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And The Weak Suffer What They Must?

Adults In the Room

Talking to My Daughter About the Economy


Champion of Austerity

1. It is fun to look at what a fully fledged austerity drive would have done to Britain’s economy. Around 2010 the UK’s public debt came to almost 80 per cent, or four-fifths, of national income. At the same time the UK government’s total expenditure was about half of national income. Now, suppose Chancellor Osborne had given his pro-austerity instincts free rein and gone into a frenzy, slashing government spending by half, a cutback equal to a quarter of national income. Cutting this much government spending would reduce national income by at least a fifth. Suddenly public debt would go from four-fifths to four-quarters, or 100 per cent, of national income, without even counting all the public money that ‘had’ to be given to the City’s bankers. This is why austerity, in times of private-sector consolidation, fails by its own criteria – the consolidation of public debt.

2. Indeed the numbers are telling. During his first two years in the Treasury (2010–12) Osborne actually increased government expenditure by 6.9 per cent. In this sense no actual austerity was practised by the Cameron–Osborne government at all. Austerity was utilized by them as a cover for a substantial redistribution of spending and tax cuts that favoured the rich and disadvantaged the poor. In simple terms, the top 20 per cent benefited greatly while the bottom 20 per cent suffered even more.

The Reverse Alchemists

1. This is banker-speak for securing an interest rate somewhat above the bank’s own borrowing rate and, hopefully, above interest rates charged to the bank’s average client.

2. After the 2008 financial sector implosion, the banks with the most risk managers ended up in the deepest of black holes. The Royal Bank of Scotland, to give one example, employed four thousand risk managers and ended up needing a £50 billion bailout from the British taxpayer.

3. During 1998–2007 interest rates fell everywhere as credit was turbocharged by the shenanigans of the West’s financiers. However, Germany’s increasing trade surplus in relation to Europe’s south and the resulting flow of money to Germany meant that the price of money (the rate of interest) in Germany was always lower than in Southern Europe.

4. The greater the supply of loans to a debtor like the Greek state, the lower the interest rate the bank had to charge to convince the debtor to take on even more loans. Thus the difference, or spread, between the interest rates paid by the Greek and the German governments shrank, giving even more incentive to the bankers to lend even more money to such debtors.

5. One way to help a stressed debtor is to reduce the interest rate charged or to prolong the repayment period without charging additional interest. Such interest rate relief naturally reduces the value that the creditor will recoup.

6. If I write on a piece of paper ‘I, Yanis Varoufakis, confirm that I shall pay the bearer of this piece of paper a sum of X euros by such-and-such a date. This piece of paper is freely transferable’ to the extent that I am considered creditworthy, such an IOU has market value and could be sold by a bearer who prefers a sum less than X now than to wait until the specified date to collect X euros.

7. And when these IOUs expired, the whole process was repeated, with the banks issuing new IOUs that the government guaranteed again so they could be swapped with the IOUs about to expire.

8. The only difference between us was that I was not sufficiently motivated to keep quiet about it. But that’s another story.

9. Peter Hartz, who designed these reforms, was Volkswagen’s personnel director. There is a nice irony here in view of Volkswagen’s implication in the major emissions scandal, which has cast a long shadow over German manufacturing.

10. Mini-jobs restricted workers to sixteen hours per week, at a standard monthly salary of 400 to 450 euros.

11. Poorer Greeks’ money wages and pensions were increasing by something like 3.5 per cent, a large rise by European standards of the time, and the official inflation rate, they were told, was only 3 per cent. So their purchasing power must have been rising too. But it was not. The reason is that the inflation rate for poorer Greeks was much higher, around 9 per cent, but inflation for richer Greeks was … negative. Negative? Yes. If you had a mortgage on a mansion in Athens’s northern suburbs, the large drop in interest rates caused by the practices of my fellow-traveller Franz and his colleagues meant that your living costs fell! So, during the first few years of the euro, the ‘good times’, the Greek grasshoppers were prospering while the ants struggled. By 2010 the grasshoppers had taken their loot out of the country without paying their taxes, and it was the ants who were called upon to bail out the bankrupt state and the bankrupt banks through pension cuts, wage cuts, cuts in their health services, etc.

12. Unnecessarily. A recession that Europeans did not have to have. Allowing Greece to default and restoring German and French banks to health the way that the Swedes and the Finns had done in 1992 would have avoided this recession.

13. Data made available by the Bank of International Settlements.

14. The IMF had already developed the reputation of a ruthless bailiff, following the Third World debt crisis, the Latin American crisis and the South East Asian crisis. Ironically, at a time, in 2010, when its managing director, the infamous Dominique Strauss-Kahn, was trying to soften the IMF’s image, Chancellor Merkel insisted it should be part of the troika. She needed it in order to convince her own members of parliament that the bailout’s austerity conditions would be brutally imposed. Thus the IMF’s makeover failed as it became embroiled in another sequence of ‘rescues’ that forced the weak to suffer that which they did not deserve.

15. Which was of course necessary given that the first bailout was always going to fail, being nothing more than the original Ponzi austerity scheme.

