• Yanis Varoufakis, interviewed by Haris Golemis
  • What Happened in Greece – What Was Possible – What Is a Feasible Europe-wide Programme Now?

  • Haris Golemis , Yanis Varoufakis | 09 Feb 16 | Posted under: Greece , European Alternatives
  • Haris Golemis: The goal of Syriza before the elections of 25 January 2015 and of the government that was subsequently formed was to negotiate with the creditors over the abolition of the memoranda, to write off a large part of government debt, and to implement an anti-austerity economic programme. This goal was not achieved. After tough negotiations that lasted for seven months, and even though in the 5 July referendum the Greek people rejected the proposal put forward by the institutions, the government was forced to sign a new, harsh Memorandum, under the threat of bankruptcy and Greece’s forced exit from the Eurozone.

    As Finance Minister, from the formation of the first Tsipras government up to your resignation the day after the referendum, you were in charge of the Greek team that conducted the negotiations with the institutions.

    What were, in your opinion, the basic reasons for this undesirable result of the government’s efforts? Did you overestimate what you could achieve in the context of the existing balance of power in the EU and the lack of alternatives? Or did it have to do with mistakes made by the Greek government during the negotiation? Or was it, perhaps, something else?

    Yanis Varoufakis: Our negotiating aim (that PM Tsipras and I had agreed upon from the outset) was fivefold:

    1. a debt restructuring (not necessarily a haircut) that would allow Greece to return to the markets within 2015 (with the help of the ECB’s Quantitative Easing programme, which would also be activated by the debt restructure);

    2. a medium- to long-term primary surplus target below 1.5% of GDP (thus a significant reduction in austerity);

    3. the creation of a Development Bank that would use public assets as collateral for the purpose of triggering a home-grown (and supported) investment-funding flow in the same public assets (for the purpose of increasing their value and stimulating growth);

    4. the creation of a Bad Bank that would allow us to manage the banks’ non-performing loans in a manner consistent with our social agenda and in line with the task of enabling banks to lend again to potentially profitable private sector enterprises; and

    5. deep reforms in the realms of tax administration, public admin­istration, procurement, energy, and product markets.

    One reason we failed to secure an agreement with the Troika on these five issues was the Troika’s ironclad determination not to reach any agreement that would seem like a Syriza success. From the beginning, the Troika set out to beat us back into the original Memorandum of Understanding (MoU), for the well understood purpose of demonstrating to the rest of Europe that resistance to its programmes is futile. Clearly, our task was always going to be extremely hard, especially in view of the German Finance Minister’s conviction that any re-negotiation of the MoU would be highly detrimental to him personally and to the task of keeping the Eurogroup united and on track towards his particular vision for the Eurozone.

    Did I underestimate the task’s difficulty? No, I do not believe I did. Months before we were elected, I had warned Alexis Tsipras, and his ‘inner cabinet’, that the Troika would be using our banks as a lever by which to subdue us. On 30 January, a few days after our government was formed, I warned my colleagues that the Eurogroup’s strategy would be to exhaust us (through a politically engineered bank run and a liquidity squeeze – courtesy of the ECB) before shutting the banks down. I also argued, repeatedly, that an ‘honourable’ agreement might only come if we were prepared to fight back following an enforced bank shutdown using the three weapons at our disposal: first, a haircut of the €27 billion of Securities-Markets­programme Greek government bonds belonging to the ECB; secondly, the announcement of a parallel (though euro-denominated) payments system; and, lastly, the amendment of the law governing the Bank of Greece so as to enable Parliament to replace its Governor.

    In summary, my view had been, from the beginning, that we would face a major fight and that, to have a chance of succeeding, we needed to do two things:

    (A) state our position clearly from the beginning in the form of a moderate, financially sophisticated document that explained our government’s Plan for Greece (something like our alternative to the toxic MoU) and which would prove to the rest of the world that we had a credible programme that had to be taken seriously by our partners and by the IMF;

    (B) stand tall, defend our proposal’s basic logic and not budge under extreme pressure, preparing for the moment the Troika would threaten us with bank closures, at which point we should deploy our three weapons (see above).

