Economists Propose Roosevelt's New Deal for Resolving European Crisis

By Con George-Kotzabasis

Professor Varoufakis loves metaphors, especially those penned by him! So I too will use a metaphor even if he will hate it. The Modest Proposal (MP) is the offspring of the comely wedlock of Stewart Holland and Yanis Varoufakis but as time passes even beautiful grooms and brides show their wrinkles and need to do something about their withering state and recover their ‘Bo Derek’ status. Thus a new younger bride was added to the old hag this time with a reputable name, though devoid of any accomplishments, that of James Galbraith, the son of the famous John Galbraith. In the two years of the MP”s existence it was unable to entice any eminent economist to support it and only one economist of run-of-the-mill standing added his name to it, i.e., James Galbraith.

The intellectual weight of both Varoufakis and Galbraith has been amply and brazenly demonstrated by a profound article of theirs published in The New York Times, in which they argued that only the left-wing party of Syriza, a potpourri of Marxists, Trotskyists, and green fear mongers, under its leader Alexis Tsipras, a populist demagogue and a mediocrity to boot, could save Greece from the crisis. That the two professors placed the salvation of Greece on the by now historically obsolete and defunct Marxism, vividly reveals their intellectual credentials and on such reputations they are trying to inveigle and persuade first class economists and serious politicians on the European continent that their MP is the panacea that will pull Europe and its periphery out of its virulent crisis.

But to come to the policies of their MP, which they are re-Christening as The European New Deal in imitation of Roosevelt’s New Deal that presumably pulled America out of the crisis and decreased substantially unemployment, they seem to be unaware that the ‘boom’ between 1933 and 1937 still occurred in conditions of depression as unemployment was still at the level of 15% and the depression only ended with America’s entry into the war as a result of the preparation for the latter and as the unemployed were recruited in the armed forces to fight the axis powers on the seas and beaches of the Pacific and on the deserts and fields of Africa and Europe. Moreover, other countries in the depression recovered more quickly than the U.S.A., for example Canada, as during the Hoover administration, from 1930 to 1933, U.S. unemployment was on average 3.9 points higher than Canada’s unemployment and during Roosevelt’s New Deal, from 1934 to 1941, unemployment on average was 5.9 points higher than Canada’s. But it was one of the greatest economists in America Joseph Schumpeter who passed his withering judgment on the New Deal when he blamed it “for the fact that the U.S.A. which had the best chance of recovering quickly was precisely the one to experience the most unsatisfactory recovery.”

The quackery, however, of their MP lies in its implied claim, after the multiple malinvestments, non-investments, and the gargantuan increase of the inefficient public sector and profuse consumption on credit all of which economically devastated the landscape of Southern Europe, that the recovery of the European Union and its periphery can be achieved without pain. That is why they are silent about any structural reforms and the privatization of the public sector, and the need of increasing competitiveness--which are primal conditions for any sustainable recovery--that inevitably involve severe pain for the majority of the people, especially in conditions of depression. But this is understandable as to admit the necessity of pain would shatter their wish and fanciful fantasy to live in the best of all possible painless worlds, and thus would debunk them from the comforts of an idyllic existence on an earth bound paradise.

Furthermore, and this is the most important factor, the crux of their MP is based on an assumption, whose chances of being realized is infinitesimally small, that the issuing of bonds by the ECB and the European Investment Bank (EIB) will be bought by public and private institutions as well as individuals to the degree necessary so the former can fund their programs and thus start the roll of the recovery. It will be hardly reassuring to these institutions and individuals however, to know that their money will be invested in countries of the European periphery with their chronic record of being economically underperforming and default looming is the order of the day. Who would be willing to invest in a seat on the Titanic? It is easy to buy bonds during a time of prosperity but is it as easy to buy them in conditions of economic crisis when there is greater uncertainty about future prospects? Moreover, what reassurance and confidence will render to the public a clause of “super-seniority status” that clearly adumbrates a high probability of “hard default?” It is precisely in highly risk conditions that such clauses are necessary. And once one inadvertently flags such a high risk one turns the market more bearish and scares members of the public from purchasing bonds. In such conditions Keynes’s “liquidity trap” reigns! So what is the fate of the MP, if the bonds purchased by institutions and the public are not adequate in number to finance the grandiose scheme of a European New Deal, other than its inglorious burial! And what will happen to Yanis Varoufakis? Will he abdicate from his vocation as an economist and enter successfully another profession, such as futurology, to compensate for his failure as an economist?

Lastly, what real resources other than artificial ones, such as the printing press and inflation, have the ECB, the EIB, and the European Stability Mechanism for launching a program of such huge dimensions? These are the questions that make the scientific validity of the Modest Proposal dubious. And these unanswered questions by the sires of the MP turn the latter intellectually untouchable to serious economists.