VAROUFAKIS: [smiling] Come, come, Wolfgang. You do not expect him to make such a mistake? If he does mention it, the next moment the Financial Times or Der Spiegel will be reporting that the Greek government is putting Grexit on the table! I have a better idea: why does the chancellor not mention this idea to Tsipras instead?
SCHÄUBLE: [smiling] Because then you will leak that the chancellor is pushing Greece out of the eurozone.
VAROUFAKIS: This sounds like a stalemate, Wolfgang, doesn’t it?
Wolfgang screwed up his face in deep thought and then, a few seconds later, shared a fresh idea with me: ‘Why doesn’t Tsipras, whenever they talk, ask her aggressively, “What’s this idea that Schäuble is pushing on Varoufakis for a time out?” If he says this as an accusation, no one will be able to leak this as either Tsipras or you having endorsed my proposal. But, at the same time, the chancellor will have the chance to say, “It may not be a bad idea, let’s discuss it.” If they do, then you and I can have our discussion about what “huge help” means.’
I agreed and upon my return to Athens related faithfully the whole exchange to Alexis. Somewhat bemused, he nevertheless promised to put to Merkel the aggressive question Wolfgang had devised.
Melted euros, sunken hearts
Almost a month later, on 8 June 2015, I was in Berlin. Accompanied by Jamie Galbraith, I met Wolfgang in his office for the last time. Schäuble received me warmly, even though he could not resist a barbed joke. Once we had sat down, he produced a pile of euro coins made of milk chocolate. ‘They were given to me by German schoolchildren, but I told them I was going to deliver them to my Greek colleague because he would need them to calm his nerves.’ I took them with a smile, offered him one (which he rejected), peeled the aluminium foil off another and ate it.
‘Pretty good for the nerves,’ I confirmed before unnerving him with bad news. ‘Wolfgang, it seems that you most definitely do not have a mandate for that conversation that you started a month ago in Brussels.’
Genuinely puzzled, he asked to know more, so I told him what Alexis had relayed to me. He had spoken to Angela Merkel. As advised, he had confronted her with the question: ‘What on earth is Schäuble telling Varoufakis about a time out?’ She was annoyed and told Alexis that this was not something she wished to contemplate, adding portentously, ‘If he [Schäuble] approaches you with this again, let me know!’6
Wolfgang looked as if he had had the wind knocked out of him. That he did not even try to contest Alexis’s account suggested it was in tune with his understanding of Merkel’s attitude. His smile disappeared, his shoulders drooped, his cheerfulness vanished. He shrugged repeatedly and told me that, given this development, he was out of ideas. He seemed lost for words. Again and again he said he had ‘no idea’ about how to resolve the impasse, that he had ‘no authority’ to discuss an agreement within the eurozone behind the institutions’ backs. For the first time I recognized not a lack of interest or some cynical stratagem but genuine helplessness, so, I tried to revive his spirits a little.
‘The people out there, Wolfgang,’ I said, pointing out of the window, ‘do not look to Mario [Draghi] or to Christine [Lagarde] to do what is right, avert disaster and find solutions. They never voted for those people. They voted for you and for me to get together and hammer out an agreement. They mandated us to find a solution and will blame us if we do not.’
He refused to look me in the eye. In fact, he did not look well.
‘Our conundrum,’ I continued, ‘our task is to find a solution that minimizes pain under the twin constraints that you and I have agreed are binding: first, the MoU does not offer a viable solution for Greece and, second, neither you nor I have a mandate to discuss Grexit, time outs and the like. So let’s find the best solution within our current set of constraints. This is what elected politicians must do.’
‘What could that solution be?’ he asked, leaving the door ajar for me to propose an alternative. It was my chance to connect with him over a practical resolution.
I explained how debt could be swapped in a manner that he could sell to the Bundestag, how Greece would need no new money, how we could guarantee that Athens would never fall into the ignominy of a primary deficit again, how we could institute far-reaching reforms that he and I could agree upon and a development bank along the lines of proposals I had developed in conjunction with German consultants close both to the Chancellery and to his own ministry. In short, I gave a summary of the revamped version of my Policy Framework paper, which we had been working on that past month and which now featured new ideas and a new title: Ending the Greek Crisis: Structural reforms, investment-led growth & debt management.7
My recollection is that Wolfgang found nothing to fault in my proposition. Later, seeking a second opinion on his response, I asked Jamie Galbraith to write down his impressions. Here is how he described Wolfgang’s reaction.
