The European Central Bank’s job is to ensure nominal stability in the eurozone economy. The ECB should not bail out governments and banks. Unfortunately again and again over the past six years the ECB has been forced to bail out eurozone states. Hence, the ECB has repeatedly conducted credit policy (rather than monetary policy) to avoid eurozone countries defaulting … By linking Greece’s EU and ECB debts to Greek nominal GDP, as Varoufakis has suggested, Greece’s public finances would be less vulnerable to monetary policy failure in the eurozone. The chancellor George Osborne should be an enthusiastic supporter of Varoufakis’s debt plan as it would cut the cost of the ECB’s tight money policies and reduce the danger of another major eurozone crisis.8
Of course it made perfect sense: swapping outstanding debt for growth-linked bonds accompanied by a crackdown on tax evasion and moderate budget surpluses was more a libertarian’s cup of tea than a left-winger’s. As I had remarked to the City’s financiers the previous day, it was a measure of the depth of the euro crisis that it took a radical left-wing government to table mainstream liberal proposals for its solution.
The ASI was all well and good, but how would the markets respond? The answer was magnificently! Bloomberg’s headline could not have been more gratifying: GREEK STOCKS GOING NUTS.
Greek stocks are soaring Tuesday on hopes of a resolution to the debt standoff between Greece’s new radical government and its creditors. As of 3.12 p.m. GMT (10.12 a.m. ET), the Athens Stock Exchange General Index is up 11.2 per cent. The news comes after Greece’s new finance minister Yanis Varoufakis told the Financial Times that instead of requesting a write-off of its €315 billion (£237 billion; $357 billion) foreign debt, the government would ask to swap Greek debt for two new types of bonds linked to growth.
A quick phone call back to Athens confirmed the good news. Not only had the stock exchange gone up by 11.2 per cent but, more importantly, shares in Greece’s banks had risen by more than 20 per cent and thousands of depositors were returning the cash under their mattresses to the bank. It was a short-term achievement but an important one: it demonstrated that our narrative of real reforms and sensible debt restructuring had the potential to win over markets and citizens.
It was time to fly to Rome.
Italian tip
I was escorted from Rome’s Fiumicino airport to the finance ministry by two police cars and two motorcycles, sirens blaring. But stuck as we were in Rome’s thick traffic, all our escort managed to achieve was noise pollution, irritating other road users and my own embarrassment. Creating more noise than substance, they brought Mateo Renzi’s government to mind.
Pier Carlo Padoan, Italy’s finance minister and formerly the OECD’s chief economist, is in many ways a typical European social democrat: sympathetic to the Left but not prepared to rock the boat. He knows that the EU in its current configuration is heading in precisely the wrong direction but is only willing to push for inconsequential adjustments in its course. He has the capacity to understand the fundamental illness afflicting the eurozone but is loath to clash with Europe’s chief physicians, who insist there is nothing to treat. In short, Pier Carlo Padoan is a convinced insider.
Our discussion was friendly and efficient. I explained my proposals, and he signalled that he understood what I was getting at, expressing not an iota of criticism but no support. To his credit, he explained why: when he had been appointed finance minister a few months earlier, Wolfgang Schäuble had made a point of having a go at him at every available opportunity – mostly in the Eurogroup. By the time we met, Padoan had managed to strike a modus vivendi with Schäuble and was evidently not prepared to jeopardize it for Greece’s sake.
I enquired how he had managed to curb Schäuble’s hostility. Pier Carlo said that he had asked Schäuble to tell him the one thing he could do to win his confidence. That turned out to be ‘labour market reform’ – code for weakening workers’ rights, allowing companies to fire them more easily with little or no compensation and to hire people on lower pay with fewer protections. Once Pier Carlo had passed appropriate legislation through Italy’s parliament, at significant political cost to the Renzi government, the German finance minister went easy on him. ‘Why don’t you try something similar?’ he suggested.
‘I’ll think about it,’ I replied. ‘But thanks for the tip.’
Central bank sabotage
The next morning, Wednesday, 4 February, I had set the alarm on my phone for 4 a.m. Shortly afterwards I was on a plane to Frankfurt, where my first meeting was with another Italian, Mario Draghi, president of the European Central Bank.
Frankfurt’s streets were covered in black ice, and the leaden sky seemed to hover just above the car’s roof. It was still morning. The surroundings of the ECB’s new tower still resembled a building site, so the final approach took us along dirt roads. Euclid and I were greeted at the door by several functionaries and whisked to the top floor in an express lift. The newness was potent, the views from large glass windows a relief from the smell of paint.
In the boardroom the ECB’s top guns had gathered. Benoît Cœuré, whom I had met in Paris a few days earlier, was the only one sporting a friendly smile. Mario Draghi looked tense, while the two Germans on the ECB Executive Board, Peter Praet and Sabine Lautenschläger, were reserved in their greeting. They all sat down one side of a long table opposite me – Euclid to my left, the view over Frankfurt behind them – and I was invited to open proceedings with a statement of intent.
