The European Crisis according to Yanis Varoufakis

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20 March 2018
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28 May 2018

The European Crisis according to Yanis Varoufakis

The European Crisis according to Yanis Varoufakis

(by Franco Lancia, June 26th 2016)

A Textual Analysis Example
N.B.: The above picture was downloaded from the BBC website on June 25h 2016.

On June 23rd 2016 the people of the UK decided to 'leave' the European Union.

In the meantime, all European people are faced with three main problems which actually are strictly connected:
a) the reception and the integration of thousands (and thousands) of immigrants, who - above all - are young people;
b) the management of the economic crisis, i.e. debt reduction, income redistribution, new investments etc.;
c) the transformation of the European Union institutions through a democratic process.

In recent times, the most useful insights about the economic crisis - which actually is a global crisis - have been provided by several economists (e.g. Joseph E. Stiglitz, Thomas Piketty, Paul Krugman, Robert B. Reich, Yanis Varoufakis etc.), some of whom have decided to take social actions. In particular, regarding the European crisis, two proposals deserve special attention: one by the Progressive Economy group, which has published a manifesto named Call for Change ('From the crisis to a new egalitarian ideal for Europe'), the other one by the DiEM25 movement lead by Yanis Varoufakis, who - with Stuart Holland and James K. Galbraith - has also published a A Modest Proposal for Resolving the Eurozone Crisis.

The analysis example that I am presenting concerns two of Varoufakis' books, namely:
- The Global Minotaur: America, the True Origins of the Financial Crisis and the Future of the World Economy (Economic Controversies) (2nd edition, 2015);
- And the Weak Suffer What They Must?: Europe's Crisis and America's Economic Future (2016).
For the purpose of this example, the two books have been analysed as a single corpus (i.e. as a single file including two sections), also because - according to the author (2016) - the second book (which aims to 'cast Europe as the protagonist') began life as a sequel to the previous one ('in which America had the lead role').

In my opinion, the two books in question are interesting for various reasons: 1) the author aims to propose a theory of the crisis, i.e. a genetic model which explains global events underpinning the 2008 crash and its consequences; 2) the historical relationships between economic and political events are well documented; 3) the author speaks as a human being truly interested in sharing his personal memories and findings.

Some technical details concerning my analysis of the Varoufakis 'corpus' will be explained in the short Appendix at the end of this page. Now let us comment on the main findings.

By using a T-LAB tool, the first map I have obtained shows nine Thematic Clusters (see below), each of which consists of a set of text segments sharing similar patterns of key-words.

Both the labels used for the clusters and those used for the two axes of the graph result from my interpretation of the data, and I will comment on this later.

Fig. 1

In the above map the bubble dimensions refer to the percentages of text segments belonging to each cluster.
A further version of the same map with the labels only (see below) also includes the respective positions of the two books as supplementary points.
More information about the main differences between the two books are provided in the final section of this page (see Figg. 11-13).

Fig. 1

Looking at the map in Fig. 1, the main question by which I am intrigued is the following:
is this map - obtained by a text analysis modelling - consistent with the economical and historical analysis proposed by Varoufakis in his two books?

Actually the main model used by Varoufakis (2015) is the so-called Surplus Recycling Mechanism (SRM), which - by regulating the exchanges (of money, goods and services) between surplus countries and deficit countries - 'is necessary to avert crises and to subdue them when they occur'.

According to the Author:

  • the Global SRM (i.e. GSRM) designed at the Bretton Woods conference (1944) by people (e.g. John Maynard Keynes) who learned by the tragic experience of the Great Depression (1929) and of the Second World War, worked quite well until the so called Nixon Shock;
  • starting from 1971, because of its twin deficit (i.e. 'trade deficit' and 'budget deficit') the USA invented the 'Global Minotaur' ( i.e. a simulacrum of the GSRM) which - like a 'Global Vacuum Cleaner' - started collecting capitals from surplus countries and 'recycling' them by means of new financial instruments (i.e. credit derivatives) like CDOs, CDSs etc., the de-regulated use of which caused the 2008 crash and its aftermath.

