Were Christine Lagarde, Nicolas Sarkozy and Angela Merkel naive enough to expect the bankrupt Greek state to return this money with interest? Of course not. They saw it precisely as it was: a cynical transfer of losses from the books of the Franco-German banks to the shoulders of Europe’s weakest taxpayers. And therein lies the rub: the EU creditors I negotiated with did not prioritize getting their money back because, in reality, it wasn’t their money.6
Socialists, Margaret Thatcher liked to say, are bound to make a mess of finance because at some point they run out of other people’s money.7 How would the Iron Lady have felt if she’d known that her dictum would prove so fitting a description of her own self-proclaimed disciples, the neoliberal apparatchiks managing Greece’s bankruptcy? Did their Greek bailout amount to anything other than the socialization of the French and German banks’ losses, paid for with other people’s money?
In my book The Global Minotaur, which I was writing in 2010 while Greece was imploding, I argued that free-market capitalist ideology expired in 2008, seventeen years after communism kicked the bucket. Before 2008 free-market enthusiasts portrayed capitalism as a Darwinian jungle that selects for success among heroic entrepreneurs. But in the aftermath of the 2008 financial collapse, the Darwinian natural selection process was stood on its head: the more insolvent a banker was, especially in Europe, the greater his chances of appropriating large chunks of income from everyone else: from the hard-working, the innovative, the poor and of course the politically powerless. Bankruptocracy is the name I gave to this novel regime.
Most Europeans like to think that American bankruptocracy is worse than its European cousin, thanks to the power of Wall Street and the infamous revolving door between the US banks and the US government. They are very, very wrong. Europe’s banks were managed so atrociously in the years preceding 2008 that the inane bankers of Wall Street almost look good by comparison. When the crisis hit, the banks of France, Germany, the Netherlands and the UK had exposure in excess of $30 trillion, more than twice the United States national income, eight times the national income of Germany, and almost three times the national incomes of Britain, Germany, France and Holland put together.8 A Greek bankruptcy in 2010 would have immediately necessitated a bank bailout by the German, French, Dutch and British governments amounting to approximately $10,000 per child, woman and man living in those four countries. By comparison, a similar market turn against Wall Street would have required a relatively tiny bailout of no more than $258 per US citizen. If Wall Street deserved the wrath of the American public, Europe’s banks deserved 38.8 times that wrath.
But that’s not all. Washington could park Wall Street’s bad assets on the Federal Reserve’s books and leave them there until either they started performing again or were eventually forgotten, to be discovered by the archaeologists of the future. Put simply, Americans did not need to pay even that relatively measly $258 per head out of their taxes. But in Europe, where countries like France and Greece had given up their central banks in 2000 and the ECB was banned from absorbing bad debts, the cash needed to bail out the banks had to be taken from the citizenry. If you have ever wondered why Europe’s establishment is so much keener on austerity than America’s or Japan’s, this is why. It is because the ECB is not allowed to bury the banks’ sins in its own books, meaning European governments have no choice but to fund bank bailouts through benefits cuts and tax hikes.
Was Greek’s unholy treatment a conspiracy? If so, it was one without conscious conspirators, at least at the outset. Christine Lagarde and her ilk never set out to found Europe’s bankruptocracy. When the French banks faced certain death, what choice did she have as France’s finance minister, alongside her European counterparts and the IMF, but to do whatever it took to save them – even if this entailed lying to nineteen European parliaments at once about the purpose of the Greek loans? But having lied once and on such a grand scale, they were soon forced to compound the deceit in an attempt to hide it beneath fresh layers of subterfuge. Coming clean would have been professional suicide. Before they knew it, bankruptocracy had enveloped them too, just as surely as it had enveloped Europe’s outsiders.
This is what Christine was signalling to me when she confided that ‘they’ had invested too much in the failed Greek programme to go back on it. She might as well have used Lady Macbeth’s more graceful words: ‘What’s done cannot be undone.’
‘National traitor’ – the origins of a quaint charge
My career as ‘national traitor’ has its roots in December 2006. In a public debate organized by a former prime minister’s think tank I was asked to comment on the 2007 Greek national budget. Looking at the figures, something compelled me to dismiss them as the pathetic window-dressing exercise that they were:
Today … we are threatened by the bubble in American real estate and in the derivatives market … If this bubble bursts, and it is certain it will, no reduction in interest rates is going to energize investment in this country to take up the slack, and so none of this budget’s figures will have a leg to stand on … The question is not whether this will happen but how quickly it will result in our next Great Depression.
