dynamic form. Ulysses did much better once Proteus, the Old Man of the Sea, got off his back. If Schabule first got Tsipras drunk on power by tricking him and if Party Politics in Greece has truly been poisoned, then well and good.
6) Shrinking the Greek Economy as well as the expected Permanent Income of Creditors is the outcome, if not the stated aim, and that's feasible, indeed salutary, ceteris paribus given that, currently, no value adding incentive compatible model for Public Sector intervention obtains.

Like most ordinary people, I feel all Europeans should have a Social Minimum, on the basis of improved factor mobility and democratic subsidiarity- such that Tiebout manorial rents are equitably distributed- and this should be gradually extended to other countries once they undergo 'demographic transition'.

Varoufakis type 'zero-sum' long term  transfers can't become sustainable or significant on a continent wide scale unless 2 conditions are fulfilled
1) factors must be inelastic in supply in the 'rich' areas
2) no preference revelation or mechanism design type problem arises.
This is implausible unless the tax collectors come from the poor region and are completely honest and have access to a window of Momus and thus can see into the hearts of men.
As a matter of fact, you can have sustainable transfers where there is a countervailing benefit- for e.g. rich regions give some cash to poor regions in return for which their Investments appreciate- i.e. there is an Aumann type correlated equilibrium. Here monetary union or the gold standard (if credible) removes uncertainty and signal extraction type problems thus rendering the game positive sum.
Graciella Chichilnisky's work is relevant in this context. Normally preference diversity can't be too much or too little and so it looks as though super-states will be more fragile. However, 'limited arbitrage' is itself canalised, so to speak, provided (this is the ideal outcome under monetary union) there is increased local Public Good Tiebout model competition such that transfers are internalized under the rubric of subsidiarity. In other words, voting with one's feet replaces the farce of voting.