    To this day I believe that the combination of (A) and (B) would have given us a good chance of success – at least of an honourable agreement within the Eurogroup. I also believed that pursuing (A) and (B) was the mandate that the Greek people had given us on 25 January.

    The reason why we were defeated is that, sometime in April (maybe a little earlier), the Prime Minister was convinced by some other members of the ‘inner cabinet’ to heed Jeoren Djisselbloem’s demand that I get ‘side-lined’. Driving a wedge between the Prime Minister and his Finance Minister was the Troika’s tactic from day one. In the same context, PM Tsipras was also convinced that Greece would make crucial concessions on the primary surplus targets – concessions that annulled (A) above, and which I was not told about (let alone consented to). The Troika, correctly, interpreted these concessions (and my effective sidelining) as evidence that

    (B) would also not hold. Free of the fear of any retaliation from our side, they just waited for our side to concede without a fight. Which is precisely what happened: When the Eurogroup shut our banks down on 30 June, my recommendation immediately to deploy our three weapons (described above) was vetoed by the inner cabinet and by the Prime Minister.

    This is why we lost. It was an avoidable defeat.

    HG: What is your prediction for the future economic, social, and political developments in Greece? Will Syriza manage to tackle the unfavourable effects of the programme included in the new Memorandum? Do you believe that the goal of disengagement from the Memorandum before its completion is feasible? If so, how can this disengagement be achieved?

    YV: Let’s be clear on this: The third bailout programme (and the associated MoU) was designed to fail. Its purpose was to humiliate Alexis Tsipras and Syriza – to make us accept a package that the Troika representatives themselves, behind closed doors, acknowledge as toxic. Here are some examples:

    More than 600,000 farmers will be asked to pay additional back taxes for 2014 and to pre-pay over 50% of next year’s estimated tax. Some 700,000 small businesses (including low-wage workers who are forced to operate as private service providers) will have to pre-pay 100% (you read that right) of next year’s taxes. As of next year, every merchant will face a 26% turnover tax from the first euro they earn – while being required to pre-pay in 2016 a full 75% of their 2017 taxes. I could list many more examples of measures which, beyond reasonable doubt, are the kind of measures one implements if one wants to destroy an economy – certainly not the measures that a neoliberal (let alone a progressive) could defend as pro-growth.

    The new Tsipras administration is attempting to erect two lines of defence against the coming tsunami of pain (and thereby minimise popular discontent). The first line is to press the Troika to make good on its promise to enter into debt-relief negotiations once its recessionary agenda has been fully implemented. The second line of defence is based on the promise of a ‘parallel’ agenda aimed at ameliorating the worst effects of the Troika programme. But both lines are porous, at best, given the harsh realities of Greece’s economic circumstances.

    There is little doubt that the Greek government will gain some debt relief. An unpayable debt is, one way or another, a haircut. But Greece’s creditors have already had two haircuts, first in the spring of 2012, and another the following December. Alas, those haircuts, while substantial, were too little, too late, and too toxic in terms of their financial and legal parameters. The question now is whether the next haircut will be more therapeutic than the last. To help the Greek economy heal, debt relief must be both sizeable and a lever for eliminating most of the new austerity measures, which merely guarantee another spin of the debt-deflation cycle. More precisely, debt reduction must be accompanied by a reduction in the target for the medium-term primary budget surplus, from the current 3.5% of GDP to no more than 1.5%. Nothing less than that will allow the Greek economy to recover.

    Is anything of this sort politically possible after our July surrender? I do not think so. Klaus Regling, the head of the European Stability Mechanism, returned recently to the Troika’s mantra that Greece does not need substantial debt relief. Regling may not be a major player in his own right, but he never speaks out of turn or contradicts the ECB and the German government.

    This leaves Tsipras with only his second line of defence: the ‘parallel’ programme. The idea here is to demonstrate to the electorate that the government can combine capitulation to the Troika with its own agenda of reforms, comprising efficiency gains and an assault on the oligarchy, which may liberate funds for the purpose of lessening austerity’s impact on weaker Greeks. The problem with this worthy ‘project’, however, is that the MoU the government signed in August (and which I voted against) denies the government the instruments that are necessary to fight the oligarchy. For example, Athens has now given to the Troika complete control over the fight against tax evasion, over the bankers, over the use of Greece’s public assets, over the statistical service, over all levers of effective power. Given that the Troika is the Greek oligarchs’ best friend, the chances that the present government will succeed in putting into effect its ‘parallel’ programme is very close to zero.

