Greece’s former finance minister Yanis Varoufakis and Irish economist David McWilliams on the hope for a global new deal.

David McWilliams: I think it is fair to say that capitalism – in the course of this unprecedented crisis – has been suspended. We are not going back to where we were, to business as usual. The state has come back, and this episode will not be forgotten by the electorate. I don’t know where we are going, but one thing seems clear: we are not going back.

Yanis Varoufakis: I like this phrase: capitalism has been suspended. The last time capitalism was suspended in the west was during the second world war, with the advent of the war economy: a command economy that fixed prices. The war economy marked the transcendence of the standard capitalist model.

But what we see now is not so much the suspension of capitalism. The rules of capitalism may have been suspended – all those sacrosanct policies are gone, the neat separation of fiscal and monetary policy is gone, the idea that public debt is a bad thing is gone.

But the institutions that are necessary to build “the war economy without war” so to speak – to suspend and transcend capitalism – those have not been put in place. There is a profound difference between saying: “It’s all going to shit, so we don’t expect you to stick to the rules,” and saying: “The rules themselves have changed, and we must make new ones to prevent an economic collapse.” All this talk of quantitative easing by the European Central Bank suggests that we remain very far from a war economy mindset.

DM: This is a familiar category error in Europe. If you are basing your economic policy on the willingness of people who are too traumatised and sick to borrow – which is the core logic of quantitative easing – then you have a very serious problem. A common image of quantitative easing is the hose: a huge monetary hose, with water gushing out to stop the fire of crisis. But the hose of monetary policy is limited by this little valve called the banks, a little valve called the credit committee, a little valve called the “willingness of business to borrow money”. And ultimately, that hose of money becomes a trickle – and even that trickle stands to benefit the wealthy much more than the poor.

So I take your point that despite the suspension of the rules, the infrastructure remains in place. But people across Europe are now saying: “Hey, there is an alternative.” This second phase will be about how we move ahead in rethinking capitalism, in rethinking finance, rethinking how economies work and for whom – potentially toward a new Bretton Woods-style settlement for the entire global economy.

So that’s where we are: in the first year of the third decade of the 21st century. Looking out at the next decade, armed with history as well as economics, what do you think the global and European economy will look like?

YV: We are sitting on a saddle point, prepared to tip in either direction. It is utterly indeterminate which of the two directions we travel.

Let us start with the positive scenario. It builds from your point about the prospects for a new Bretton Woods – with its particular manifestation in the European Union.

The fact that Germany is now in the same pile of shit as the rest of us offers a glimmer of hope

If we are going to have continental consolidation, what should it look like? It would not be a federation, because – even though that is more necessary than ever – it is less likely than ever, because the centrifugal forces of the coronavirus crisis, the migration crisis, and the euro crisis are pulling us apart. But the alternative is to deploy the existing [EU] institutions in a way that can simulate a federated Europe, and we can do this tomorrow, if we so choose: to provide immediate cash to all those who are struggling in poverty, to invest in the green transition.

There is a glimmer of hope here, because there is a profound difference between 2020 and 2010. Back then, when Ireland and Greece went belly up, there were remarkable dissimilarities between what our countries were experiencing and what Germany was experiencing, what Holland was experiencing. Today, Germany’s industrial machine is broken – and was broken long before the coronavirus hit. Two main industries – automobiles and machine tooling – were already in serious trouble. So the fact that Germany is now in the same pile of shit as the rest of us offers a glimmer of hope that they might say: what should we do? It’s no longer: “Your problem: here’s the Troika.”

DM: And we will send you the bill as well! So that’s the positive scenario. The interruption of “business as usual” gives way to new policies and new possibilities for Europe and beyond. What’s the other option?

YV: Well, we humans – and we Europeans, in particular – love to miss fantastic opportunities and end up with dystopian outcomes instead. It’s very likely that we will encounter the same recalcitrance by the same set of European ordoliberals, who will keep putting roadblocks in the way of moves toward a genuine, democratic federalism.

DM: Obviously, such a roadblock will have a disproportionate impact on the southern member states of the European Union. What do you think the impact of this particular trauma will have on, say, Italy – a founding member of the European Union, and a crucial part of Europe’s emotional hinterland?

YV: Every time there is a crisis in Europe, Italian growth rates fall. Every time there is a problem, Italy sinks deeper into stagnation – with Salvini waiting in the wings. If Frankfurt, Berlin, and Brussels fail again to move toward the positive scenario, Italy – not just Italy, but all of Europe’s most devastated regions – will move again toward the neo-fascist right. In that case, all bets are off.