Mindful of the importance of brevity, I began by introducing my government’s priorities and intentions vis-à-vis the Greek programme, and then, in no more than ten minutes, outlined our sequence of proposals: debt restructuring based on debt swaps that financiers the world over considered sensible and proper, a primary budget surplus of 1.5 per cent in perpetuity, a development bank to replace fire sales, a public ‘bad bank’ to deal with the banks’ non-performing loans, deep reforms in various markets and so on. As I concluded, I handed Mario Draghi the non-paper summarizing my debt-swap proposal.
Draghi began his reply with a brief speech on the ECB’s independence and his determination to play no role in the politics of the negotiations between my government and other eurozone states, emphasizing the prohibition that prevents the ECB from ‘monetary financing’ via the commercial banks. ‘And I must tell you that recent developments in Greece are putting us in a difficult position,’ he informed me ominously. ‘Later today our governing board is meeting and it is very likely that your waiver will be withdrawn.’
The waiver was what allowed the ECB to provide our banks with liquidity in return for junk collateral.9 It could be provided only if the Eurogroup consented – a purely political decision and one that amounted to ‘monetary financing’ despite Draghi’s protestations to the contrary. Withdrawing the waiver was the first of the two steps required to close down Greece’s banks; the second would be switching off emergency liquidity assistance. Draghi pointedly refrained from revealing whether he agreed with the withdrawal or not; he was merely warning me that he would not be surprised if a majority of board members supported it.
So there I had it: within a few sentences of his welcoming remarks, Mario Draghi was signalling a commitment to escalating the asphyxiation that the ECB and Greece’s central bank governor had begun before we were elected. It was an explicit, calculated act of aggression.
I began my reply by expressing my great and genuine respect for the manner in which Draghi had striven from the first day of his presidency to do whatever it took to save the euro while adhering as far as possible to his bank’s charter and rules. This skilful balancing act was what had bought Europe’s politicians the time they needed to get their act together, address the crisis properly, and thus alleviate the impossible circumstances in which the ECB had found itself: responsible for saving the eurozone’s failing economies while being prohibited from using the essential means – ones available to any normal central bank – of doing so.
‘Alas, the politicians did not use the time you bought for us wisely, did they?’ I said. The expression on Mario’s face conveyed embarrassed agreement. I continued:
You have done a fantastic job in keeping the eurozone together as well as in keeping Greece in the euro, especially in the summer of 2012. What I am here to put to you today is that you continue to do this during the next few months, granting us politicians the time and monetary space necessary to strike a workable deal between Greece and the Eurogroup; one that ends the Greek crisis once and for all, thus enabling you fully to respect your independence and your rulebook vis-à-vis Greece, while we politicians get down to the business of healing our country’s wounds through policies that bring a sustainable, real recovery. But none of this will happen unless we have your support.
Two days ago I went to London to soothe the nerves of the City, to create trust and to reverse the negative ‘recent developments’ that you mentioned. It was a great success. As you know, Mario, yesterday the banks’ shares and the Athens Stock Exchange rose sharply. I would have thought that it is a central bank’s duty to help a finance minister reinforce such a boost in market confidence, rather than to reverse it. If the ECB today removes the waiver it will be tantamount to destroying the market optimism that I worked so hard in London to create.
I sensed Mario was put out by the charge against him – that he was about to undo an improvement in market sentiment by resorting to legalisms. A prerequisite for the waiver was an ongoing programme, he said, triggering a bitter exchange.
‘Your government is not committing to the existing programme,’ he told me, echoing Jeroen Dijsselbloem.
‘All we are doing is seeking to renegotiate the programme to make it viable,’ I retorted.
‘It will be expiring in any case on 28 February.’
‘Fine. Why don’t you wait until after the next Eurogroup meeting [scheduled for Wednesday, 11 February] before you pull the waiver and undo the good work I did in London? Mario, we won government with only four weeks in which to renegotiate the programme. This deadline is so short as to be ridiculous. But to have it curtailed today by three weeks [by] our central bank is unacceptable.’
‘It does not matter much, Yanis, when we pull the waiver since the Greek banks have run out of most eligible collateral.’ He spoke as if the waiver decision was inevitable, beyond his control, an act of God.
If it did not matter when they pulled the waiver, I argued, then there was no need to do it that very afternoon. ‘Why not wait for the Eurogroup meeting only a few days away? Why snuff out the gains I just made in London?’
His only comeback was to insist that it was not he who was proposing the waiver be removed, implying again that it was out of his hands.
At this point I could have lambasted the president of Europe’s central bank for washing his hands of a major decision taken by his own board that would destroy precisely the thing that central banks were created to shore up: market confidence. But I did not, partly because there was a slim chance that he did oppose the waiver’s removal but was unable to stop it. Instead I told him that I trusted he would be able to prevail upon the ECB Governing Council to keep the waiver and thus not jeopardize yesterday’s Athens stock exchange revival, just as I trusted that he would support my debt restructuring proposals. ‘I am saying this here, at the ECB, because it is in this building not in Brussels that Europe has the experts capable of understanding and supporting them.’