Coming back to our map, we can see that the 'BRETTON WOODS' point - when projected on the vertical axis (i.e. 'surplus countries' vs 'deficit countries') - occupies an intermediate position; moreover, by following the red arrows, we can reconstruct some historical trajectories which are quite interesting (see below).

Fig. 3

I have also to add that the 'proximities' between two pairs of bubbles in the above mentioned map are consistent with the narrative proposed by Varoufakis. In fact, in his view, France and Germany are the leading countries of the European Union, while the way in which the financial system (see the Bank_CDOS point) managed the relationship with the Greece debt is similar to 'predatory' behaviour used with the people who purchased subprime mortgages. To this purpose, see how 'Franz', a man who worked for a major German bank for twenty-five years, confessed to Varoufakis (2015) to have become a "predatory lender" (more information about the Franz episode is provided below).

Here are the list of the key words which most contributed to the vertical axis bipolarity.

Fig. 4

When looking at the deficit countries, we have to remember that Varoufakis - above all in his book 'And the Weak Suffer What They Must?' (2016) - is talking about Europe. And, in his view, Europe cannot overcome the big crisis in which it is involved without rethinking its political projects and strategies, and without implementing a sort of SRM which shares the Bretton Woods spirit. As a matter of fact, in his opinion the Maastricht Treaty and the ECB policies are just condemning countries like Portugal, Ireland, Italy, Greece and Spain (i.e. the so called PIIGS countries) to increase their debt and to be pray to speculators and of a deregulated bank system.

So, let's try to add some arrows to our map (see below).

Fig. 5

The reason way I labelled the semantic opposition along the horizontal axis 'Financialization/Speculation' vs 'Political (and democratic) Process' comes from an interpretation of the following data, i.e. from the key words which most contributed to the 'negative' (left side) and 'positive' (right side) poles of such axis. Here are their lists.

Fig. 6

Having explained the context in which the main characters (i.e. the thematic clusters) of our map interact with each other, let us now take a look at their main characteristics.
In the following table the first 30 key words with the highest Chi square values in each cluster are listed in descending order.

Fig. 7

As T-LAB automatically scores the text segments belonging to each thematic cluster, here is a list of the three text segments which obtained the highest scores within each cluster.


the European Union's troubles cannot be due to the impossibility of forging an overarching European identity that does not usurp their separate national identities. They are simply bamboozled as to how the European Union can evolve from bureaucratic institutions in the service of an economic cartel to a European democracy serving a sovereign European people


Student exchange programs are the best example of a Brussels-guided process cultivating the promise of instilling a European identity among Europe's young. The European Union's prospect of evolving into a democratic federation built on the shoulders of an advancing European identity was damaged badly by our monetary union and its discontents


That monetary union is good for Europe's economy and consistent with European democracy ought to be a theorem. Europe, however, decided to treat it as an axiom. Margaret Thatcher's objections, which incidentally coincided with those of Europe's radical Left, were twofold. Monetary union would produce an economic disaster.


But the concern of the great and the good is about Greece's debt to the European Central Bank—the ECB. You see, dear reader, a year before, in 2010, an ill-fated attempt to shore up Greek government bonds by the ECB's president, Monsieur Jean-Claude Trichet, involved the purchase by the ECB of a bunch of Greek bonds at low, low prices.


The EFSF had to issue new debt on behalf of all eurozone countries, except Greece ( which had already fallen into insolvency ) and of course Ireland, to lend to Ireland. This meant that, with Greece and Ireland out of the group of creditor EFSF members, a greater burden was to be shared by the remaining pillars of the EFSF.


Nor were the REST_OF_EUROPE's swine—or PIIGS as Portugal, Ireland, Italy, Greece and Spain became collectively branded. Greece's bailout, then Ireland's, then Portugal's, then Spain's were rescue packages for, primarily, French and German banks.