This is the endpoint of the negative scenario: a giant domino effect, leading to the disintegration of the European Union. Not that the EU will cease to exist. Only that it will become irrelevant, like the Commonwealth of Independent States.

DM: Oh, I remember the Commonwealth of Independent States very well …

YV: It still exists! It still has an office in Moscow. So the negative scenario is that the European Union will become like the CIS. And that will be music to the ears of the Trumps, Bolsonaros, and Modis of this world. We would move into a transactional, Hobbesian global economy: nasty, brutish, and poor for the majority of people.

My sense is that the period when you could travel, engage, move, we might have reached the end of that open period.

DM: When I was born in Ireland, the country was very poor. And then it became quite wealthy, on the back of the European project, on the back of Europe’s position in the global supply chain, and with a tax policy that attracted lots and lots of capital. My sense is this model might be gone, and this style of globalisation along with it. I fear that the period when you could travel, engage, move – we might have reached the end of that open period. People will say: “This virus came from the cosmopolitan world, from the world of international movement.” Whether it’s right or not, we might begin to blame people. We know that the Black Death resulted in ferocious antisemitism in Europe. People asked: “Who can we blame for this?” And so they blamed the one community that was already in isolation in the ghetto.

This is what terrifies me most, sitting here in the first year of the third decade of the 21st century. What we saw before may come again, and we turn back to Yeats: “Turning and turning in the widening gyre / The falcon cannot hear the falconer; / Things fall apart; the centre cannot hold; / Mere anarchy is loosed upon the world.” I fear now, unless we move quickly and in a new direction, the world that my kids will inherit is going to turn very nasty, indeed. So it’s a clarion call.

YV: The loudest call in a generation. I share all of your concern for the future, although I must challenge the analysis on which it is based. The openness that you describe has always gone hand in hand with severe restrictions: Nafta and the US-Mexico border; freedom of movement in Europe and Frontex along the Mediterranean. This is not a contradiction; it is the logic of a system that prizes the movement of capital over the freedom of human beings.

If we fail now to stand together – to rally around a new Bretton Woods, to deliver the investments that humanity and the planet so desperately need – my fear is that this system will only deepen its cruel logic. Surfing on the hose of liquidity unleashed by the policies like quantitative easing, the financial sector will increase its grip on the global economy; bankers are very good at getting rich from such volatility. So now is the time for us, here in Europe as around the world, to mobilise behind this shared vision of a global new deal. Because without it, the walls between us will only get taller and thicker: porous only to the money that flows through them.

Whether or not we can avoid an economic depression will be determined by what we do now. Amid the pessimism it is crucial to appreciate that it is possible to avoid this outcome if we deploy all the right levers of economic policy. The European Central Bank (ECB) has underwritten the economy at borrowing rates below zero. As a result there should be no hesitation in borrowing more to tide us over.

We can also reprice existing debt to dramatically reduce the cost of outstanding debt, and we can boost demand to cushion the slump by putting money directly into people’s and businesses’ accounts.

Dropping money into accounts is the same as giving a tax cut, which is something we are accustomed to. We don’t seem to twig that money in our back pocket is the same whether it’s gifted to you in a direct payment or a tax cut. Much of our resistance to new ideas is conceptual as much as logical. This is not limited to economics.

The battleground for the economy is the small business sector, where not only the future of the economy lies, but also the fortunes of the new government. The small firms sector – companies with 50 staff or fewer – employs half of all Irish people. Such companies depend on cash flow, having neither deep reserves of cash nor access to investors’ funds.

Where assets are owned they are typically not liquid, perhaps consisting of a premises or specialist machinery, and are not easy to sell when cash is short. Small businesses tend to operate in highly competitive markets, such as hospitality and tourism, with slender margins.

Slender margins come back to modest capital, the perennial curse of the small business.

Where a company can charge a lot, generating margin, it normally has a unique product or some permanent comparative advantage. Such a company is tending towards monopoly, which is what all companies want, but usually they are reined in by their competitors.

In this way small companies are kept small by other small companies. Although there are examples of companies that break out, typically small companies swim in the same crowded stream.

Balance sheet

Access to capital is usually the crucial determinant of whether a company breaks away from the crowd. If you see a company growing much faster than its competitors in a highly competitive market, quite apart from the ambitions of the owner, you can bet that its balance sheet is more leveraged than the others.