My fellow panellists, who included two former finance ministers, looked at me the way one looks at an inconvenient fool.9 Over the next two years I would encounter that look time and again. Even after Lehman Brothers went belly up, Wall Street crumpled, the credit crunch hit and a great recession engulfed the West, Greece’s elites were living in a bubble of self-deluded bliss. At dinner parties, in academic seminars, at art galleries they would harp on about Greece’s invulnerability to the ‘Anglo disease’, secure in the conviction that our banks were sufficiently conservative and the Greek economy fully insulated from the storm. In pointing out that nothing could have been further from the truth I sounded a jarring dissonance, but it would only get worse.
In reality, states never repay their debt. They roll it over, meaning they defer repayment endlessly, paying only the interest on the loans. As long as they can keep doing this, they remain solvent.10 It helps to think of public debt as a hole in the ground next to a mountain representing the nation’s total income. Day by day the hole gets steadily deeper as interest accrues on the debt, even if the state does not borrow more. But during the good times, as the economy grows, the income mountain is steadily getting taller. As long as the mountain rises faster than the debt hole deepens, the extra income added to the mountain’s summit can be shovelled into the adjacent hole, keeping its depth stable and the state solvent. Insolvency beckons when the economy stops growing or starts to contract: recession then eats into a country’s income mountain, doing nothing to slow the pace at which the debt hole continues to grow. At this point alarmed money men will demand higher interest rates on their loans as the price for continuing to refinance the state, but increased rates operate like overzealous excavators, digging yet faster and making the debt hole even deeper.
Before the 2008 crisis Greece had, relative to the height of its income mountain, the deepest debt hole in the European Union. But at least the income mountain was rising faster than the hole was getting deeper, creating a semblance of sustainability.11 All that changed menacingly in early 2009 once the bottom fell out of the French and German banks as a result of having stuffed their boots with toxic American derivatives rendered worthless by Wall Street’s cave-in. Greece’s double misfortune was that income growth in the country had hitherto been fuelled by further debt provided to corporations (often via the Greek state) by the same French and German banks that were lending to the state.12 The moment these banks panicked and stopped lending to Greece’s public and private sector simultaneously, the game would be up. Greece’s income mountain would collapse at the same time as the state’s debt hole became an abyss.13 This was what I told anyone who would listen.
In the autumn of 2009 a new Greek government was elected on the promise of higher spending as a means of helping the nation’s income mountain recover, but the new prime minister and his finance minister, from the PASOK social democratic party, did not get it. The state was irretrievably bankrupt even before they were sworn in. The global credit crunch, which had nothing to do with Greece, was about to stop European banks lending to us. For a country with debt-driven growth – debt denominated in what is essentially a foreign currency, monetary policy over the euro being wholly out of Greece’s control – surrounded by European economies in deep recession and unable to devalue, Greece’s income mountain was bound to dwindle at such a rate that the debt hole would consume the nation.
In January 2010 in a radio interview I warned the prime minister, whom I knew personally and with whom I was on rather friendly terms, ‘Whatever you do, do not seek state loans from our European partners in a futile bid to avert our bankruptcy.’ At the time the Greek state was making a superhuman effort to do precisely that. Within seconds government sources were chastising me as a traitor – a fool who failed to understand that such prognoses are self-confirming: retaining market confidence in the state’s financial health was the only way to keep the loans coming, Convinced that our bankruptcy was assured whatever calming noises we emitted, I ploughed on. The fact that I had once written speeches for Prime Minister Papandreou caught the eye of the BBC and other foreign news outlets. Headlines such as FORMER GREEK PM ADVISER SAYS GREECE IS BANKRUPT titillated the media and cemented my reputation as the worst enemy of the Greek establishment.