    HG: The Greek case brought to the fore the antagonisms between the European governments as well as the structural problems of the Eurozone. On this basis, how do you view the future of existing European integration?

    YV: The good news from our saddening surrender is that Europeans now know much that previously they ignored. They learned, for instance, how undemocratic and downright inane the Eurogroup is. They understand better than ever that the world’s most significant economy – the euro area – is administered inefficiently and by a process that fails the test of basic rationality. They can now sense that Europe will either consolidate (by means of a pooling of debts, banking systems, a Green New Deal to boost aggregate investment, and a continental anti-poverty programme) or the euro will fragment. This recognition is not sufficient to bring about proper democratisation and closer integration. But it is a necessary condition nevertheless.

    HG: You travel around Europe, give lectures, and have political contacts. Do you believe that the outcome of the negotiation of the government with the institutions has left a positive legacy of the effort of promoting a substantial, progressive change in Europe? Or has the unfortunate ending increased disappointment and the feeling that there is no alternative?

    YV: Absolutely! Wherever I go I come across a groundswell of political energy and excitement at the prospect of a new European movement that will draw a line under the crisis and reverse the misanthropic process that is threatening our communities, including the European Union, with a combination of authoritarianism, permanent recession, deflation, and racism. The craving is there. What we now need is a means of allowing it to turn into action.

    HG: Recently, you expressed your intention to create a pan-European movement with the aim of radically changing the Eurozone and the EU. Could you give us some more details about this initiative of yours?

    YV: One lesson I have learned in the past year is that the old model of conducting politics in Europe is finished. Currently, political activity continues to be based on national parties that still try to engage the citizens of a Member State with political programmes of social welfare and economic reform. Alas, Member State governments soon discover that they have no policy space for implementing anything that deviates significantly from the Brussels-Frankfurt self-defeating austerity agenda. They also discover that there is no scope for forging meaningful alliances with other national parties at the level of the EU Council (or of the mostly irrelevant European Parliament). This political model, I argue, is finished.

    If I am right that the Eurozone cannot become a realm of shared prosperity through political action at the level of national parties, there is only one logical conclusion: Political action must now shift from the realm of the Member State to a pan-European realm.

    Of course, this is a tall order. Organising a hierarchical Europe-wide political party is both impossible and undesirable. It is impossible for obvious organisational reasons. And it is undesirable because a hierarchical political organisation from Dublin to Athens and from Riga to Lisbon will provoke antagonism from existing national parties while resorting to degrees of discretionary power (on behalf of its leaders) that is precisely not what Europeans want.

    For these reasons, we are proposing something quite different. Instead of creating yet another nationally based party, several of us are working towards a European network – a platform that will facilitate a conversation amongst Europeans who share a deep concern that democracy in Europe has, in effect, disappeared, thus reinforcing a never-ending economic crisis, increasing levels of authoritarianism (from Brussels and Frankfurt), and strengthening the racist right and assorted enemies of European democracy.

    Who will participate in this network? It will be open to everyone who shares basic democratic, humanist principles that we intend to lay out soon in the form of a short manifesto appealing to all European citizens, to all grassroots organisations, to municipalities, to unions, to political communities everywhere, to Europe’s body politic.

    What will the purpose be? Our purpose is to spawn a Pan-European movement for democratising the sources of power that have, for some time now, been ‘liberated’ from any significant political control or authentic democratic process. The purpose is to reverse the sequence of doing politics in Europe. Instead of beginning with national parties which then attempt to forge European alliances, we want to see the creation of a European progressive movement, which, at some point, finds its expression spontaneously at the level of local and national government elections.