Schäuble listened to the presentation at length with close attention and body language that suggested no disagreement on any point of the argument. Varoufakis stated repeatedly that a solution should be definitive and not a predicate for further failure and ongoing bailouts … The most important fact about Schäuble’s response was that he said, repeatedly and with a shrug, that he has ‘no idea’ about how to resolve this matter.
I pressurized him for some kind of response. ‘Here I am, asking you, the finance minister of the richest and most powerful country in Europe, to tell me what I should do. You reject my ideas; your own proposal was rejected by your chancellor, and meanwhile the negotiations between my prime minister’s team and the troika in the Brussels Group are heading in a direction that is the opposite of a solution. What should I do, Wolfgang?’
He looked up for the first time in a while and said without any enthusiasm, ‘Sign the MoU.’ We had come full circle.
‘OK,’ I said. ‘Let’s suppose I do it. Let’s assume that I sign the damned thing. Tell me this: are we not going to be in the same situation again in six or twelve months? With another funding crunch feeding GREECE ON THE VERGE AGAIN headlines, more recession, and a political backlash in the Eurogroup?’
Perking up a little, Wolfgang agreed and said, ‘This is why I told you to convince your prime minister to consider a time out.’
‘Except that your chancellor put an end to that discussion.’
‘Well, that leaves you with the MoU,’ he said, falling back once more on the same non-solution.
Only a move beyond reasoning and rhetoric could break the vicious cycle, I thought, a human gesture. ‘Will you do me a favour, Wolfgang?’ I asked humbly. He nodded warmly. ‘You have been doing this for forty years,’ I said; ‘I have only been doing it for five months. You know from our earlier meetings that I have followed with interest your articles and speeches since the late 1980s. I need to ask you to forget for a few minutes that we are ministers. I want to ask you for your advice. Not to tell me what to do. To advise me instead. Will you do this for me?’
Under the watchful eye of his deputies, he nodded again. Taking heart, I thanked him and sought his answer as an elder statesman, not an enforcer. ‘Would you sign the MoU if you were in my place?’ I was expecting him to give me the predictable answer – that, under the circumstances, there was no alternative – along with all the usual, senseless arguments. He didn’t. Instead he looked out of the window. By Berlin standards, it was a hot and sunny day. Then he turned and stunned me with his answer. ‘As a patriot, no. It’s bad for your people.’
A chink had appeared. Naturally, I tried to prise it open. I said that since we now agreed that the MoU was ‘bad’ and Grexit was off the table, an agreement like the one I was proposing was the only solution consistent with our mandate and duty to our people – the Germans as well as the Greeks. But by that stage Wolfgang looked like a broken man.
The cynic would say that Dr Schäuble was playing a larger game – that, as he had said at the IMF conference, causing Michel Sapin’s outburst, and as he had said to me before the Eurogroup on 11 May, Grexit to him was an instrument with which to pursue his vision of a smaller, more disciplined eurozone, with the troika firmly entrenched in Paris. The cynic would be almost right.8 Except it would not be the whole story. As I departed that day, I was not leaving behind me a Machiavellian dictator; I was leaving behind a sunken heart, a man ostensibly more powerful than almost anyone in Europe who nevertheless felt utterly powerless to do what he knew was right. As the great tragedians have taught us, nothing causes greater wretchedness than the combination of supreme authority and wholesale powerlessness.
Before leaving his office, I took the chocolate euros and put them in the inside pocket of my jacket. We said our goodbyes. I took the lift to the ground floor and walked out into the sunniest of days. As I got into the car that awaited us, I looked up in the direction of Wolfgang’s office surprised to feel a strange sadness at the memory of his sunken spirits. Later I would be making a speech at Berlin cathedral. Who among the enthusiastic crowd that received me that night would have believed I had felt this way?9 By the time I arrived at the cathedral, the heat had melted the euro coins. The undated resignation letter that I made a point of keeping in the same pocket was smudged with chocolate.
The war of the models
‘A Taste of Armageddon’, episode twenty-three of the very first Star Trek television series, first aired in 1967, tells the story of a five-century-old war between two planets, Eminiar and Vendikar. In order to reduce the war’s economic costs, the combatants have come to an interesting arrangement. Instead of firing real missiles at one another, they have agreed to continue their conflict in the purely digital environment of a computer model where their attacks on one another are simulated, with model-based missiles unleashed against each other’s model-based cities. But while no material damage is done, the casualties are very real. For the agreement also compels each side to send to specially made ‘disintegration chambers’ the number of people who, according to the model, would have died had the attacks been real.
