The scheme I outlined, alluded to in June 2012 and in the Five-Pronged Strategy of May 2013, was based on theoretical work I had done previously on how fiscally stressed eurozone governments could gain some room for manoeuvre through a novel utilization of their tax office websites. The gist of it was simple.
Suppose that the state owes Company A €1 million but is delaying payment owing to the state’s liquidity squeeze. Suppose also that Company A owes €30,000 to Jill, one of its employees, plus another €500,000 to Company B, which supplied it with raw materials. Meanwhile, Jill and Company B also owe, respectively, €10,000 and €200,000 in taxes to the state. Now imagine that the tax office creates a reserve account for each taxpayer (per tax file number, to be precise), including for Companies A and B and Jill. The state can then just ‘deposit’ €1 million into Company A’s reserve account simply by typing it in and provide each taxpayer with a PIN to be used to transfer ‘funds’ from one taxpayer’s reserve account to another. Company A could then transfer €30,000 to Jill’s reserve account and €500,000 to Company B’s reserve account, which Jill and Company B could then use to repay the €10,000 and €200,000 they respectively owe the state in tax arrears. The immediate cancellation of many arrears would have been thus effected.
Such a system would be great to have in Portugal, in Italy, indeed in France even during the best of times, but it would be critical in Greece during the emergency of an ECB-enforced bank holiday, allowing all sorts of transactions to continue, not just those with the state. For example, pensions could be partly paid into a pensioner’s tax office reserve account, and the pensioner could then transfer a part of that sum to, say, her landlord, who would also have tax to pay. Even though these credits could not be withdrawn from the system as cash, the scheme would continue to work for as long as the state continued to accept the credits in lieu of tax. And it could work remarkably well if it were developed further in two ways.
Every Greek citizen already has an identity card. Imagine if this were reissued as a smart card featuring a microchip similar to those in modern debit and credit cards. The ID cards of pensioners, public-sector workers, people on benefits, government suppliers – anyone who has financial dealings with the state – could be linked to their tax office reserve accounts and used to pay for goods and services at supermarkets, petrol stations and the like. In other words, even if the banks were to close down, even if the state was rendered illiquid, the government could still meet its obligations simply by assigning tax credits to people’s ID cards – as long as the total value credited did not run the government into a fiscal deficit, of course.
Second, the same system could be used to allow the government to borrow from Greek citizens, thus bypassing the commercial banks, the hostile and suspicious money markets and, of course, the troika. As well as receiving tax credits from the state, citizens could be given the option to buy credits from the tax office online, using web banking linked to their normal bank accounts. Why would they want to do this? Because the government would offer them a discount of, say, 10 per cent, if they later used those credits to pay their taxes, say, a year down the line. The state would in effect be borrowing from its citizens at an interest rate (10 per cent) that no European can get from any bank these days. As long as the total level of tax credits sold by the government was capped and fully transparent, the result would be a fiscally responsible increase in government liquidity, greater freedom from the troika and thus a shorter path to the ultimate goal of a viable new agreement with the EU and the IMF.
Seemingly impressed, Dragasakis asked me to produce a written blueprint for this scheme, while Alexis and Pappas appeared soothed by the thought of the precious time it would buy them after a rupture with the creditors. Within forty-eight hours of my return to Austin I had sent a ten-page technical blueprint to Pappas to pass on to Alexis and Dragasakis.
Let’s briefly fast-forward four months to March 2015 and to a cabinet meeting of the Syriza government with Alexis, as prime minister, in the chair. After an assessment of the confrontation with the troika that had begun with a vengeance on day one, just as anticipated, I outlined a bill my ministry had tabled in parliament to combat the humanitarian crisis: debit cards would be issued to three hundred thousand families living below the poverty line, with a credit of a few hundred euros per month to cover their basic needs.
‘But these cards are just the beginning,’ I said. ‘Soon they could replace ID cards and provide the basis of a payments system that functions in parallel with the banks.’
After I explained how the system would work, I outlined its many advantages: it would give the government more fiscal space, support the poor without subjecting them to the stigma of using coupons and, above all, signal to the troika that Greece had a payments system that would allow our economy to function even if they closed down our banks. Lastly, I pointed out that if the troika decided to push Greece out of the eurozone, as the German finance minister had been wanting to do for years,6 this same payment system could be redenominated to a new currency at the press of a button.
When the cabinet meeting was adjourned, most of the ministers present approached me to express their enthusiasm, some patting me on the back, others embracing me, one telling me that she was moved and inspired.
Five months later, after my resignation, the press lambasted me for having entered into a tough negotiation without a back-up plan. For days I was mocked in the media not just by opposition politicians but also by many Syriza MPs for walking into the lion’s den without a strategy for what to do if the banks were shut down. I waited to see if Alexis or anyone else in the cabinet came forward to put the record straight. None did. So, during a teleconference conducted by David Marsh of the Official Monetary and Financial Institutions Forum in which I was replying to questions on what had gone wrong with the Greek government’s negotiations with the EU and the IMF I made known my plans for a parallel payments system.
