My message to you is that this is a government interested only in Greece’s recovery within a policy framework that is therapeutic for the eurozone as a whole. This is not going to be another government that tries to fool you into believing that we shall adopt a certain reform programme just in order to get the next loan tranche. You may have gathered that we do not give a damn about the next loan tranche. We prefer to go down in flames than to keep extending this indignity. The one thing the people of Greece tell us time and again is: stop the practice of the past years of coming to you cap in hand for more money, pretending to be changing the country when the country was deforming, not reforming.
On that note I withdrew to leave the teams to their discussions under Euclid’s supervision. It was the first time the troika’s representatives had been ordered to negotiate with technical staff of their own rank in Brussels rather than cross-examining our ministers in Athens. In the weeks to come they would make their feelings about this demotion abundantly clear.
Over the next two days Euclid and Jamie kept me continuously informed of progress. At first the troika appeared neither aggressive nor unfriendly. The IMF’s representative expressed scepticism as to how much, and how quickly, we could claw money back from rich tax dodgers, was happier with our ideas for the management authority we proposed should handle the banks’ non-performing loans, and reserved his outright hostility for anything to do with trade union rights. But while the meetings themselves began in a civilized fashion, foul play was taking place outside the room, with the troika leaking to the media that ‘the Greek story doesn’t bind together’. Maybe it didn’t fully, I responded to journalists, but it did bind together a great deal more than the troika’s spectacularly failed programme.3
On the second day, Euclid reported, the troika turned up the hostility dial. Unwilling to acknowledge the design faults in their cherished programme, they behaved instead as if their job was to assess our ability to implement that programme. Some of the points they raised were frankly ludicrous, their accusation that we had no plan for financing our debt repayments winning the medal for conspicuous hypocrisy. Euclid’s assessment was that they were conducting an experiment in calculated aggression and that it would be disastrous to acquiesce. Jamie’s view was that the time had come for official Europe to realize that keeping Greece out of default would require a bridge facility and a time frame for major amendments. To impress this essential fact upon them, his advice was ‘Make your exit from this swamp Tuesday afternoon [the day after the Eurogroup] and let them come to you if they want to. Apologies if this is all teaching my grandmother how to suck eggs.’
Thirteen days to the threatened bank closures
Our team’s two-day meeting with the troika was never going to produce a breakthrough. Our purpose was to show good faith to Chancellor Merkel, who had intervened to ensure that our proposal for a bridge was accepted. The troika’s purpose was to defend its programme while leaking to the media that we were incompetent fools whose ideas were all over the place. The real battle would take place at the political level before and during Monday’s Eurogroup – on 16 February, thirteen days, according to Jeroen’s threat, before every bank branch and ATM in Greece would shut down if we failed to reach an agreement.
Meanwhile my team worked frantically on a new non-paper combining and improving on our proposals. Jeff Sachs produced excellent work on Greece’s debt. The Lazard team worked diligently with Elena on fiscal policy, banks and the broader reform agenda. Jamie did wonders coordinating the work. And Euclid strove to prevent me from making too many concessions in my framing analysis.4 The international press was pretty much united in its condemnation of our efforts, parroting the troika’s accusation that we were backtracking on reforms and had arrived in Brussels without any coherent proposals. The one thing they disagreed on was what Greece should be doing to stem the bank run that their reports were doing so much to fuel: half reported that I was planning to introduce capital controls, the other half admonished me for not doing so.
