Yanis Varoufakis, an influential economist and the former finance minister of Greece, spoke about President Trump’s proposed tariffs, the dollar which is almost at parity with the euro, and the Greek economy in a wide-ranging interview with Greek Reporter.
Varoufakis who is the Secretary-General of Democracy in Europe Movement 2025, a left-wing pan-European political party he co-founded in 2016, said that the strength of the dollar is not surprising and it’s nothing new. He pointed out that soon after the launch of the euro, the euro did fall below 1 US dollar. And then it rose up and then came down.
“The US dollar is a very special currency and its value, unlike every other currency in the world, has very little to do with microeconomic fundamentals,” Varoufakis said, and gave an example after he looked at GDP per capita data.
“In the last couple of years, Mississippi, a deficit state, with a poor economy and full of struggling US citizens, is in terms of GDP per capita, richer than the United Kingdom and France.
“The reason why it appears higher in terms of GDP is because of the exorbitant value, the overpriced US dollar. To explain it, you need to look at the tsunami of capital that is flooding into the United States, for reasons that are not so much related to the fundamentals on the ground in the economy. But it has to do with the manner in which globalization has been evolving over the past 20-30 years,” Varoufaakis notes.
He added that this has been happening since the mid-1970s when the American trade deficit essentially operated like a huge vacuum cleaner sucking into the US the net exports of Germany, Japan and much later, China.
“The money that capitalists in Germany, in Holland, in Japan, in China, were making out of that was returning through Wall Street to the US economy in the form of purchases of US Treasuries and of course real estate. So that has always been the case independently of who was in the White House.
“The election of Trump and his promise to introduce tariffs along with the promise to essentially remove all regulation in terms of monopoly regulation, big tech regulation, has created an intensification of a tsunami of capital that is flooding into the US.”
Yanis Varoufakis on Trump’s proposed tariffs
Varoufakis however, is questioning whether Trump is going to follow up his promises with actual tariffs in order to eliminate the trade deficit of the US.
“If, let’s say however that he succeeds, then what happens is, the real estate sector, which we know is very dear to his heart, as well as Wall Street, are going to suffer monumentally.
“Because it is the US trade deficit which is actually channeling a huge quantity of dollars to foreign capitalists, German capitalists, Chinese capitalists, German capitalists, and all this money comes back to the US to support Wall Street, the treasury market, and of course real estate. So, to cut a long story short, I think he doesn’t really want to eliminate the trade deficit,” Varoufakis told Greek Reporter.
Trump’s tariff threats are a bargaining chip to address the issue of the US dollar being overvalued relative to other major currencies, which has been causing trade imbalances, he stressed.
Varoufakis added that Trump may attempt to do something similar to the Plaza Accord of 1985 involving major economic powers, primarily the US and Japan, along with France, the West Germany at the time, and the United Kingdom. An agreement to depreciate the US dollar relative to the Japanese yen and the German Deutsche Mark through coordinated foreign exchange market interventions.
The accord aimed to reduce the US trade deficit and stimulate US exports by making US goods more competitive in international markets.
Such an accord will lead to the “complete Japanification” of European economies, Varoufakis said. “Think of what happened after the Plaza Accord in Japan. You are going to have a very serious private debt crisis, a crisis in real estate. Already we have overvalued real estate across Europe and a slumping industry. It will have detrimental effects on the prospects of the middle class across the European Union.”
Varoufakis: The Greek “bubble” will burst
Turning to the Greek economy, Varoufakis said that the Greek government has been magnificent at projecting a very positive image, of what is a “zombie state,” and an economy which cannot effectively reproduce itself.
He warned that the Greek “bubble” would burst due to international developments. He stressed that the collapse of the Franco-German axis, and the importunity of the Berlin government will signal that the European Union budget is going to very soon prove utterly inadequate to support the existing programs, the structural funds, the recovery type of funding that we have had in Greece and Italy over the last few years.
He added that if the Ukraine war is going to be terminated by the Trump administration a substantial portion of the common agricultural policy funds is going to be channeled to Ukraine.
“All that occurs ill for Greece, because the bubble on which the Mitsotakis government has banked for the last few years is going to burst. Already the real estate market, which has been a major inflator of this bubble, is in trouble.
“And we are going to have a repetition of what we had towards the end of the 2000s, a bubble burst and suddenly we realize that unsustainable debts cannot be sustained,” Varoufakis told Greek Reporter.
Related: Wolfgang Schaeuble’s Memoir Delves Into the Greek Debt Crisis