    What should a realistic set of practical objectives be? For the movement to take root, it is crucial to go beyond timeless principles. Here are some tangible aims and a timeline for achieving them:

    • Very short term (next week): Demand complete transparency in the decision-making process that determines Europeans’ lives: for example, campaign for live streaming of Eurogroup and European Council meetings, for the publication of the minutes of the ECB’s Governing Council, for the immediate uploading on the web of the documents constituting the basis for Europe’s TTIP negotiations, etc.

    • Short term (within six months): Aim at the utilisation of existing European Union institutions (without new treaties and within the letter of current ones) in order to stabilise the four crises making up the never-ending euro crisis: public debt, banking, under-investment, and poverty. (See the Appendix below for examples of how this could be achieved within existing rules, charters, and treaties – i.e., within a few months)

    • Medium term (in two years): Once Europe has been stabilised and its governance rendered transparent, a Constitutional Assembly should be convened, with representatives elected on pan-European tickets (rather than nation-based ones), to begin the process of imagining the new institutions and the new constitution that must underpin the long-term democratisation of the Union.

    • Long term (ten years hence): Implementation of the decisions of the Constitutional Assembly


    APPENDIX: Examples of policies to be effected in the medium term so as to stabilise the Eurozone’s social economy (19 October 2015)

    Policy 1: A proper investment-led New Deal for Europe

    The euro is currently kept together by the ECB’s Quantitative Easing programme (QE). However, there are two problems with QE.

    Problem 1: The ECB charter’s no-bailout clause and the absence of Eurobonds forces the ECB to buy bonds in proportion to Member State shareholdings – i.e., to buy more bunds than, for example, Spanish bonds. This is a problem for Germany (where the pension funds face negative yields on their investments) and, for example, for Spain, Portugal, etc. (where commercial interest rates do not fall sufficiently).

    Problem 2: QE is ineffective in fostering real investment but effective at inflating asset bubbles (and social inequality).

    Here is something that the ECB could do that overcomes these two problems while spearing investment-led recovery without new government debt and without violating any treaties (including the ECB’s own charter). The proposal is for QE to focus exclusively on European Investment Bank (EIB) bonds. The idea is simple:

    The European Investment Bank (and its smaller offshoot, the European Investment Fund) should embark on a pan-Eurozone investment-led recovery programme, focusing on green technologies and green energy, worth between 6% and 8% of Eurozone GDP. The EIB would concentrate on large-scale infrastructural projects and the EIF on start-ups, SMEs, technologically innovative firms, etc.

    The EIB/EIF can issue bonds to cover the funding of this pan-Eurozone investment-led recovery programme in its totality; that is, by waiving the convention that 50% of the funds come from national sources.

    To ensure that the EIB/EIF bonds do not suffer rising yields, as a result of these large issues, the ECB will be ready to step into the secondary market and purchase as many of these EIB/EIF bonds as are necessary to keep the EIB/EIF bond yields at their present, low levels.

    In this scenario, the ECB enacts QE by purchasing solid Eurobonds – i.e., the bonds issued by the EIB/EIF on behalf of all EU states. In this manner, the concern about which nation’s bonds to buy is alleviated. Moreover, this form of QE backs productive investments directly, as opposed to inflating risky financial instruments, and has no implications in terms of European fiscal rules (as EIB funding need not count against Member States’ deficits or debt).

    The ECB’s QE support of EIB bonds will guarantee that the EIB yields will remain ultra-low for a long while, alleviating any pressure from credit-rating agencies viz. EIB bonds. By purchasing large quantities of EIB bonds, the ECB can, in partnership with the EIB, help shift idle savings (which currently depress yields on all investments) into productive activities. This would be tantamount to a European New Deal.

    Policy 2: An anti-poverty programme that binds Europe together

    The European Central Bank System’s Target2 account should, under normal circumstances, balance out. Indeed, it did balance out before 2008. Even though countries like Greece had a chronic trade deficit in relation to Germany, capital was flowing the other way (from Frankfurt’s banks to Greece, in the form of private and public debt) thus balancing out Target2.

    As the Euro Crisis exploded, and capital fled the periphery, the peripheral countries suffered a debt crisis and a credit crunch, which pushed Target2 into permanent imbalance. Austerity-caused poverty and Target2 liabilities for peripheral countries grew in unison. These Target2 liabilities, as per the original ECB system design, accrued interest payments from the central banks of the deficit to the central banks of the surplus Member States. Billions of such interest has accrued over the past five years, eventually distributed to the treasuries of the surplus Member States by their central banks. (Indeed, in Germany there is a ritual every year when the Bundesbank proudly announces how many euros it directs from its Target2 earnings to the federal government.)

