Friday, July 31, 2015

The Case Against Varoufakis

In dealing with Varoufakis, I am reminded of Sam Brown’s quip: “Never offend people with style when you can offend them with substance.” In other words, there is no need to talk about Varoufakis’ shirts, his motorcycle and helmet, his photo shoots, his constant interviewing, his escape to Aegina the night of a historic vote, etc. The substantive case against him is simple and consists of three charges.

First, his entire negotiating position was premised on the idea that the Eurozone would cave in order to avoid Grexit. Of course, Varoufakis has told us that German Finance Wolfgang Schäuble warned him that he would push for Grexit—which means that either Varoufakis did not believe him or did not think that Schäuble’s threat was credible. Any sensible observer of European politics understands that even though the Eurozone is willing to do a lot to preserve the currency union, it is not willing to capitulate to a member who is asking for money without any quid pro quo. In other words, the premise was, from the beginning, unrealistic, and in pursuit of his negotiating strategy, he did Greece enormous damage. 

Second, Varoufakis did nothing to do strengthen Greece’s position during the negotiations. He confused lecturing other finance ministers with “diplomacy” and managed to turn every single Eurozone country against Greece. Nor did his public diplomacy do much good—it turned him into a rock star, but without any improvement in Greece’s diplomatic hand. I cannot think of a country that has squandered so much capital so quickly. Nor did he find other ways to boost Greece’s hands; his “Plan B,” for instance, could have helped Greece withstand pressure from the European Central Bank for a few days or weeks; but it is hard to see why the other side would blink first. 

Third, Varoufakis was/is so consumed with the idea of debt relief that he seems unable to contemplate anything else. He was unable to discuss specifics on the budget, nor was he able to produce a realistic numeric plan that converted the proposed reforms into fiscal outcomes/targets. He was, in short, not a technocrat (technocracy assumes some competence) but an entertainer. His only ideas that we will remember are either the ludicrous (the under-cover tax collectors) or dangerous (IOUs, parallel banking system). 

In short: he started with a false premise about how the Eurozone functions, he was unable to build coalitions or any momentum for his cause, and he was incapable of moving beyond “debt relief” as a strategy to help Greece exit the current crisis. It was these mistakes that history will note, together with the catastrophic consequences of his tenure for the Greek economy. 


  1. It is much easier to point out there's a problem, than it is fix the problem. However, in order to have a fix, firstly someone must point out the problem (when you ignore the problem, you are stuck with it forever).

    Varoufakis has spoken openly and quite rightly pointed out some of the problems of the Euro and the EU as a whole. I do not believe he has provided a solution to these problems; or at least I think the solution that he attempted to provide cannot work. However, I will point out that no one else is even acknowledging the problem here.

    1. I don't think that's true. Varoufakis has not said anything about the EZ that hasn't been said (usually better) but dozens other economists. But even if it were true, that's a measure by which to judge a pundit, not a minister of finance who is negotiating for his country's future and who has sold the Greek people on his solution to the problem.

    2. Forgive me for asking, but if this problem is so well understood, then can anyone explain why the Greek government is right now in the process of signing up to a new credit card, so they can make payments on the old credit card?

      It seems obvious that Varoufakis' criticism of "Extend & Pretend" economics is being ignored here, thus off they go to negotiate more of the same. Kick the can, delay the inevitable... only answer we ever get.

    3. The Greek government is getting a new loan because it has lost all hopes of market access (which it had regained partly) and because of the catastrophic damage done to Greek banks (courtesy of SYRIZA's reign). We did not have extend and pretend -- we had debt relief conditional on a last round of reforms -- except that we could not finalize the debt relief. Nor do I agree with V's main thesis that if Greece had gotten debt relief all would have been good -- as I have written before, austerity and Greece's economic performance since 2010 had very little to do with debt and everything to do with a sizable deficit.

    4. I agree on the point that the Varoufakis plan of Keynesian spendthrift was never a good plan. However, it would be unfair to specifically blame one man for such a foolish plan, unless that man was John Maynard Keynes himself. Every government (and every powerful person) is vulnerable to a scam artist that finds a convincing way of telling them exactly what they want to hear. You will find many Keynesians amongst the governments of the western world, what they enjoy more than anything else is spending other people's money. Justification is whatever it needs to be.

      The part that Varoufakis did get right is that giant unpayable debt cannot be fixed with more debt. Bubble blowing must one day come to an end; on a worldwide basis that's what is happening. The losses must be accounted for, what cannot be paid won't be paid. At the moment we are one the one hand trying to pretend there is are no losses, while on the other trying to find ways to pass that loss onto a bigger sucker, for example German banks successfully passed the loss onto the ECB and IMF, who in turn are looking for ways to stick the taxpayers of Europe.

      Governments invariably kick the can down to future generations because babies don't get a vote. There will come a day when future generations simply dispute the debt and refuse to pay... this day might be already here.