Upton Sinclair once said, ‘It is difficult to get a man to understand something when his salary depends upon his not understanding it.’ In this case, the income and wealth of the Greek ruling class depended on their not being convinced of Greece’s bankruptcy. If every man, woman and child in this generation and the next had to take on unsustainable loans in order to keep the Greek oligarchs’ relationship with foreign bankers and governments sweet, so be it. No argument appealing to the interest of the remaining 99 per cent of Greeks and their descendants could have swayed them. But the more they plugged their ears against the dissonant facts, the greater the duty I felt to warn our people that the loans the establishment were seeking on their behalf would, in the name of avoiding it, worsen the bankruptcy and, as a result, consign the Greeks to a debtors’ prison. Friends and colleagues warned me that my thinking might be correct but that it was bad politics to speak of bankruptcy. Not being a natural-born politician, I would respond with a line by John Kenneth Galbraith: ‘There are times in politics when you must be on the right side and lose.’ Little did I know how prophetic that would prove.
And so I continued my solitary struggle to convince a nation to embrace bankruptcy in order to avoid the workhouse that was being prepared for it if it did not. In February 2010 on national television I suggested that the problem with all extend-and-pretend loans is that, as in a game of musical chairs, the music has to stop at some point. In this case that would be the point at which the weakest Europeans, whose taxes and benefits would finance the loans, cried, ‘Enough!’ But by then we would be much poorer, much more indebted, as well as hated by our fellow Europeans. In April 2010, a month before the bailout, I published three articles in quick succession. In the first of them, on 9 April, under the title ARE WE BANKRUPT? I argued that if the state pretended it was not bankrupt, through bailout extend-and-pretend loans, Greeks would face the ‘most spectacular bankruptcy among families and businesses in our postwar history’. But if the state confessed its bankruptcy and entered into immediate negotiations with its creditors, much of the burden would be shared with those responsible for the debt: the banks that indulged in predatory lending before 2008.
The establishment’s response was simple and to the point: if our government were to demand debt restructuring, Europe would jettison us from the eurozone. My rejoinder was also simple and to the point: doing so would destroy France and Germany’s banking systems and with them the eurozone itself. They would never do it. But even if they did, what was the point of being in a monetary union that crushes its constituent economies? So, unlike those opponents of the euro who saw the crisis as an opportunity to press their case for Grexit, my position was that the only way of staying sustainably within the eurozone was to disobey its institutions’s directives.
Fewer than ten days before the bailout agreement was signed I fired another two shots across the government’s bows. On 26 April, in an article headed EUROPE’S LAST TANGO I likened our government’s efforts to secure a bailout to those of successive Argentinian governments which strove to preserve, through large dollar loans from the IMF, the peso’s one-to-one link with the US dollar just long enough for the rich and the corporations to liquidate their Argentinian properties, convert the proceeds into dollars and wire them to Wall Street – before leaving the economy and currency to collapse and the accumulated dollar debt to crush the hapless Argentinian masses. Two days later I went all out with an article whose title says it all: LOOKING ON BANKRUPTCY’S BRIGHTER SIDE.
Five days later the bailout loan was signed. The prime minister, choosing an idyllic island as the backdrop for his address to the nation, hailed it as Greece’s second chance, proof of European solidarity, the foundation of our recovery, blah blah blah. It was to be his undoing and the nation’s one-way ticket to the workhouse.
Champion of austerity
In September 2015, after my ministry days were over, I made my first appearance on the BBC’s Question Time, recorded in front of an audience in Cambridge. Its host David Dimbleby introduced me as Europe’s anti-austerity champion, an open invitation to a laddish member of the audience to confront me with his pro-austerity philosophy: ‘Economics is really simple. I’ve got ten pounds in my pocket. If I go out and buy three pints of beer in Cambridge, I’m probably borrowing money. If I carry on doing that, then I’m going to run out of money and I’m going to go bust. It’s not difficult.’
One of the great mysteries of life, at least of my life, is how susceptible good people are to this awful logic. In fact, personal finances are a terrible basis for understanding public finance, as I explained in response: ‘In your life you have a wonderful independence between your expenses and your income. So when you cut down on your expenses, your income is not cut. But if the country as a whole goes [on] a major savings spree, then its total income is going to come down.’
The reason for this is that at a national level total expenditure and total income are precisely equal because whatever is earned has been spent by someone else. So if every person and business in the country is cutting back, the one thing the state must not do is cut back as well. If it does so, the abrupt fall in total expenditure means an equally abrupt fall in national income, which in turn leads to lower taxes for the Treasury and to austerity’s spectacular own goal: an ever-shrinking national income that makes the existing national debt unpayable. This is why austerity is absolutely the wrong solution.