    These monies are not taxes or a return to risk taken as part of some investment the surplus countries make in the deficit revenues. They are concocted interest payments reflecting nothing more than the Eurozone’s faulty architecture. Indeed, they are accounting units, expressed in euros, that grow in proportion to the internal imbalances of the monetary union. Put differently, they are the flipside of balance-of-payments imbalances, of the failure of Eurozone-wide investment to rise to the level of savings, and of austerity’s ‘success’ in boosting poverty. The surplus Member States receive billions every year at the expense of the deficit Member States, not for any services rendered but solely because of the Eurozone’s failure to equilibrate.

    The proposal here is simple: Use these funds to pay for an American-style food stamp programme that puts an end to hunger. Imagine if the ECB were to fund, using these accrued billions, a Eurozone-wide food stamp programme. Imagine if a family in eastern Germany, another one in Greece, a third in Ireland were to receive a cheque in the post (to be used in the local supermarket) with which to feed its children, signed by Mario Draghi on behalf of the Eurozone! Imagine the impact this would have on creating genuine consolidation and solidarity throughout the monetary union!

    Policy 3: A step-by-step (proper) banking union

    The banking union was created in name to deny a banking union in practice. Without a common deposit guarantee fund and a common (ECB/ ESM-funded) backstop for the resolution of failing banks, the banking union we have is exhausted in common rules which, of course, led to the re­nationalisation of the banking resolution process – i.e., to a banking dis­union. For example, Greek and Portuguese banks remain under the threat of a bail-in whereas German and Dutch banks are not (since the German and Dutch states have sufficient capacity to ensure that the banks domiciled there will not be bailed in). Which, of course, means that a million euros in a Greek or a Portuguese bank account is far less valuable than a million euros in a German bank account. Ergo, a banking union in name but not in substance.

    Dr Schäuble opposes a proper banking union because the Bundestag will never accept the (effective) fiscal union that is implied by a sudden (proper) banking union (that is, he rejects making all Eurozone taxpayers the final backstop of all 6,000 Eurozone banks). However, there is an alternative. Instead of creating this (proper) banking union in one go, we could do the following:

    Every time a Eurozone bank needs to be recapitalised with public funds, e.g. with ESM funds, the government of the Member State in question will have the option of allowing the particular bank to drop out of its national jurisdiction. That bank then is admitted to a new (special) Eurozone jurisdiction (EJ). Once under EJ, the ECB appoints a new board of directors (who have never served on any board of the bank’s previous national jurisdiction) with a remit to cleanse the bank and to work together with the ESM-ECB to resolve or recapitalise the bank. Funding will come directly from the ESM which will receive (and hold) the bank’s shares in return for the capital provided. Once the bank has been rendered solvent again, the ESM will sell its shares and will get its capital back with interest.

    That way, the money that goes to failing banks does not count as part of the national debt of the country in which that bank used to be domiciled. The death embrace between insolvent banks and fiscally stressed states is thus broken once and for all. At the same time, the European taxpayer knows exactly where his or her money has gone, can see who is supervising its return to the private sector, and is confident that the cosy, toxic, often corrupt relationship between national politicians and ‘national’ bankers becomes a thing of the past. Lastly, a new Eurozone-wide banking jurisdiction is built step by step, putting us in good stead for a future where there will be a single, Eurozone-wide jurisdiction.

    Policy 4: A limited debt conversion plan for Eurozone Member-State public debt

    Policy 1 replaced the current ineffective QE-based strategy for re-equilibrating the Eurozone with an investment-led New Deal for Europe, to be implemented by means of a particular form of QE (with the ECB exclusively purchasing EIB bonds). The question now is: And what about public debt? What will replace the ECB’s current efforts to stabilise yields of, for example, Italian bonds if QE is directed toward buying EIB bonds (in the context of the European New Deal)? Here is a suggestion:

    The German government’s rejection of Eurobonds may have problematic motives but is, essentially, understandable. If Eurobonds are jointly and severally guaranteed state bonds, their yields would be closer to Germany’s than to, say, Greece’s. Still, they would be too high for Germany and possibly not low enough for Greece.