    5. Even if one focuses on debt alone, V was wrong in my mind. He was confronted with three realities when he came to power: first, interest payments were at a 29-year low, so debt, while high, was not really holding back growth at all; second, he (the Greek government) had a pledge to offer debt relief; and third, the ECB was launching its QE program, which could massively simplify the refinancing needs of the Greek government. Instead of exploiting these favorable conditions, he picked an unnecessary fight that he was unlikely to win and that caused enormous damage to the Greek economy.

  2. I agree with all of your points. One other thought, though: do you agree with some of Varoufakis's supporters who consider his celebrity status as crucial in increasing awareness of Greece's and the EZ's plight? I never saw it that way myself. Then again, I've tended to see all of the former finance minister's actions as either wrong-headed or delusional. Should we at least give him this much credit?

    1. I don't think so. Debt relief has been on the table since 2012, and, arguably, the previous Greek government could have secured it in 2014 if it had not dragged its feet on the final round of reforms.

      The reason why everyone is talking about Greece's plight and the need for debt relief is not because Varoufakis raised the issue through his celebrity status, but because his actions have sunk the economy to such a depth where debt relief is now essential (remember, the economy was growing, however modestly, in early 2014 and unemployment was falling).

      It was his mismanagement of the economy that made debt relief inevitable, not his persuasive arguments.

    2. What the hell is wrong with you people ? Seriously !!! This man did his very best in a very difficult situation that had already been made untenable by the previous governments and the banking system. I'm so sick of this stupid Varoufakis bashing. You people conveniently keep forgetting that there was already two bail outs and an enormous problem long before this government came into power and even more important you chose to ignore the glaring fact that this crisis was a planned event. You want to over simplify a very complicated situation and lay the blame at the feet of one man. That's doubly stupid as it is the wrong approach and it is certainly the wrong man to blame.

  3. I beg to differ with your case.

    First, a short description of the background of my arguments, because I think only a European view provides the full picture. I understand your Greek point of view (knowing that this understanding is limited from the outside and relying on few EN available sources e.g. you/Greek Analysts & others). But as a balance, there is the contrasting observation of the German and Italian debate, filtered by real project experience in Iceland after 2008.

    With that in mind, there are different starting points:
    a) Tsipras and Varoufakis acted (and I think still act) in tandem. Thus, that should be taken into consideration for any valuation.

    b) The entry point into the negotiations was different than you perceive it. Both negotiated for Eurozone stay and a debt cut, not for a program or Grexit (see some analysis on that here – I think it is a good background read on many issues touched
    We also do not know what the economic sunk costs have been for them and the EZ. I think there is ground to argue that the bank recapitalization was on the agenda anyway (most likely with Greek bail-in).

    c) In my opinion Varoufakis did – contrary to what you write – understand the functioning of the Eurozone with regards to the bailouts (all – not only the Greek) and their position because he understood the root. The dominant opinion about the economic medicine (mainly supply side policy after austerity) is – knowingly or not – wrong. It is not a currency crisis or MU crisis alone (like a demand shock), but a full-blown government debt and banking crisis. Who did say that the very likely argument for the first bailout (save the banks and take one for the EU team) did change between 1st, 2nd and 3rd bailout if you take an EU view?
    It is also the wrong program for Italy, Spain and Portugal. Via our Italian clients I can tell you that any nominal growth as indicator for success is just far-off any kind of economic reality there.
    This unites the EZ leaders as any change in status quo damages them.

    d) If c is right, then you need a radical break up of positions – Varoufakis was good at that. The difference of Varoufakis was not that he was the first one to point it out, but that it became an official political position in the EZ with him. Exactly this is the reason why many Europeans with very different political stance (including me) still cheered his position on debt and the absurdity of the program(s) which is mainly debt roll over for its own sake and neither good for Greece nor good for e.g. Germany. It is not to say that other SYRIZA (left) policies are therefore as well cheered. No, they are not.

    With that background to your arguments. The problem with your 3rd argument is that a real reform program for Greece which means a combination of

    a) structural reforms (small impact in dev. econs on GDP growth) and
    b) a value chain change of your industry reforms (big impact on growth)

    can only be done in

    i) a long term program (7years) with very skilled macro/micro management and
    ii) with a mixture of policies that are absolutely out of focus of any EZ program.

    Condition is of course that the Greek population is willing to do it and it would be best to have a global growth period.

  4. You are an economist so I just give one example: In a good program you would e.g. introduce structural reforms (they cost you as people have to adopt and there is uncertainty) step by step, start at the same time with an investment program in a promising industry (increase in government spending as only trust actor to jump start), privatize and once this industry is alive, start intelligently squeeze-taxing around (here finally the money comes in). Sticks and carrots in a very balanced way with strict hands-on micromanagement geared to generate trust and growth while taking taff stances on other issues like tax evasion. From a pure macro view it might also have been wise to install currency controls for such a program just in 2010 or 2012, as they are the stop to further “devaluation” or in a MU to asset deflation (and a stop to tax evasion). That is just to illustrate how unconventional one has to be to introduce reasonable change in this situation, but there is a long list like e.g. you would not start with opening yourself up, but keep closed until you can compete. It also means to temporarily increase deficits.