In fact, this was a question we were considering among ourselves in case the Monday Eurogroup failed to reach an agreement. Participants in this internal and secret exchange, held partly in person and partly via email, were the Lazard team, Jeff Sachs, Willem Buiter of Citibank, Jamie Galbraith, Elena Panariti, Glenn Kim, Euclid Tsakalotos and myself. I started the discussion with this statement:
A euro ‘trapped’ in a eurozone member state bank operating under capital controls (e.g. Cyprus) is worth less than a paper euro or a euro elsewhere. Indeed, one could buy a nominal sum of euros’ worth of deposits in a Cypriot bank for fewer paper euros or euros deposited in a German or French bank account. This discount is, in effect, an exchange rate. Capital controls, thus, are a form of ‘exit’ – temporary and reversible to be sure but exit nevertheless. The name on the currency would not change, but in all other respects, the currency is devalued overnight upon the imposition of capital controls.5
The first responses I received came from Elena, Jamie and one of my advisers from Lazard. Their gist was that if I imposed capital controls the ECB would be absolved of responsibility for the bank run it had caused and would no longer have to make the agonizing decision to switch off liquidity (ELA) to Greece’s banks. Meanwhile, capital controls would be a godsend to the German government. Imposed by Athens, they would be interpreted as our admission of the need to deny our profligate citizenry access to their deposits – all at zero cost to the creditors, since our debt would remain in normal (non-devalued) euros. It would be a terrible self-inflicted defeat. Not only would we have to live under what would be to all intents and purposes a restrictive twin currency system, but the troika would have every right to claim that it had been our own choice to do so. The only non-Greeks to be hurt by capital controls would be the Greek subsidiaries of European corporations, but most of them – such as Carrefour and Crédit Agricole – had already withdrawn from Greece since 2010.
Jeff Sachs was the most vociferous opponent of self-inflicted capital controls. He phoned me to say that in all his years of advising governments he had never seen a surer way of committing political suicide than a finance minister passing legislation that stopped citizens from withdrawing their bank deposits. Politically, it was imperative to avoid them. And if capital controls could not be avoided – if, for example, the ECB pulled the plug on ELA – it was crucial that the sitting government opposed them fiercely and blamed them, as would be right and proper, on the ECB that imposed them. Willem Buiter was of the same opinion: self-imposed capital controls would deplete our political capital while doing nothing to help reduce austerity at the level of fiscal policy. Their verdict was clear: we should never, ever embrace capital controls.
Something more obliged us to reject them: by effectively creating a dual currency, capital controls fundamentally damaged the integrity of the eurozone. The Syriza government believed in the importance of doing all it could to save the eurozone and make it work for every member state, not just Greece. As capital controls would be detrimental to the EU member states’ common interests, for that reason alone we had to oppose them. And if the ECB forced capital controls upon us, as it had the power to, the whole cabinet should join the inevitable demonstrators outside the closed banks with banners castigating the ECB and the Central Bank of Greece for such a fundamental dereliction of duty. In that regrettable scenario we would be duty-bound to put emergency measures in place, which would mean inaugurating our own euro-denominated parallel payments system – as well as making good on our stated intention to haircut the ECB’s SMP bonds.6
In the weeks and months that followed, this remained my consistent advice to Alexis and our war cabinet, a mantra that Alexis and especially Pappas endorsed fully.7 In the meantime my public position on capital controls was consistently and repetitively the same: our government was striving for a rational, mutually beneficial agreement within the eurozone; capital controls made no sense in a functioning currency union and would damage its integrity, so we opposed them; if capital controls were introduced, it would not be because we wanted, sought or approved them.
That same weekend Jeff Sachs was hard at work on the other side of the Atlantic, trying to convince the Fed to weigh in on our behalf and persuade the ECB to abandon its ongoing asphyxiation strategy. His message to Janet Yellen was simple: the new Greek government’s programme of reforms and fiscal targets was reasonable; they understood well that Grexit was an exceptionally dangerous path, one that would not be taken at their instigation but only under duress from the ECB; Yellen ought to tell the Europeans not to risk destabilizing the world economy over a few billion dollars and to advise Draghi to desist from introducing capital controls that would solve nothing.
Meanwhile the press was increasingly targeting me personally in its reports. In response to a BBC profile that labelled me ‘Greece’s Cassandra’, Bill Black, the American economist who had campaigned so effectively against Wall Street, came to my defence.