    Germany is a successful economy, but it is not large enough to guarantee the debt of the whole of the Eurozone. Nor should it. If Germany had to guarantee those Eurobonds Eurozone-wide, then its own solvency would be in question, its own yields would rise, and certainly the Eurobond would be seen as an undesirable, inefficient compromise. So, here is my suggestion:

    The European Central Bank makes the following announcement Monday morning: From today, every time a bond of any Eurozone country matures, that Member State will have the right to request that it participates in the ECB’s Limited Debt Conversion Programme (LCDP).

    Suppose for example that an Italian government bond matures. Italy has approximately a 120% debt-to-GDP ratio. The permitted Maastricht level is 60%. So Italy has twice as much debt as it was allowed to have by Maastricht. What we can then do, under the proposed LCDP, is to separate the debt of every Member State into the Maastricht-compliant part and the rest – the good debt and the bad debt, if you want. And the ECB undertakes to service the good part of the debt, the part of the debt that the Member State was allowed to have – let’s call it the Maastricht Compliant Debt (MCD).

    So, in the case of Italy, the LCDP stipulates that 50% of every maturing bond will be serviced by the ECB – not purchased, but serviced. That means that the ECB pays the bondholder 50% of the maturing bond so as to help ‘extinguish’ it. But before anybody starts protesting that ‘this is not permitted because the ECB is not allowed to monetise debt’, my proposal is not that the ECB monetises it; it is not that it prints the money and pays for the debt (as it does now under QE).

    The LDCP suggests that the ECB act as a go-between between the money markets, investors and Italy. And it will do this, according to LDCP, through the ECB issuing its own bonds on behalf of Italy (or, equivalently, backing such an issue by the Italian government or even the ESM) to service the 50%, the MCD part of the maturing bond.

    Let’s say that the ECB issues a ten-year ECB bond in order to do this. Simultaneously, it opens a debit account for Italy within the ECB and Italy commits to pay into that debit account, over the next ten years, the sums necessary to redeem the ECB bond and its coupons. Italy, in short, will cover the complete cost of this ECB-bond issue.

    What is the benefit for Italy of doing this? The benefit comes from the fact that the ECB has much, much greater credit-worthiness, and the ECB bonds would have much, much, much lower yields, even lower than Germany’s and certainly lower than Italy’s. And if we do this for the ‘good’ debt, for the MCD only, of every Eurozone Member State that wants to participate in this debt conversion scheme, a total reduction of more than 35% of the Eurozone’s total debt servicing costs (for the next twenty years) will result. Effectively, the European debt crisis goes away.

    Now the question is, why will the ECB bonds be credible and fetch very low yields? They will be credible for three reasons. Firstly, for Italy to participate in this scheme, it will have to sign a super-seniority clause with the ECB, just as countries that borrow from the IMF accept a super­seniority clause with the IMF. In other words, even if Italy in ten or fifteen years’ time is fiscally in trouble, its payments into the ECB debit account take priority status. It has to be repaid before anything else is repaid. That is one reason why those ECB bonds will be credible. Another reason is that Italy will be asked to insure its debt to the ECB by making regular (small) payments to the ESM with the ESM providing this insurance cover to all participating members. Finally, the third reason is the common knowledge that the ECB is a … central bank – without whatever connotations that has.

    Finally, note two additional merits of this proposal:

    1. Unlike the current QE, the ECB does not violate the letter of its charter in the sense that it does not print money to buy Member State debt (instead, it borrows money on behalf of Member States, with guarantees that the Member State will, directly or indirectly, pay these debts back).

    2. The limited debt conversion scheme proposed here actually strengthens the Maastricht rules since it gives rise to a substantial interest-rate spread between a Member State’s Maastricht-Compliant Debt (the 60% of GDP) and the rest of the debt that the Member State was not allowed to have under Maastricht. This feature of the scheme answers concerns regarding moral hazard. 

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