The discussion was supposedly being held under the Chatham House Rule, allowing participants to quote what is said but not to attribute it to the speaker, but this convention was ignored. Recordings of my entire presentation were soon made public. Immediately those same journalists and politicians who had been ridiculing me for not having a Plan B suddenly accused me of the direct opposite: VAROUFAKIS’S SECRET GREXIT PLAN was a typical headline, suggesting that I had gone behind Alexis’s back to engineer a devilish plot for getting Greece out of the euro. Calls to indict me on criminal charges began to mount. Indeed, while these lines are being written a charge of high treason is hanging over me in Greece’s parliament for undermining Prime Minister Tsipras by means of a ‘secret plot’.
It is a source of personal pride and joy to me that the troika’s cheerleaders within Greece use every opportunity they can to undermine me. I consider their attacks a badge of honour, conferred for having dared to say no to their demands in the Eurogroup. But to have former cabinet colleagues, those very same people who filed past me to praise my proposed payments system, either pretend they have never heard of it or join in with the denunciations fills me only with sadness.
The offer
The offer caught me completely unawares. Around midnight in Alexis’s flat the discussion moved from deterrence and parallel payments systems to practical politics. Alexis briefed me on the high probability of an early election. The government’s term had more than two years left to run, but it was doubtful it could survive beyond March 2015, when the five-year term of the president of the republic expired. Unless Prime Minister Samaras could muster a reinforced parliamentary majority around his chosen presidential candidate, parliament would be automatically dissolved and elections called.7 Alexis then delivered his offer, unassumingly and under Dragasakis’s watchful eye.
‘If we win, and there is no doubt we shall, we want you to become finance minister.’
Throughout my journey from Austin to Athens I had been reciting the precise wording in which I would turn his offer down – except that I had been anticipating a completely different offer from the one he had made, that of chief negotiator under Finance Minister Dragasakis. But now Alexis was proposing to unify the two roles and make me responsible for both.
To buy time, and in genuine puzzlement, I turned to Dragasakis. ‘But I thought that you would assume the finance ministry.’
Alexis stepped in to explain: ‘Dragasakis will be deputy prime minister overseeing the three economic ministries,’ meaning the Ministry of Finance, the Ministry of the Economy and a new Ministry of Productive Reconstruction.8
This changed everything. The proposed cabinet structure was sensible. The only reason for turning down Alexis’s offer now would have been doubt regarding his and Dragasakis’s true intentions, calibre or character. It would have been awkward, to say the least, to bring up such fundamental doubts with them directly. I raised another issue of principle instead.
‘As you know,’ I said, ‘I have serious reservations about the Thessaloniki Programme. Indeed I have very little respect for it and, given that it has been presented as your pledge to the Greek people on economic matters, I cannot see how I can, in all honesty, assume the responsibility of implementing it as finance minister.’
Predictably, Pappas jumped in at this point to restate his insistence that the Thessaloniki Programme was not binding for me. ‘You are not even a member of Syriza,’ he pointed out.
‘But would I not be expected to join if I am to become your finance minister?’ I asked.
Alexis interjected with a studied response: ‘No, under no circumstances. I don’t want you to become a member of Syriza. You need to remain unburdened by our party’s tortuous collective decision-making.’
My head was ringing with alarm bells. Alexis’s point was reasonable but pregnant with immense risks. On the one hand, remaining semi-detached from Syriza, a party whose flimsy economic policies I had criticized for years, would afford me a precious degree of freedom and allow Alexis to blame those of my decisions that contradicted party policy on the fact that I was not bound to it. At the same time, this blame could snowball into condemnation of me at the drop of Alexis’s or Dragasakis’s hat, leaving me exposed to animosity from the party whose backing I would need so badly when struggling against the troika and the Greek oligarchy. Again, this was hardly a concern I could have shared with them.
The pressure to decide was mounting, but I needed to know for sure: were we truly in agreement over both aims and means? If not, my life would have remained blissfully uncomplicated.
‘Let’s see if we can agree on fundamentals before we discuss my role in a Syriza government,’ I said.
My intention was to try out on them an up-to-date, firm, clear-cut version of the Five-Pronged Strategy I had proposed to Alexis in 2012, before it was so ingloriously discarded.9
The covenant
First and foremost, I began, came meaningful debt restructuring.10 We had to agree that this was the be-all and end-all of a Syriza government. Getting Greece out of debtors’ prison was more important than preventing privatizations or any other objective on Syriza’s agenda. They agreed.
With debt restructuring, I continued, we could finally put an end to the austerity–deflation spiral and aim at a small government surplus – I specified a target of at most 1.5 per cent of national income. This would require sharp reductions in VAT and the corporate tax rate in order to re-energize the private sector.