16. In the end Syriza did not win that election but came in a strong second. Its victory eventually came on 25 January 2015 in an election that I contested successfully and which resulted in my becoming Greece’s minister of finance.

17. Seeing that the ECB was buying Greek bonds, the theory went, investors might have been encouraged to do so too.

18. This ploy might have worked except that M. Trichet, in a move of baffling folly, pre-announced the amount the ECB would spend on these purchases to counter the speculators. It was an open invitation to speculators to make money, as long as they could spend more money than the ECB was willing to. In Wild West terms, it was the equivalent of Clint Eastwood rolling up to the site of the showdown announcing to his opponent how many bullets he had left in his revolver. Then again, there is a simpler explanation as to why M. Trichet and the ECB did this: they only cared about making the French and German banks whole (by buying for them at full price the Greek government bonds whose value had crashed), with the story about striving to keep Greece in the money markets being only a poor excuse.

19. In the first Greek bailout, in May 2010, Europe’s ridiculously hard line towards Greece was no to a haircut, no to debt relief, yes to a huge loan (€110 billion) with high interest rates. The only beneficiaries were of course the beneficiaries that the bailout had been designed to benefit: French and German banks. Once their losses were averted, Brussels and Frankfurt began to plan for the inevitable haircut, which would hit small Greek bondholders and tragically the Greek pension funds whose charters obliged them to hold their capital in Greek government bonds. So a second bailout, which included a haircut for the weak, was ratified fully by the spring of 2012. To contain the skyrocketing debt, bonds held in private hands were haircut substantially and twice – once in the spring of 2012 and once again in December 2012 – that time under the guise of a ‘debt buyback’. In short, in 2012 Greece’s private debt was cut in real value terms by 85 per cent. Except that the bankers and the ECB, which under Trichet had purchased more than €50 billion of Greece’s public debt, were fully protected. The Greek state borrowed another €130 billion from which to infuse €50 billion into Greek banks and up to another €50 billion to pay back the ECB, which behaved like a hedge fund holdout. The only victims of the haircut were the small holders of Greek debt and pensioners, whose pension funds were effectively robbed of their capital base.

20. The first countries to violate the Maastricht Treaty rules were Germany and France, almost immediately after the euro was established. In particular, following the 2001 dot-com recession, Berlin had a choice between breaking the 3 per cent budget deficit limit, which was part of the Maastricht rules, or imposing harsh austerity upon the German economy. It opted for the former. Similarly with France a few months later.

21. Which were already issuing their own worthless IOUs with guarantees from the insolvent Greek state.

22. Through the so-called Emergency Liquidity Assistance (ELA) programme of the ECB.

23. Between 2008 and 2010, when the banks’ immediate needs were taken care of by the ever-generous taxpayers, the eurozone’s debt-to-income ratio rose from 66.2 to 80 per cent. Then, between 2010 and 2014, austerity pushed the zone’s debt above 91 per cent of GDP. However, in the countries where the greatest austerity was imposed, debt exploded. The following table tells the sad tale of Ponzi austerity.

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24. This is the ‘moral hazard’ argument, according to which the possibility of common debt would give each an incentive to indulge in loose living.

25. So Germany would bear around a quarter of the liability as its national income was a quarter of the eurozone’s.

26. Central banks do not literally print money on such occasions. Instead, every commercial bank has an account with its central bank (the Bank of America has such an account at the Federal Reserve, Deutsche Bank has one at the European Central Bank, and so on). Instead of printing cash and handing it over to them, the central bank allows the commercial bank to draw money from its accounts with the central bank that the commercial bank never deposited there – something akin to an overdraft facility. In exchange, the commercial bank hands over to the central bank as collateral some asset – for example, a stack of mortgages or personal loans that the central bank can collect on if the commercial bank defaults or goes bankrupt. The central bank’s hope is that the commercial bank will then lend this money to its customers (such as companies or families wishing to buy a house or a car) with the effect of stimulating the real economy.

27. Monti had an impressive record both as an economics professor and especially as the European Commission’s commissioner for competition policy. In that role he famously clashed with behemoths like Microsoft and was acknowledged as a skilled and honest operator. However, his image was tainted once he came to be seen as Mrs Merkel’s appointee to Italy’s highest office despite the fact that, once in office, he acted in the interests of Italy and put up a major struggle at the European Council to bring about a proper banking union. On a personal note, Mario Monti and I have since discovered a great deal of common ground and a mutual appreciation of our perspectives on what Europe must do to overcome its crisis.

28. Ireland was felled by its banks and property developers. The tsunami of capital from Germany’s banks was flowing straight into Ireland’s commercial banks, which were then lending it on to developers. White elephants in Dublin’s financial district, row upon row of new blocks of flats in the middle of nowhere, and second and third mortgages were the outcome. With prices racing ahead creating a semblance of homeowner wealth, credit card use multiplied and a generalized consumer spending spree occurred. When the credit crunch spread from Wall Street and London, land prices collapsed, construction workers were laid off, mountainous debts went bad and the banks themselves, the Anglo-Irish Bank in particular, imploded. In a move that will remain in Irish annals as a stigma comparable to the potato famine, the Dublin government succumbed to ECB blackmail: make the German creditors of Ireland’s commercial banks whole – even a bank that was closed down and thus is no longer systemically important for Ireland’s financial sector – or else!