A fast-growing company in good times is normally a fast-contracting company in bad times. In general, though, small businesses don’t break away from the pack as they are hemmed in by the forces of competition. However, they can be profitable, and they employ lots of people because they tend to be labour-intensive.

Small business owners are regularly vilified by low-grade ideologues and even lower-grade members of the intelligentsia, heroic. Though not big enough to join Ibec, and not represented by Ictu, they are the people who take the risks, and who turn off the lights when everyone else has gone home.

In James Joyce’s time they used to be called the civic bourgeoisie. Joyce, the arch modernist, championed this tribe by making his everyman hero, the ever-anxious, Leopold Bloom, a self-employed advertising copywriter.

Without them there is no economy. You can’t run an economy with multinationals and civil servants alone. You need the domestic private business sector in the middle.

In terms of the nitty-gritty, small businesses have fixed and variable costs. The variable costs are largely wages, and the fixed costs are loans, premises, rents and taxation. The ratio is usually about 60 per cent wages, and 40 per cent fixed costs. There are variations, but that’s a fair rule of thumb. Maybe in hospitality it’s higher in the wage side.

Up to now the Government has looked after the variable costs bit with its wage subsidy. But there’s no help on the fixed cost side to prevent small businesses going bust.

Today small businesses are drowning because they have no income. They have been shut down by the virus. No income with fixed costs to pay means bankruptcy and a run on cash. Creditors don’t get paid; they in turn can’t pay their creditors; and a debt spiral becomes inevitable.

Recognising this, the UK government last week announced that it would underwrite small business loans up to £50,000 at the same historically low interest rates afforded to the government. This is a big move that will be financed by the central bank.

The UK government will bear the short-term risk that some companies will go bust; the majority will not, precisely because they now have access to credit. It is a short-term loan, not a grant. It is administered by the UK banks in the normal way, except the banks will not be making their usual interest rate cut. In effect the banks have been subordinated to the UK government’s will for the duration of the crisis.

We should do exactly the same. The ECB has already made the cash available to the State and the banks at -0.75 per cent. It has also instructed all banks to stop giving out dividends to shareholders, signalling that capitalism has been suspended. It is urging us, via our Central Bank, to act.

The Irish Central Bank could immediately facilitate the repricing of all loans to zero. Technically the ECB has made this possible by a monetary instrument called a targeted longer-term refinancing operation (TLTRO), which gives credit at 0 per cent to banks.

The Irish State owns 70 per cent of AIB. It could instruct AIB to reprice all SME loans and mortgages to 0 per cent.

If the banks are worried about depositors not getting paid interest, the Irish Central Bank could make available one rate for depositors and one for debtors. The rate could be 1 per cent for depositors and 0 per cent for borrowers – a concept called dual interest rates.

Carry the cost

Then, you may ask, won’t the Central Bank have to carry the cost? Well, yes it would, but central banks can’t go bust. Have you ever seen a central bank go bust?

They don’t have balance sheets like normal banks. They can generate interest income for the banks indefinitely – that’s the magic of central banking. They make free money when they print the stuff. Its called seigniorage in monetary economics. Equally, they can run losses for as long as it takes the economy to recover. In an earlier career when I worked as an economist in the Central Bank we ran all these crisis scenarios.

All these options are still open. The only difference now is that the ECB is the lender of last resort, and it has already indicated that it will pick up the tab at less than zero interest rates.

There is no time to waste. The Central Bank has to act now, and the new government must make saving small businesses its number one priority.

Guy Raz, of NPR’s Live with Guy, talks with Sinek on why he is hopeful that businesses who prove resilient and sustainable during this pandemic will stand the test of time.

Economics is not a cult. It is not a set of definitive, unchanging rules. It is not a religion. There is no creed. There are no believers and there is no dogma. While there are clubs or factions, membership of those is optional. At its core, economics is the art of the possible. It is the study of a complex system that is never at rest, a dynamic and adaptive system of enormous energy and potential. It evolves rather than grows or contracts.

The economy is like an immune system, dealing with new dangers, learning on the job and constantly acclimatising. Despite what most economists say, there is no such thing as equilibrium. A moment’s thought would tell you that an economy in equilibrium is a ludicrous notion.

Economic policy comes with a box of various tools to be used depending on circumstances.