‘Why should business pay less?’ Alexis protested.
I explained that I thought the private sector should pay more in total tax revenue, but the only way to achieve an overall increase in their contribution at a time of next to no sales and with bankrupt banks unable to provide credit even to profitable firms was to reduce the corporate tax rate. Dragasakis stepped in to say he agreed, apparently allaying Alexis and Pappas’s initial consternation.
When it came to privatizations, I continued, we would have to make compromises if we wanted an agreement with the EU and the IMF. Syriza’s blanket rejection of privatization would have to be replaced with a policy of considering them case by case. Fire sales of public holdings had to end, but there would be some assets, such as ports and railways, that we should make available conditional on a minimum level of investment, on the buyer’s commitment to granting workers proper contracts and the right to union representation, and on the state retaining a large, even if minority, shareholding, the dividends from which would be used to assist pension funds. Meanwhile, those assets that were to remain under public ownership should be handed over to a new public development bank, which would use them as collateral in the raising of funds to be invested in these same public assets so as to boost their value, create jobs and enhance future revenues. They agreed on this too.
Now came the delicate issue of Aris, Zorba and their fellow bankers. Remembering the awkward conversation with Alexis in the Stoneship’s shadow, I chose my words carefully in Dragasakis’s presence. I asked them to what extent they were prepared to take on bankers with Aris’s and Zorba’s background and force them to surrender control of their banks, which were essentially the property of the taxpayers. I reminded them of the curious alliance between our bankers and the European Central Bank, which was keeping their banks alive via government-backed IOUs. Either institution was capable of asphyxiating a Syriza government.
Pappas brimmed with revolutionary zeal, decreeing that all the bankers would be sent packing. More cautious but nonetheless positive, Alexis added that this was why it was important to have a senior person as deputy prime minister, meaning Dragasakis, to rein in the bankers.
But were they prepared, I asked, to adopt my proposal that these bankrupt banks be placed under the management and ownership of the EU? I knew this was an extraordinarily challenging proposal for a left-wing party that tended if anything towards nationalizing the banking sector. A perilous silence followed.
Alexis broke it by asking the inevitable question: ‘But why can’t we nationalize the banks? The state owns majority stakes in them anyway. Can’t we just pass a law that converts our non-voting to voting shares?’
I replied that unless we were prepared to turn the banks over to the European Union, we would not be able to unburden the Greek state of the liabilities incurred by their fake recapitalization. Bank nationalization would only make sense in the event of Grexit. ‘But we are committed to refusing to think of Grexit as an objective, correct?’
‘Correct,’ came Alexis’s immediate reply.
‘In which case, can we agree that our negotiating position on the banks should be that their shares, along with the liabilities for their recapitalization, should be transferred to the European Union, with new boards of directors no longer in the pocket of Greece’s bankers?’
Alexis and Pappas agreed, but I noticed that Dragasakis chose not to respond directly, remarking only that it was important to stay within the limits of legality – a point that ought to have been self-evident. His avoidance of the question reinforced my suspicions. So far though, all three seemed happy with the agenda. Nevertheless, I felt the need to recapitulate one more time what we had agreed our aims to be.
‘Debt restructuring comes first. Second, a primary surplus of no more than 1.5 per cent of national income and no new austerity measures. Third, wide-ranging reductions in sales and business tax rates. Fourth, strategic privatizations under conditions that preserve labour rights and boost investment. Fifth, the creation of a development bank that would use remaining public assets as collateral to generate a domestic investment drive, and whose dividends would be channelled into public pension funds. Sixth, a policy of transferring bank shares and management to the European Union while creating a public “bad bank” to deal with the banks’ non-performing loans, so as to prevent evictions and the mass expropriation of small business by vulture funds.’
Again they agreed, this time with greater conviction.
But I was not finished yet. Their agreement had to extend also to my proposed negotiating strategy, complete with its key deterrent, the threat to haircut our SMP bonds, and the parallel payments system with which to buy time in the event of an impasse that would bring on bank closures. I went through these points and they agreed once more.
Then came my final and most pressing point: ‘Key to having a shot at a decent agreement is that we share a common understanding that we are not going to bluff against the troika. Are we clear on that?’ I enquired anxiously.
Dragasakis asked what I meant. Was this a genuine question or tactical amnesia? Regardless, I was happy to make the key point once again, the same point I had been making since our very first meeting: ‘It is not a bluff to issue a statement of intent if you are intending to carry it out regardless of what the other side does.’
Alexis understood: ‘We heard. You’re saying that we will not sign even if threatened with Grexit. Correct?’
I confirmed that that was exactly my point: there was no point entering into a tough negotiation with the world’s most powerful credit institutions unless we were after a viable agreement within the euro, did nothing to jeopardize such an agreement, but were also clear in our minds that between surrender to a renewed sentence in debtors’ prison and Grexit we preferred the latter.
‘Are we clear on this?’ I repeated.