29. See Brecht, The Threepenny Novel (1989), in which the following exchange appears between two characters named McHeath and Peachum. McHeath says, ‘Brute force is out of date – why send out murderers when one can employ bailiffs?’ To which Peachum replies, ‘Admittedly, murder is a last resort, the very last – but it is still useful.’

30. The differences between Greece and Ireland are instructive. Ireland had a tiny debt before 2008. Greece had a large one. The reason is simple: capital flow from the surplus countries was directed into the Greek state, which in turn passed it on to developers – those who built highways, 2004 Olympic sites, etc. In Ireland the same capital flow went directly into the banks, which then passed it on to the developers, bypassing the state. Thus, Irish public debt was tiny while private debt was gargantuan – the opposite case to that of Greece – but when the crisis hit, the result was the same: the Irish state took on the burden of private debt and collapsed. The Greek state just collapsed.

31. Of course, a few months later, on the last day of June 2015, the ECB shut down the entire Greek banking system to force our government into accepting the troika’s bailout logic. It was the price we had to pay for refusing to let our central bank be blackmailed.

32. In the case of the Irish banks, the private bonds that they had purchased were uninsured. In the case of Greek state bonds, their buyers knew that these were Greek law contracts, meaning that they could be given a haircut by a future stressed Greek government. This is precisely why the interest rates were higher than in Germany. Higher risk, higher rewards. As long as the gamble paid off, the German bankers reaped benefits that they shared with no one. But when the gambles turned bad, as Irish banks and the Greek state failed, they demanded that the taxpayers of Greece and Ireland pay up as if they had bought insurance from them.

33. No government can legally impose a liability on Jill in order to bail out Jack without passing a suitable piece of legislation through parliament. In this case, the illegitimacy of the transfer was heightened by the fact that Jack was a foreign unsecured bond holder and Jill an Irish citizen who had never authorized her government to saddle her with a new debt (with associated cuts to benefits, wages and pensions, plus tax hikes) for his benefit.

34. The government tore up – ‘retired’ – the promissory notes once it took them back from the central bank.

35. As were of course Greek pension funds, except that no one really cared about the pensioners.

36. There is strong suspicion that Greek bankers lent the 10 per cent to one another.

37. See J. M. Keynes, The General Theory of Employment, Interest and Money, London: Macmillan (1936), p. 183.

38. Except when QE pushed the yen or the dollar down, thus helping Japanese and American exporters mop up foreign demand, adding a beggar-thy-neighbour dimension to its effects.

39. This is why in its never-enacted OMT programme Mr Draghi had to introduce, as a condition, that the country whose bonds the ECB purchases must first be put into the straitjacket of a troika programme.

40. Directed and produced by Carol Reed and based on a Graham Greene novel, The Third Man was released in 1949.

41. ‘But to my mind, though I am native here / And to the manner born, it is a custom / More honour’d in the breach than the observance.’ Hamlet, William Shakespeare, 1602.

Parsimony versus Austerity

1. Foreign Account Tax Compliance Act, a law passed in 2010 that obliges US citizens to report all their foreign transactions.

2. In December 2014, a month before our meeting, my predecessor had sent an email to the troika in which he proposed a series of reforms. His and Antonis Samaras’s hope was that the troika would accept these as the last batch of austerity measures and disburse the remaining €7.2 billion that Greece should have received from the troika, mostly to repay the troika. There were three major reasons why that email was ignored: first, the new austerity measures therein were too much for the Samaras government to push through parliament; second, they were too little to satisfy the troika’s voracious appetite; third, a third bailout was essential to keep extending-and-pretending the state’s bankruptcy, something that the Samaras government was neither willing nor able to pass through parliament given its depleted majority.

3. The Serpent’s Egg is a film by Swedish director Ingmar Bergman. Its depiction of the genesis of the Nazi mindset among scientists had shaken me up when I first watched it as a young man.

Back to the Future

1. The Golden Dawn Party, whose deputies sat in Greece’s parliament immediately opposite the ministerial box, is often referred to as a neo-Nazi party. This is wrong. There is arguably nothing ‘neo’ in their Nazi ideology. They worship Hitler, their symbol is a variant of the swastika, they dress like Nazis, they salute like Nazis. In short, they are fully fledged Nazis bereft of any pretence to a twenty-first-century makeover.

2. Georgia Xenou was the great-grandmother of my daughter, my first wife Margarita’s grandmother.

3. By 1947, under the Truman Doctrine, the prosecution of the civil war by the West had been passed on from Britain to the United States. British troops were withdrawn and replaced by US military advisers. The injured Xenos’s torture and murder are described in an eyewitness account published in Greek. The book is entitled The Dead Brigade, and its author was Constantine Papakonstantinou, whose nom de guerre was Captain Belas. See pp. 623–4 of volume 1 (1986, third edition 2002).