If proof of this were ever needed, Greece has provided it. Our 2010 bailout had two pillars: gigantic loans to fund the French and German banks, and swingeing austerity. To put Greek austerity into perspective: in the two years that followed Greece’s ‘rescue’, Spain, another eurozone country caught up in the same mess, was treated to austerity which amounted to a 3.5 per cent reduction in government expenditure. During the same two-year period, 2010 to 2012, Greece experienced a stupendous 15 per cent reduction in government spending. To what effect? Spain’s national income declined by 6.4 per cent while Greece’s by fell by 16 per cent. In Britain, meanwhile, the newly appointed chancellor George Osborne was championing mild austerity as a means of achieving his dream: a balanced government budget by 2020.14 Osborne was among the first finance ministers I met after my election. The most startling aspect of that encounter – at least to those in the press who expected a frosty or outright acrimonious meeting – was that we found very little to disagree on. In the first few minutes of our discussion I suggested to him that ‘While we may disagree on the merits of austerity, you are not really doing much of it, George, are you?’15
He agreed smilingly. How could he not? If an Austerity Olympics had been staged, Greece would have swept the board while Osborne’s Britain would have been an also-ran at the bottom of the medals table. Osborne also seemed appreciative of the help he was getting from the Bank of England, which from the moment the City went through its 2008 credit convulsion had printed billions to refloat the banks and keep the economy ‘liquid’. Osborne referred to this Bank of England largesse combined with government spending cutbacks as ‘expansionary contraction’.
‘They are behind me every step of the way,’ he told me, evidently relieved not to be in my situation, hostage to a European Central Bank that was doing precisely the opposite.
‘I envy you, George,’ I lamented. ‘Unlike you, I have a central bank stabbing me in the back every step of the way. Can you imagine what it would be like, here in Britain,’ I asked, ‘if instead of your “expansionary contraction” you were forced, like I am, into a “contractionary contraction”?’
He nodded with a smile, signalling if not solidarity at least sympathy.
That a meeting between a Tory chancellor and a finance minister representing the radical Left in Greece went swimmingly is not actually as puzzling as the press would have everyone believe. Three years previously, with the euro crisis at full blast, a chartered accountants’ chamber based in Australia decided to entertain the attendees at their annual conference in Melbourne by staging a debate between a left- and a right-winger from Europe. So they invited Lord (Norman) Lamont, former chancellor in John Major’s government, and me to debate, convinced of the fireworks that would ensue. Unfortunately for them, they chose the wrong theme: the eurozone crisis. Having taken the stage in front of a large audience anticipating a cockfight, we quickly discovered that we agreed on almost everything.
The discussion was so amicable, in fact, that after we had left the stage together, we met Danae outside and the three of us proceeded to have lunch together at a riverside restaurant. Bathed in brilliant sunshine, the friendship blossomed – with the help of some delightful Aussie wine, as Norman keeps reminding me. After that we remained in touch, exchanging views in a manner that confirmed we had more in common than even we could have imagined. It was December 2014 when I shocked Norman with the news that I would be taking over Greece’s finance ministry within a month. Since that day, and throughout my tumultuous months in office but also beyond, Norman has proved a pillar of strength, a safe friend and a constant supporter. In fact, before I stepped into 11 Downing Street to meet George Osborne in 2015, Norman had called him on the telephone to pave the way for our meeting with a few warm words about me.
While my friendship with Lord Lamont seemed odd to many, especially to my left-wing comrades in government, it fitted well within a broader pattern. Throughout the bleak years, from 2010 to this day, I have been continually stunned by the support that I, a proud leftie, have received from a variety of right-wingers – Wall Street and City of London bankers, right-wing German economists, even US libertarians. To give an example of how weird things got, on a single day in late 2011 I addressed three rather different crowds in New York City – one at Occupy Wall Street, another at the New York Federal Reserve and a third consisting of hedge fund managers and bank reps – and when I told all three audiences the same story about Europe’s crisis, I received from each of these three camps of sworn enemies the same warm response.