Since one economy's trade surplus is another's deficit, growing net exports of a large economy ( like China's or Europe's ) means that it also exports deflation to the rest of the world. A 9 percent eurozone trade surplus would destroy America's, China's, Latin America's, India's, Africa's and south_east Asia's hopes for stability and growth.


absorbing south_east Asia's trade surpluses ( as America did with Europe's and Japan's under the GLOBAL_MINOTAUR ). Instead, south_east Asia was always in a structural, long-term TRADE_DEFICIT with Japan, having to rely on net export revenues from America and Europe for its growth.


Maresca implied that, unlike Japan and Europe, China would not willingly liberalize its capital and MONEY_MARKETS, and therefore the flow of capital from China to the USA would be impeded. In simpler words, profits made by Chinese, Japanese, European and, of course, US companies operating in China would not be readily transferable to the GLOBAL_MINOTAUR, Maresca lamented.


in April 1993 the governor of France's CENTRAL_BANK thought it wise to repeat the outrageous ( and not just to the Bundesbank ) claim that the French and German currencies were equals and would provide comparable support to the single currency. It was as if France were demanding a few more smacks from the Bundesbank before Germany shared its money with the French.


an unavoidable response to the tendency of the French franc to devalue, courtesy of Germany's trade surplus in relation to France. 15 The only way the franc's DEUTSCHE_MARK value could be kept constant was, indeed, for the Bundesbank to keep doing the one thing it detested: to incessantly buy francs using freshly minted deutsche marks.


Were these marks to remain stashed in the vaults of the French CENTRAL_BANK, or anywhere for that matter, the Bundesbank would not have minded much. Only these creaseless German banknotes did not stay under lock and key but were steadily repatriated into Germany, as the French used them to buy more Volkswagens and speculators converted their francs into mark


By then, Volcker had already risen through the ranks of successive Democratic and Republican administrations to become instrumental in the dismantling of the BRETTON_WOODS system. 16 The 1971 announcement of the Nixon Shock may be remembered in John Connally's Texan accent but it was “probably that goddamn Volcker, ” as President Nixon once referred to Paul,


The only person at the BRETTON_WOODS conference who could deny him the crowning glory of putting his stamp on the new global system was his American disciple, Harry Dexter White. And this is precisely what White did. Keynes's proposal was brimming with intellectual power. White was overflowing with the power vested in him by America's economic and military might.


During that preparatory phase, the United_States had to put together the essential pieces of the jigsaw puzzle of the GLOBAL_PLAN, of which BRETTON_WOODS was an important piece. BRETTON_WOODS While the war was still raging in Europe and the Pacific, in July 1944, 730 delegates converged on the plush Mount Washington Hotel located in the New Hampshire town of BRETTON_WOODS.


The first dynamic determines the wage share ( total wages as a share of NATIONAL_INCOME ): as employment increases above a certain threshold, say E, labour becomes scarce, workers'bargaining power rises, and therefore so does the wage share.


To see how the combination of these two dynamics produces a regular cycle ( boom to bust to boom ), suppose the economy is growing and employment is on the rise. according to the first dynamic, once employment exceeds threshold level E, wages rise too. But when wages rise above level W, the second dynamic kicks in, reducing employment.


In a country that prided itself on the fact that, at_least since the 1850s, real wages had risen steadily, thus giving every generation of workers the hope that their children would be better off than they were, real wages stagnated. To this day, they have not even recovered their 1973 real purchasing power.

N.B.: After the above sentence, Varoufakis (2015) adds a chart (see below) which illustrates eloquently how the logic of 'Global Minotaur' has damaged the average people. In other words, it has incresed the income inequality.


Moreover, the eurozone is ruled by an informal group ( the Eurogroup ), meeting in secrecy, that never reports to the European Parliament—as it does not, formally, exist. These revolving doors between legislative power at the center and executive power in the member-states was designed


To fill this institutional lacuna, the Maastricht Treaty and its successor treaties created a panoply of noncredible rules to constrain states. of course noncredible rules end up as violated rules. Seeing its rules being violated, Brussels and Frankfurt made up new, even stricter, ones ( see chapter 6 ) that ended up suffocating those who tried to implement them.


this was something that Frankfurt and Berlin rejected with venom. When it came to countries like Germany and France, the rules were meant to be broken. 20 but for countries like Greece, the rules are the rules are the rules! even if they are unworkable, unenforceable rules



The CDOs were, in effect, instruments for bending the very rules designed to save the banking system from itself. 2 An alternative to keeping the CDOs in the bank vaults was to pawn them off to a CENTRAL_BANK ( e. g. the Fed ) as collateral for loans, which the banks could then use as they wished: to lend to clients, to other banks, or to buy even more CDOs for themselves.