During the negotiations with the troika a similar ‘war of the models’ took place, with real casualties among the Greek people. For example, whenever I argued that in a struggling economy marred by poverty and tax evasion the best way to increase the state’s revenues from VAT or from corporate tax was to reduce VAT and corporate tax rates, the troika would retort that their computer models showed the opposite: only by increasing the rate of VAT and corporate tax would tax revenue rise. And my ministry’s Council of Economic Advisers, under George Chouliarakis, was using the same models to produce the same arguments in favour of austerity. One day, incensed and incredulous, I asked to be allowed a glimpse inside the models. I was told that such models were complex, the implication being I would not understand, but I insisted: in a previous life I had been an econometrician, I replied.
When they showed me their models, I realized why they had been reluctant to do so. Inside there lay a scrupulous economist’s nightmare: an inbuilt and frankly ridiculous assumption that price increases such as those produced by VAT increases never reduce sales, and that rises in corporate tax rates always lead to more tax paid by business. They had omitted to include any ‘price elasticities’ in their models – to use the technical term for this blunder. To my knowledge, no economist ever assumes that a price increase, however steep, will leave sales unaffected. Or, conversely, that a price drop will never stimulate sales. Or that increasing corporate tax rates will always lead to corporations paying more taxes to the state. And yet the troika, my Council of Economic Advisers and the respected financial press – even those among them who refused to endorse higher tax rates for Greece – implicitly endorsed precisely this economic idiocy every time they defended these models against my arguments.
To demonstrate the flaw, I performed a simple exercise: I asked the troika’s model to simulate the impact on the government’s revenues of raising the VAT rate from 23 per cent to 223 per cent. We all know what would happen in reality after such a ludicrous tax hike: sales would collapse and so would the government’s revenues. But not in the troika’s model, which produced a massive increase in revenues. Like all models, garbage assumptions beget garbage predictions. Even so, just as in ‘A Taste of Armageddon’, the casualties would be real enough: poor pensioners further impoverished, businesses pushed over the precipice, a whole social economy on the edge.
To counter the troika’s models I urgently needed our own, one scientifically superior and socially humane. Normally, this would fall to the Council of Economic Advisers to provide, except that Chouliarakis lacked the expertise and, more importantly, the will. He seemed perfectly satisfied to defer to the troika’s models, whose results strengthened Wieser and Costello’s hand. But as he now had the full support of Maximos, there was no point arguing with him. Instead, I asked my own team, under Elena Panaritis, to create a decent model from scratch.
Without the resources of the seventy-strong Council of Economic Advisers, without even a proper office to work in, this tiny team did magnificently. Together we worked out the econometrics, built in decent estimates of the responsiveness of different markets to price and tax changes and completed the coding. Within a fortnight even the troika’s technicians in Athens admitted that our model was superior to theirs. The trouble, of course, was that this was no academic game in which the most accurate model won; it was a war of the models in which the most powerful side won. This can be illustrated by an episode involving the IMF’s Poul Thomsen.
One evening in Brussels Poul was wearying me with his standard tirade about our VAT system and how it ought to be simplified: ‘It is ridiculous to have six rates of VAT,’ he thundered. ‘It makes the system susceptible to arbitrage and fraud.’10
My response was that the real problem with VAT in Greece was not its complexity but the fact that 23 per cent was too high a rate for an economy in a slump and a society so mired in poverty that millions could not afford to pay it. We needed to offer the Greek people a new social contract: the government would reduce the rates and in return the people would actually pay the tax. Additionally, I argued, we needed to digitize transactions to discourage tax evasion.
Poul was adamant: too many rates is the problem, he kept saying over and over again. ‘You need to go to just two rates,’ he insisted.
It had been a long day, and I was tired so I decided to cut to the chase: ‘OK, Poul. Here’s the deal. I shall adopt your idea of just two VAT rates nationwide on condition that you agree that they’re 6 per cent and 15 per cent, plus a 3 per cent increase for transactions using cash instead of debit cards. What do you say?’
Poul looked at me. ‘Do you mean it?’ he asked, evidently pleased at my suggestion.