What authentic libertarians, Wall Street’s recovering bankers and Anglo-Celtic right-wingers liked about my otherwise left-wing position was precisely that which the Greek and European establishment loathed: a clear opposition to unsustainable, extend-and-pretend loans that repackage bankruptcy as an illiquidity problem. True-blue free marketeers are allergic to taxpayer-funded benevolence. They reject wholeheartedly my views on the desirability of substantial public investment in recessionary times and of tax-mediated income distribution at all times. But we agree that extending a bankruptcy into the future through taxpayer-funded loans is a horrific waste of resources and a gateway to mass misery. Above all else, libertarians understand debt. As a result, we saw eye to eye on the misanthropic fallacy behind the programme that Christine Lagarde was pushing me, four years later, to embrace.
The official explanation of how the establishment’s programme was supposed to help Greece recover in 2015 might be termed ‘Operation Restore Competitiveness’. The basic idea was this: Greece has the euro and therefore cannot attract investment from overseas by devaluing its currency, which is the usual strategy for regaining international competitiveness. Instead, it can achieve the same result through what is known as internal devaluation, brought about via massive austerity. How? Swingeing government expenditure cuts will bear down on prices and wages. Greek olive oil, hotel services on Mykonos and Greek shipping fees will therefore become much cheaper for German, French and Chinese customers. With Greece’s competitiveness thus restored, exports and tourism will pick up, and with this miraculous transformation investors will rush in, thus stabilizing the economy. In time growth returns and incomes pick up. Job done.
It might have been a convincing argument if it were not for the elephant in the room – an elephant that libertarians recognize: no sane investor is attracted to a country whose government, banks, companies and households are all insolvent at once. As prices, wages and incomes decline, the debt that underlies their insolvency will not fall, it will rise. Cutting one’s income and adding new debt can only hasten the process. This is of course what had happened in Greece from 2010 onwards.
In 2010, for every $100 of income a Greek made, the state owed €146 to foreign banks. A year later, every €100 of income earned in 2010 had shrunk to €91 before shrinking again to €79 by 2012. Meanwhile, as the official loans from European taxpayers came in before being funnelled to France and Germany’s banks, the equivalent government debt rose from €146 in 2010 to €156 in 2011. Even if God and all the angels were to invade the soul of every Greek tax evader, turning us into a nation of parsimonious Presbyterian Scots, our incomes were too low and our debts too high to reverse the bankruptcy. Investors understood this and wouldn’t touch a Greek investment project with a bargepole. The corollary was a humanitarian crisis that ended up bringing people like me into government.
Once I was there, with the international Left in permanent disarray, US libertarians and UK free marketeers were among my most effective supporters. Interestingly, their ideological, quasi-Darwinian commitment to letting the market’s losers perish was pushing them towards my side. Mindful of the dangers of too much credit, their dictum that ‘To every irresponsible borrower there corresponds an irresponsible lender’ led them to the conclusion that bad loans should burden irresponsible lenders, not taxpayers. As for irresponsible borrowers, they should also pay the price of their irresponsibility, mainly through being denied credit until they proved their trustworthiness again.
Blacklisted
Throughout 2010 and 2011 almost every other day it seemed I appeared on radio and television imploring the government to confront reality and enter the phase of grim acceptance that Greek public debt had to be restructured. There was nothing radical or particularly left wing in this proposition. Banks restructure the debt of stressed corporations every day, not out of philanthropy but out of enlightened self-interest. But the problem was that, now that we had accepted the EU–IMF bailout, we were no longer dealing with banks but with politicians who had lied to their parliaments to convince them to relieve the banks of Greece’s debt and take it on themselves. A debt restructuring would require them to go back to their parliaments and confess their earlier sin, something they would never do voluntarily, fearful of the repercussions. The only alternative was to continue the pretence by giving the Greek government another wad of money with which to pretend to meet its debt repayments to the EU and the IMF: a second bailout.
I was determined to spoil their party: to shout from any rooftop I could scale that our worst option would be to accept more loans. I tried various metaphors: ‘It’s like accepting a credit card,’ I once said on television, ‘in order to repay mortgage instalments that you cannot make because of a drop in your wages. It’s a crime against logic. Just say no. A home repossession is a terrible thing, but eternal debt bondage is even worse.’