It was a similar story in France, where the banks had to admit that they had at_least €33 billion invested in CDOs. To this sad sum, we must add the European banks'exposure to the indebted eurozone states6 ( €849 billion ), to Eastern Europe ( more than €150 billion ), to Latin America ( more than €300 billion ) and to bad Icelandic debts ( around €70 billion ).


To set up, in partnership with banks, hedge funds, pension funds, etc. – a simulated market for the toxic CDOs that would yield simulated prices, which could then be used to rewrite the banks'accounts. Here is how it was meant to work. Suppose Bank B owns a CDO ( let s call it c ) that B bought for $ 100.


GLOBAL MINOTAUR (Theory of the Crisis)

A pure Panglossian theory! REH: no one should expect any theory of human action to make accurate predictions in the long run if the theory presupposes that humans systematically misunderstand or totally ignore it. for example, suppose a brilliant mathematician were to develop a theory of bluffing at poker and schooled you in its use.


For if no mathematized economic model is possible that depicts the real-time transactions of different people and industries, then economic modelling must be divorced from any theory of crisis. After all, a crisis is, by nature, a dynamic phenomenon affecting a multi-person ( and multi-industry ) society that unfolds in real time.


Is it not a most peculiar scientific failure that, for all its mind-boggling complexity, mathematical economics cannot even begin to wrap its equations around the idea of a Crisis? Given that the story of mathematical economics is the story of a dramatic scientific failure, why am I claiming that, as a body of theory, economics ended up as one of the beast's handmaidens?


By using a T-LAB tool which allows exploring network relationships between thematic clusters, the following graph has be obtained.

Fig. 8

N.B.: The above graph has been created with Gephi by importing a .gml file created by T-LAB.
Also T-LAB allows us to map the relationships between keywords within each thematic cluster. For example, the following two pictures refer to the Greece Debt cluster.

Fig. 9
Fig. 10

As in both the above charts there is a reference to the so called Ponzi scheme, let's recall a key memory quoted by Varoufakis (2015).

"Franz and his banker colleagues had been, in effect, running a huge Ponzi scheme in the deficit nations of Europe's monetary union. This is what Franz meant with the sad admission, "I had become a predatory lender. " And when those pyramids crashed, as Ponzi schemes inevitably do, "Ponzi growth " metamorphosed into what I once called "Ponzi austerity".

As far as the main differences between the two books included in our corpus, they can be summarized in two ways:

1) by comparing the respective percentages of the thematic clusters (see below)

Fig. 11

2) by comparing the word occurrences, either of the typical words (i.e. in which of the books they occur the most, see below Fig. 12) or of the exclusive words (i.e. used in one book only, see below Fig. 13)

Fig. 12
Fig. 13

Other types of comparisons would be possible, but - for the purpose of this example - I prefer not to add further outputs.

To conclude, while the UK people has decided to 'leave', I recall three things:

  • The way Varoufakis (2016) starts the chapter 'The one that got away'
    "I had a friend once who would attend parties only to whine about how boring they were. It is not difficult to draw a parallel with Britain's attitude to the European Union. Both major parties, Labour and the Tories, have for years been tearing themselves in shreds over the European question. To this day, the imperative of maintaining open communication lines with Euroloyalists and Eurosceptics across Britain's political spectrum makes British officials visiting Brussels behave like my friend: they would attend everything in order to declare their permanent dissatisfaction... Britain is inside the European Union, constantly threatening to leave…."
  • On July 26, the website reported the following news
    "More than 2.5 million people have signed a petition calling for a second EU referendum, after the vote to leave.
    It has more signatures than any other on the parliamentary website and as it has passed 100,000, Parliament will consider it for a debate."
    To this purpose, I observe that any discussion about the rules is part of a democratic process; but democracies decide through votes. This is the rule...
  • The United States presidential election of 2016 are scheduled for November 8.
    On July 6th 2015, the presidential candidate Bernie Sanders made the following statement:
    "I applaud the people of Greece for saying ‘no’ to more austerity for the poor, the children, the sick and the elderly. In a world of massive wealth and income inequality Europe must support Greece’s efforts to build an economy which creates more jobs and income, not more unemployment and suffering".
    Actually the last words written by Varoufakis in the 'The Global Minotaur' (2015) are the following:
    "While emerging countries like China, Brazil, India, South Africa and so on must contribute important building blocks in the construction of this brighter future, America must nevertheless lead (n.b.: in this case, 'lead' means 'propose' a Global Surplus Recycling Mechanism such as that created by the New Dealers). If it does, perhaps centuries later its own Minotaur's death will inspire the poets and the myth-makers to mark its demise as the beginning of a new, authentic humanism. If it does not, then our generation's postmodern 1930s will last a lot longer than a decade."

I have a confession to make: when reading the above passage I had a strong insight and I re-discovered that in front of me there is (i.e. it is hung on a wall of my study) an amazing painting of a friend of mine (Claudio Marini), which was done in 2007 (!), and the dimensions of which are 150 cm x 100 cm (for other paintings of the same series, click here).


Unfortunately I am not a photographer and the above picture has been obtained by using the camera of my tablet; so both the colours and the tri-dimensional effects cannot be properly appreciated. However - I swear - the 'emotional associations' evoked by the 'Global Minotaur' and by the painting of my friend are strongly related, so much that - being a psychologist - I could re-write this analysis in a very different manner.

For example, I could reinterpret the main factors underlying the Varoufakis' discourse on the European crisis as follows:

It seems to me that similar psycho-cultural factors are also active in the United States' presidential election campaign; and - for sure - the candidacy of Donald Trump is not for 'hope and solidarity'.

But this is another story...

By the way, as the above picture refers to the social representations of the European crisis, people interested in this issue may find of interest the European research project Re.Cri.Re. ('Between the Representation of the Crisis and the Crisis of Representation').


The version of T-LAB used was T-LAB Plus 2016.

A few words about the pre-processing steps:
- the two books by Varoufakis have been assembled in a single file (i.e. the corpus);
- the automatic lemmatization has been applied;
- a list including specific multiword expressions (e.g. 'Interest Rates', 'Financial System', 'Great Depression' etc.) has been used;
- a customized list including 1,533 key words (occurrence threshold = 10) has been applied.

The thematic map with 9 clusters (see below for a 3d version) has been obtained by using the Thematic Analysis of Elementary Clusters tool. This means that the map has been obtained by a modelling process which includes (a) a cluster analysis of the context units (i.e. text chunks) resulting from an automatic segmentation the two books of Varoufakis and (b) a correspondence analysis of a contingency table with 1,533 rows (i.e. the key-words used) and 9 columns (i.e. the thematic clusters);


- the measures reported in Fig. 4 and Fig. 6 are the absolute contributions resulting from the correspondence analysis;
- the graph in Fig. 8 has been obtained by applying a Sequence Analysis ('Sequences of Themes' option) and by saving a .gml file by means of the Graph Maker tool;
- the MDS chart in Fig. 9 has been obtained by using the T-LAB Co-Word Analysis tool and by plotting a list of key words belonging to the thematic cluster named 'Greece Debt';
- the graph in Fig. 10 has been obtained by using the T-LAB Word Associations tool;
- the bar chart in Fig. 11 is a customized version of an output of the Thematic Analysis;
- the two table in Fig. 12 and Fig 13 have been obtained by using the T-LAB Specificity Analysis tool.

N.B.: The reason why 'DEUTSCHMARK' and 'DEUTSCHE_MARK' are respectively present in the left and the right table of Fig. 13 is that they are spelled differently in the two books.