Right now we are faced with the spectre of a once-in-a-lifetime pandemic, driving us into lockdown and a recession which could lead to a depression unless we replace shibboleths with hard thinking. As Van Morrison might say, there is “No guru, no method, no teacher”. When faced with a crisis like this, every policy reaction is possible. Nothing can be ruled out.

We are only at the end of the beginning. We are now going into phase two, when concerns about national and individual health, though still central, give way to concerns about national and individual wealth.

In a crisis the first thing to do is define reality, not as we would like it to be, but as it is. Then you see what policy tools are available.

Our reality is that the economy has been shut down not by debts, spending, a property bubble, too much lending or bad policy, but by a virus. And we don’t know how long it’s going to take to be free of this curse. Some 600,000 are on the dole and national income is set to fall by at very minimum 10-15 per cent. Tax revenues are collapsing and State spending is rocketing. Most retail and hospitality businesses will struggle to reach 40 per cent of last year’s revenues. The summer as we know it has been abandoned.

Prevent bankruptcies

Therefore, the primary objective should be to keep as many businesses – particularly small businesses – afloat. We must prevent bankruptcies, which prompt defaults, which are contagious. Unless we do this, we will face a raft of bad loans in 2021-22, crippling the banking system once more. The banking system has a huge interest in saving its own loan book now, keeping small business solvent.

The second objective is to ensure that the pandemic expenditure does not lead to a spike in debt-GDP ratio, a rise in interest payments or an austerity budget being introduced over the next couple of years. Austerity budgets affect the poor most because the poor depend on government most. There is no reason for an austerity budget if we deploy all the economic tools at our disposal.

How can we achieve these two objectives?

All roads lead to the Central Bank. The Government uses the Central Bank as its clearing house; it provides overdrafts when taxes fall short and revenue shoots up. It does this by crediting the government’s account.

The European Central Bank (ECB) has said it will do “whatever it takes” to save the European economy and the euro, meaning the Irish Central Bank has a green light to act as it sees fit.

The ECB has shown itself to be extremely flexible in a crisis. This is its second such scenario and last time (after it dumped the tragic Jean-Claude Trichet), Mario Draghi tore up the rulebook and used the central bank’s printing press to buy government debt and corporate debt in the secondary market, to save the euro.

Now its current boss Christine Lagarde needs to keep the free money flowing. The ECB has made €750 billion available to finance state spending, and there will be more where that came from. One of the Central Bank’s jobs is to “magic up” money, and the Irish entity has the power to do so.

Print money

Can I let you into a secret? It costs nothing to print money or credit every business account with a zero – or two for that matter. This many seem odd to you, but this is the great trick of monetary economics. In the wrong hands at the wrong time, such as in Zimbabwe, a powerful central bank can destroy a country; but in the right hands at the right time, it can save a country.

We should print money and credit business accounts until every business has enough money to make sure it survives the Covid-19 shock.

There are no catches. This is “helicopter money” that goes into people’s accounts directly without going through the cumbersome banking system. It is quantitative easing for the people. When the problem is too little money, more money solves it. Who doesn’t understand that?

The Government’s account should be similarly credited, so that State expenditure doesn’t raise debt ratios, interest costs or demand austerity in the future.

And if the “inner accountant” in you gets uncomfortable with this free money idea, the State could issue a perpetual bond to pay for everything. A perpetual bond is never repaid. There could be an interest rate paid, but this should be close to zero.

If the Central Bank undertook to buy it and provide infinite liquidity, the financial market would follow suit and use it as a proxy deposit. The accountants satisfy their demand for credits and debits, the Government issues a perpetual IOU, and we chill out and wait for a vaccine.

It’s that easy, and it’s free. So why isn’t it being done?

Easy answers

You’d be amazed how many clever people hate easy answers. It’s natural to believe these things are complicated, but they are not. In economics, what is complicated is rarely useful and what is useful is rarely complicated. As with many fields, only those who truly understand their subject have the self-confidence to opt for the easy answer.

Should we be afraid of inflation? With 600,000 on the dole and oil prices close to zero, rising prices are not coming any time soon. If the Central Bank is worried about inflation in the future, it can put lending limits on the banks. We know how to stop inflation – it’s deflation that’s the real killer.

I understand why we might fear one institution having such power. However, this is why the world’s central banks aim to behave conservatively in normal times, so that when a crisis comes they have the credibility to act in a one-off temporary fashion to save the economy.

Extraordinary times demand extraordinary action. We are in extraordinary times.