    For that you need a deep debt cut (EZ said no) or the financing via a program (EZ no), a different policy mix (EZ ??) as in all bailouts and time (more than 3 years) + I argue there is no way of any agreement of such a program as you come home and have to explain your industry/businesses why you do not do the same for them. It also means no alliances unless Germany is willing to get into a Marshall-Plan like program to recycle the CA surplus into investments. Because in any other case you end up with a group of receivers against one giver.

    There were other suggestions by Varoufakis I read, more in line with the above different policy mix, but just not debatable – as they are not in Germany. Then according to the media reports there was the proposal by Varoufakis to set-up the 50bn asset fund in a different way. Actually his idea is good - we worked on similar concepts in Iceland – they are politically very difficult to introduce as they want to write the law, but not do the implementation of economic results (just to name one of a long list).

    You see how different that approach is from the usual reading of the "needed reforms" and understand the likelihood of passing it.

    If you cannot get such a program, the second best alternative is the debt relive only (I think back to 40% of GDP is a good proxy and compliant with EU own targets, so you get the magnitude).

    In pursuing it, Varoufakis did a good job as he understood that the pressure angle – given the political position is fixed - is more the public as talk shows today are the number one arena of public opinion setting amplified by social media. This is why I do not share your second argument (and yes the Paris Match pictures were stupid). For this conclusion I have to add that the German press since long time is openly lobbying against a third program for Greece and leading economists are since long pro-Grexit. As such the position of Greece did not change much, if not improve especially by Varoufakis Berlin speech. The turning point in sentiment – if there was any compared to prior - was the referendum which was called by Tsipras. Then again after the Schäuble plan (pro Greece then).

    The Grexit threat is a long story in itself, and the comment is already pretty long. To make it short: I think the very same fact that Dr. Schäuble risked the irreversibility of the EZ (he did ruin EZ from market perspective) with the paper on which Tsipras folded, showed that it might not be a political solution today in Greece, but still a viable economic threat. That is why the tapes were leaked now – you see the tandem still working. Plan B has also to be seen in connection with the ELA which at least showed the political acting of the ECB even if you could not get an injunction.

  5. Just because a debt cut was promised in 2012 it does not mean – in contrast to public believe – that it will/would have come. Dr. Merkel said no debt cut/bailout in MU already back in 2010, so why change now? If they would think so, a negotiation offer would have been an inverse structure: “Do reforms, and the more you do, we agree on %wise relive after quota of repayment.” That is how you set-up the incentive structure. This on the table would have silenced Greek’s negotiation position immediately, or? I think Tsipras was catch on to spot that it was political promise only (I know a similar case for Iceland).

    So, what is the result today: The debt cut is on the table by IMF and very, very likely becomes part of an agreement. The Greek case gets support now, especially by the US that simply want to have a peaceful EZ/EU since from their perspective the west is in a hot war what the EZ did not understand and ½ year negotiations are an awful waste of resources.

    The program is as bad as it was before, maybe worse, but what are/have been real alternatives besides Grexit with regards to the policy mix the EU and IMF would agree on? And on the structural reform part and tax collection we can all agree.

    In sum: Not bad for a so called failed finance minister when you compare it to the start position. I could understand you arguing now, what if you compare it to a very good solution? Here you are right, but we have to consider the constraints. I am afraid to argue it is only Grexit, as other options are not political feasible today, and most likely never were.

    Then again, what have been the economic costs? As written above, I think we do not know because we have no idea what Varoufakis (or Dr. Schäuble) assumed as sunk costs in the negotiations.

    If the banks are, then only – GDP Q1+ Q2/2015 is left as costs. And who knows, as economics is 50% psychology, maybe Q3/Q4 outperform despite SYRIZA as uncertainty is gone. The currency controls show how strange the EZ is as a currency area and we can debate about 100bn flight deposits as an intelligent move to drive up costs for the other side if you think Grexit was a viable option for Dr. Schäuble. And we need to translate the future debt cuts in term of GDP to understand the magnitude of savings for Greece compared to the loss today.

    And compare it to the costs of the wrong program whatever % Greeks fault is for not enough reforms.

    As much as I understand your frustration, only history will tell us the valuation of Mr. Varoufakis taking account of the singularity (or not) of circumstances.
    One fact of course remains – the real case: We are all in the hand of politicians acting without economic understanding and maybe for that Varoufakis merits to be called a welcomed fresh air.

    Yes, Greece needs and merits good reforms and structural change, as does Italy or Spain – just do not hope to get it from the very same group of politicians on EU level, that leave their own people frustrated at home. Go and ask German companies (only in private) about the CDU/SPD coalition …
    I hope I could explain the many layers in the game and the valuation of its players.

    (It became a very long three part comment, still hope you find it interesting).


Note: Only a member of this blog may post a comment.