So why does the BBC treat Varoufakis as a sexy leftist and Dijsselbloem as the respected spokesperson for the troika even though Dijsselbloem is a fanatic ideologue who has caused massive human misery because of the intersection of his inflexible ideology and economic incompetence? Varoufakis’s views on the self-destructive nature of austerity as a response to the Great Recession are mainstream economic views. He certainly is a leftist, but his policy views arise from different ideological traditions most people would find antagonistic [to left-wing thinking]. That makes him a non-ideologue as the term is defined. The troika, by contrast, is led entirely by ideologues. The primary difference is that they are exceptionally bad economists and exceptionally indifferent to the human misery they inflict on the workers of the periphery that they despise and ridicule. The BBC, the New York Times and the Wall Street Journal will never write a ‘profile’ of the troika’s leadership that makes any of these points. The BBC profile is another example of what I call revealed biases. Journalists and media organs routinely reveal and betray their biases – biases that they hotly deny but rarely escape.8
But the line that raised my spirits most before my second Eurogroup came not from a left-winger or political fellow traveller but from Citi’s global chief economist, Willem Buiter. At the end of an email advising against capital controls, he wrote, ‘Noli illegitimi carborundum!’ which he also helpfully translated for me: ‘Don’t let the bastards grind you down!’
Breakthrough?
The night before the Eurogroup Alexis called with good news. The president of the European Commission, Jean-Claude Juncker, had secretly sent us a draft communiqué: could I look at it? Was it what we wanted?
A quick look made clear it was a major breakthrough.
Greece belongs and will stay in the euro. The … [previous] programme agreed between Greece and its European and international partners was necessary to correct macroeconomic imbalances and put Greece on a path to secure its financing and restore market access. But the economic and social impact of the crisis on Greece and its citizens has been immense. There is a need to move to a new relationship based on a mutually beneficial agreement for Greece and for Europe as a whole. The objective is to work together on a new growth-model for Greece based on social fairness, sound public finances, a competitive export-oriented and investment-based economy, a stable and well-supervised financial system and a modern public administration.
Its re-evaluation of the troika was also excellent.
Greece wishes to end the undue intrusive approach of the troika, understood as technocrats who operate without political mandate. Pending the agreement of a new deal by June/July, it should be possible to organize the discussions with European and international partners in a more constructive format concerning both missions and dialogue, and to ensure that technical discussions are at every moment backed by a political mandate taking full account of the need for growth and the social fairness of all reforms.
Additionally, there were helpful provisions for ending our liquidity squeeze.
[T]emporary bridge financing could be made available from the release of SMP profits … Progress in agreeing this needs to be based on mutual trust and credibility [what counts are actions and not words]. To this end, Greece should rapidly adopt and implement a number of key reforms.9
This was nothing short of an endorsement of the proposals I had been putting to every official I had met since my original trip to Paris.
Alexis and the rest of our leadership were relieved – as was I – but deep down I remained sceptical. It looked too good to be true. When I voiced my concerns, Alexis said he understood but encouraged me to hope for the best. That night I had a little more sleep than usual.
The commissioner’s humiliation
The following morning my secretary informed me that Pierre Moscovici, EU economics and finance commissioner working under Jean-Claude Juncker, wanted to see me in his office at 1.30, half an hour before the Eurogroup was meant to commence. I told her I could feel ‘snakes slithering in my gut’, a Greek expression for being filled with foreboding.
When I entered his office, Pierre stood up to greet me. We shook hands warmly and he invited me to sit down. Without a further word he passed me a document to read. It was a version of the draft communiqué I had read the previous night … only a touch better. He asked for my opinion.
‘Where do I sign?’ I replied.
‘Really?’ asked Pierre.
‘Absolutely.’
Pierre looked tremendously satisfied. ‘Well, in that case we shall have an easy Eurogroup. Can I get you a coffee?’ I accepted his offer.
While sipping my EU standard-issue coffee, I asked if he was sure that his draft would pass through the Eurogroup. Would Jeroen accept it? How would Wolfgang respond?
‘Not to worry. It is all agreed.’
‘By whom? What about Christine and Mario?’
‘They are on board too.’
‘Are you sure, Pierre?’
‘Yes, we just had lunch to discuss this: Jean-Claude, myself, Mario, Christine and Jeroen.’
