A sea of hands was raised when I invited questions. For more than two hours I made my way around the room, answering each and every one of them. Some were hostile, others friendlier. I made a point of dealing exhaustively with them all. Judging by the warm applause at the end of the session, I felt that the job had been done.
As our hosts accompanied Euclid and me on our way out, three or four of the most influential City players in the room approached to say they were impressed. ‘You will see this reflected in the markets tomorrow,’ one of them assured me while shaking my hand cordially.
‘In other circumstances, I would be compiling my report to the Central Committee with a recommendation that you are dispatched to the Gulag,’ joked Euclid.
‘Comrade, I’m happy to be sent to the Gulag for right-wing tendencies as long as the job is done – and if you promise to visit me occasionally so that I can be reminded of the expression of horror on your face just now!’ I retorted.
Later that evening we were treated to dinner at the residence of our London ambassador. Norman Lamont and David Marsh were there, as was my great American supporter and adviser, Jeff Sachs, who arrived straight from Heathrow. I was pleased to have him at my side. Another of the guests was Reza Moghadam. Reza was with Morgan Stanley but, like Jeff Sachs, had previously worked at the IMF. More significantly, he had held Poul Thomsen’s job there until only a year before. My conversation with him was fascinating. He confirmed everything that I had been saying about the Greek programme since 2010 – the IMF’s gross error in participating in the Greek bailouts, the troika’s callousness and, in particular, the sole reason that the IMF and the EU were asphyxiating us: because they did not have what it took to confess the error of their ways. As I remarked to Euclid, who had been listening with incredulity, it was one thing for us lefties to be saying all this, it was quite another to be hearing it from the horse’s mouth – from the guy who had actually been implementing the Greek programme until only a few months ago.
Over coffee and after-dinner drinks I wondered if maybe my proposals had done the trick. London-based financiers, Tory politicians, influential journalists and former members of the IMF all appeared to see my point. Yes, we were a left-wing government, but all we were asking was for some basic common sense to prevail at the centre of European power.
That night the mainstream press coverage of my visits to Paris and London seemed positive. The BBC reported: ‘The economist-turned-finance-minister seeking to renegotiate Greece’s huge debt obligations says his priority is the well-being of all Europeans and has ruled out accepting more bailout cash … He said, “We have resembled drug addicts craving the next dose. What this government is all about is ending the addiction.”’7
The message was getting through at last. But as I turned out the lights for a few hours’ sleep in advance of my flight to Rome, I was anxious what the next morning would bring. Would the Athens stock exchange rebound? I desperately needed a boost in the money markets to provide a signal to investors and other EU governments that we had what it took to create a wave of optimism; to plant the idea in the minds of the EU and IMF that they would benefit from a deal with us.
An inconvenient achievement
At 8 a.m., after the first cup of coffee of the day, I received a phone call with a most peculiar message: my menu of debt-swap proposals had received the enthusiastic approval of the Adam Smith Institute (ASI), the think tank founded in 1977 that paved the way for Margaret Thatcher’s neoliberal project and which to my mind represented everything I had opposed during my years in the UK. The statement by ASI fellow Lars Christensen read:
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.
