Varoufakis highlights battle between rules and macroeconomics at the euro group table

‘The success of macroeconomists such as Varoufakis will be judged by the precedents they set in inspiring others over that longer term’

That was a nice remark about macroeconomics by Yanis Varoufakis, the Greek finance minister, in his interview with this newspaper on Thursday. Together with the outcome of negotiations on Greece’s short-term indebtedness, in which he gained some limited political space to implement immediate domestic reforms, it contains the key to a longer-term evaluation of Greece’s radical-left Syriza government.

“My colleagues in the eurogroup were disconcerted that one of their members insisted on talking macroeconomics. One of the great ironies of the eurogroup is that there is no macroeconomic discussion. It’s all rule-based, as if the rules are God-given and as if the rules can go against the rules of macroeconomics. I insisted on talking macroeconomics.”

Macroeconomics is the study of the structure, behaviour and performance of whole economies, especially output, employment and inflation. “Macro” comes from the Greek for large. Macroeconomics counterposes microeconomics, which deals with individual firms and consumers in particular markets.

Big picture vs rules

At European level, the debate on macroeconomics versus rules overlaps with that of Keynesian economics favouring investment-led growth and a deeper redistributive euro zone versus the ordo- or neoliberal economics of structural reforms intended to enhance mainly export-led growth. The Keynesians say these create austerity and depression because such reforms destroy growth, especially in peripheral or weaker economies, without compensating transfers.

That fixation on rules echoes Varoufakis’s response to Michael Noonan and others who say that academic economists such as him are fine in theory but not in practice. If such rules lead in reality to humanitarian catastrophe, as in his country, they must be confronted politically he says. And of course this latest crisis over Greece, while ostensibly about those rules, is actually highly political, precisely because Syriza challenges them on both economic and political grounds and sets precedents.

A kindred distinction between analytical and operational economics is made by the European Commission president Jean-Claude Juncker, with the heads of the euro zone, the European Central Bank and the European Council in a note for the informal European Council on February 12th. It explores the next steps towards better governance in the euro zone, following up on a previous document from the four presidents in 2012.

Concerning the nature of economic and monetary union, the document says upfront: “The euro is more than a currency. It is also a political project.” The single currency has created a “community of destiny” between its 19 members which “requires both solidarity in times of crisis and respect by all for commonly agreed rules”. The note reviews the euro zone’s experience of crisis since 2007, the measures taken to strengthen it since 2010 and examines where it now stands.

That yields a very mixed and mostly poor assessment: of some rebalancing but persisting unemployment, high public and private debt and indifferent competitiveness due to continuing rigidities. The paper goes on to say more effective commitments to growth-enhancing structural reform and greater labour and capital mobility in the EU’s single market are needed in the short term. But, looking ahead, “It remains necessary, for citizens and markets alike, to develop a long-term perspective” on how economic and monetary union should develop.

To that end, it asks a series of questions. They include how to ensure sound fiscal and economic positions in all euro states and better implement existing rules; and whether new institutions are needed and the negative links between banks and sovereign debt have been broken. Three significant questions are posed: is existing sovereignty-sharing adequate for the euro’s economic and financial needs? Is more fiscal risk-sharing desirable and what would be its preconditions? And how can the euro’s accountability and legitimacy be best achieved?

Deeper integration

This brings us out of rules and back to macroeconomics – and to the politics of deeper integration, EU fiscal capacity and debt mutualisation. High officials in this process along with political leaders ask whether Germany is willing to do transfers and mutualisation, whether France can contemplate the treaty change needed and whether the euro’s political leaders have yet got used to existing intrusive rules, much less taking on even more highly conditional ones.

So while the single currency needs to be strengthened, this may not be politically feasible. Macroeconomists such as Varoufakis bring a new politics to bear on this question. Their success will be judged by the precedents they set in inspiring others over that longer term. The euro will not achieve accountability and legitimacy unless its systemic needs and socio-political bases are more closely linked . This requires a solidarity capable of creating closer political identities. Otherwise how can it survive?