Year of the Witcher: Yanis of Rivia Triumphs

We said before that 2015 is the Year of the Witcher -- the moment that three decades of pent-up anti-neoliberal resistance erupt, with tectonic force, into collective innovation.

In a referendum this Sunday, the people of Greece voted by a landslide 61% to 39% to reject neoliberal austerity.

Europe's neoliberal elites have preached the virtues of austerity for six long years. Their policies have failed. The  335 million citizens of the eurozone are now 3% poorer, on average, than they were in 2007. Rates of investment in the eurozone are crashing to all-time lows, while economic growth is nonexistent. Nowhere is the crisis worse than Greece, which has fallen into a catastrophic economic depression.

If this is success, one shudders to think of what failure is supposed to look like.

On Sunday, the ordinary people of Greece -- humble clerks and cashiers, drivers and cooks, students and teachers, farmers and civil servants -- proved wiser than Europe's elites. They voted against neoliberal austerity, but for European solidarity. To paraphrase the inimitable Yanis Varoufakis, their resounding NO to the financial despotism of the eurobanksters is a YES to the democratic union of all Europeans. Greece can and will pay back its loans, but first it needs debt restructuring and a return to growth.

After the vote, Varoufakis gracefully resigned his post as Finance Minister, a political gesture of goodwill towards the other finance ministers of the Eurogroup -- the folks who, after all is said and done, must sit down and work out an agreement with Greece. Varoufakis' stint very much a  real-life version of one of CD Projekt Red's witcher contracts -- the hunting and taking down of the Euro-Minotaur, that grievously wounded but still-dangerous beast which has devastated economy after economy. One must say, Yanis took down the beast with epic precision.

Now comes the time of Ciri-style mass insurrection, as the people of Europe battle against the White Frost of Neoliberalism.

The Eurozone Crisis: Three Charts, One Solution

The European Union's common currency, the euro, has been in trouble for years. The problem, in a nutshell, is that the euro is a financial union between 19 countries, but not yet a fiscal union between those countries.

Why does this matter? Here in the US, we have 50 states which share a single currency, the dollar. It works because wealthier states like California pay more to the Federal government than less wealthy states like Mississippi. That means Mississippi can pay for its schools, infrastructure and healthcare, enabling its children to grow up and get good-paying jobs at Apple and Google, so it all works out. When an economic downturn comes, the Federal government steps in with deficit spending, enabling the 50 states to pay their bills. Everyone shares the burdens, everyone reaps the rewards.

Not so in Europe's eurozone. Its 19 participating countries share a currency, but there's no European equivalent of the Federal government to backstop the economy. When a downturn comes, the result is that the richest European countries (Germany, Netherlands, Finland) have the resources to recover, while the poorest countries (Ireland, Spain, Portugal, Italy and Greece) lack the cash -- and subsequently fall apart.

Here's an index of per capita real GDP growth in the Eurozone, Greece, and the US from 2003 to 2014 (i.e. adjusted for population growth and inflation):

Greece grew a bit faster than the rest of Europe from 2003-2007. But when the crisis of 2008 hit, the Greek economy collapsed into a Depression -- a 26.6% decline in its real GDP.

But what's scariest about this chart is not what happened to Greece, but the trendline for the Eurozone. Six years after the crisis, real per capita GDP in the eurozone is still 3% below its 2007 peak, precisely where real per capita GDP in the US is now 4% above its peak.

That's right, here in 2015, the 335 million people in the eurozone are, on average, still poorer than they were in 2007. You'd think six years of spectacular economic failure would cause the eurozone countries to rethink their policies, but no -- the Eurogroup is now demanding fresh austerity from Greece.

Why? Because when any national economy shrinks, governments have to run budget deficits (more money goes out than comes in). The problem is, when poorer countries in the eurozone have to pay the interest on their deficits, they have no fresh source of money to grow their economy. Austerity triggers more cuts, which trigger bigger government deficits, which trigger more austerity, in a never-ending spiral downward. This is what happened in the US during the Great Depression from 1929-1932 in the US, and the same thing has been happening in the eurozone. Here's the chart of national debt to GDP for Greece, the US, and the eurozone:

Blaming Greece for its debt is exactly like blaming a patient suffering from malaria for running a fever. The fever is the symptom, not the cause. The underlying problem is that the Depression has destroyed the viability of the Greek economy, preventing it from recovering. Here's the chart which explains why austerity has failed:

Investment (gross capital formation) is the motor of any modern economy. A country needs to invest at least 15% of its GDP just to maintain its basic capital stock, but needs to invest more if it wants to grow. US rates of investment took a hit during the recession, but recovered to respectable levels. But investment fell off a cliff in Greece. This is bad, because as long as its investment rate is this low, it will never, ever be able to pay its debts.

Regardless of what happens in Greece over the next week, this problem is not going away. In fact, it is going to get even worse (Joseph Stiglitz explains why). What's true for Greece is true for all the poorer eurozone countries, all of which are locked in a self-perpetuating cycle of austerity, stagnation, falling investment, and then more austerity. To borrow an apt metaphor from the field of nuclear fission, Greece's meltdown would trigger a chain reaction of defaults -- the meltdown of Portugal, then Spain, then Italy and Ireland, and ultimately the collapse of the entire eurozone economy.


Thankfully, there is a sensible alternative to catastrophe, an alternative has been proven to work in eighty years of US history.

Make the euro work for every eurozone citizen, just like the US dollar works for every US citizen.

The first step is investment. The EIB should immediately invest the equivalent of 3% of Greek GDP (just 7 billion EUR) in wind and solar energy, infrastructure, healthcare and education. Stabilize the Greek economy, enable it to recover, and then it will be able to pay its debts.

Next, extend this program to all the poorer nations of the eurozone. This will require an investment fund of about 150 billion EUR (that's about 3% of the roughly $5 trillion GDP of these countries).

This may sound like a lot of money. It isn't. The EIB has a rock-solid, triple A-rated balance sheet of 542 billion EUR, and 150 billion EUR is peanuts compared to the eurozone's $9.5 trillion economy. Remember, this isn't throwing good money after bad. This is putting idle savings to socially useful work, under the democratic supervision of the people of Europe. Get the eurozone growing again, and the euro will no be longer a deadly weapon of immiseration, but a benevolent engine of prosperity.

All in, nobody out.

It's as simple as that.