The first item in my non-paper was the proposal to swap the SMP bonds held by the ECB for a new Greek government perpetual bond. This was sensitive ground. The SMP bonds were, as we both knew, the backbone of my deterrence strategy and his Achilles heel. If Greece unilaterally wrote them down, we would in all probability wreck his quantitative easing programme. I wondered what he would have to say about them.
His tactic was to skirt around the issue, dismissing the idea of a swap as a form of ‘monetary financing’ and therefore impossible. I begged to differ: a write-down might, I conceded, be interpreted strictly as an indirect form of monetary financing, but my proposal was for swapping one kind of debt (short term) for another (infinitely long dated). The Greek government would continue to owe the ECB €27 billion, but instead of repaying that capital within a few years it would undertake to make regular if small interest payments to the ECB ad infinitum. No write-down, no monetary financing. ‘This is something that the authors of the ECB rules could not have banned simply because they had never considered it,’ I concluded.
Unexpected help came from Benoît Cœuré. He turned to Draghi to say that my proposal had merit and should not be dismissed. Even if the ECB was reluctant to accept a new Greek perpetual bond in return for its remaining SMP bonds, maybe we could ‘triangulate’: the European Stability Mechanism (ESM), the EU’s bailout fund, could give €27 billion in cash to the ECB in order to redeem the SMP bonds, while Greece could issue its perpetual bond, with a face value of €27 billion, and give it to the ESM. I immediately recognized a further merit of Benoît’s idea, which was that by leaving no Greek bonds on the ECB’s books (perpetual or SMP), Greece would qualify for Draghi’s forthcoming round of quantitative easing.10
Quickly changing the subject, Draghi complained that my public comments about the insolvency of the Greek banks were making it hard for him to keep them open, given that his rulebook banned him from keeping insolvent banks afloat. I responded by pointing out that the waiver the Greek banks had been granted was itself a clear admission that they were insolvent; why grant it otherwise? The problem was that this temporary fix had become permanent as a result of our collective failure to deal with the underlying insolvency. ‘Surely our task now is to end the death embrace, the doom loop, between insolvent banks – that the ECB is forced to keep afloat against its rules – and an insolvent state at which Europe’s taxpayers keep throwing good money after bad?’
Peter Praet and Sabine Lautenschläger, sitting on Mario’s left, looked aghast, not because what I was saying was preposterous but – I am convinced – because it was very close to their own criticism of the Greek bailouts and the ECB’s role in them. Praet began to question me on privatizations. I gave the same answers as I had in London when addressing my City friends. They seemed satisfied with the argument but unhappy with the reality on the ground in Greece – my feelings entirely! After a few more questions and a short statement from Euclid, which was a little more combative than mine, the meeting drew to a close.
As we were leaving, Mario approached me and together we left the boardroom. Walking along a corridor, away from others’ ears, he attempted to mollify me on the issue of the possible withdrawal of our waiver by the ECB’s Governing Council that afternoon. I would have none of it.
‘Mario, I shall hold you personally responsible if the waiver is removed on the day after I pushed the banks’ shares up by 20 per cent. If you do this it will be a first in the history of central banking – a central bank working to undermine a finance minister’s success at improving market sentiment.’
Draghi looked coy. Again, he protested that it was really not up to him; that he did not control the ECB Governing Council. Once more he argued that I was not helping him keep the waiver by continuing to speak of his Achilles heel, the possibility of a unilateral haircut of the SMP bonds.
All I wanted was for us to work together, I reassured him. ‘Not only will I not haircut those bonds unilaterally, I will not even think of it – as long as you do not close down our banks,’ I promised.
‘I will do my best,’ he replied. ‘But it is not always up to me.’
Time and again since the euro crisis began, I have had to correct the fundamental misconception that it is a tussle between Germans and Greeks, north and south, between a stingy Berlin and a profligate European periphery. On the contrary, the enemies of European solidarity, rationality and enlightenment reside in Greece, in Germany, in Italy – everywhere. And the same is true of their defenders.
After the ECB meeting a couple of media engagements kept me in Frankfurt for a few hours. During that time I was accompanied by four German secret service bodyguards, two walking ahead, two trailing a few steps behind. Whenever we took cars, they would get in last and alight first to size up the surroundings. Unsmiling and intense, with their crew cuts, earpieces, microphone cufflinks, rubber boots and subtle uniforms, they were impervious to my objections to their constant presence.
When my interviews were done, they took me to the airport, where they continued to do their thing, silently, efficiently, as I made my way through to catch my flight to Berlin. Before boarding the plane I asked for permission to go to the loo. One of them, obviously the team leader, followed me inside, standing too close for comfort. But I knew he was just following orders so I relaxed, and soon I was washing my hands and on my way out.
Before we reached the other three bodyguards, who were waiting by the gate, he spoke for the first time. In very good English he asked permission to address me. ‘Of course,’ I said.
‘Minister,’ he said, ‘I want you to know that what you are doing is very important – not only for your country but also for us. You are giving us hope that there is a chance that we shall be liberated too.’
Whenever I hear people, including friends and supporters, tell me that Europe is finished, that there can be no common path for Germans, Brits, Italians and Greeks, I reach into my memory to retrieve the words of that German secret service officer.
It’s for you!
