For the first time in my Eurogroup career I decided to focus my attention not on the reforms being proposed but on questions of funding and debt sustainability.
I take it that the institutions want us to pass the austerity and reform measures. These are difficult decisions for an economy in recession. What are you offering us in return? Do you envisage that your reforms and funding proposals open up a clear path out of the debt–recessionary cycle? Is there a credible path for coming out of the woods? I cannot table at my parliament prior actions, like you can’t, Wolfgang, table them at the Bundestag, without being able to answer the question: is this sustainable? Colleagues, no one in this room has had the courage to stand up and say that what the institutions are proposing is rendering Greece sustainable in the medium term. This should be of great concern to all of us – as Europeans. Here we have, after many meetings and months of negotiations, a proposal from the institutions that raises major concerns about the way we are running our monetary union. We should not be in a position where we throw our hands up in the air and we declare that we do not know how to stabilize a country like Greece for the medium term.
Christine Lagarde and Mario Draghi were not looking happy. Wolfgang Schäuble seemed livid. But I had only just got started. I now pointed out two technical problems. The first was that the troika’s funding proposal went only as far as November 2015, ‘But the IMF’s programme continues until March 2016. Which means it is illegal for the IMF to continue with its programme since there is a funding gap between November 2015 and March 2016.’ The IMF’s rules are clear on this: it cannot lend to and participate in the reform of a country whose funding needs are not fully covered during the period of its contract with the IMF.
The second technical error also related to the funding proposal: ‘From what I see here, it is proposed that the SMP bond redemptions in July and August, amounting to a total of €6.7 billion, will be taken out of the HFSF [Hellenic Financial Stability Facility] kitty of €10.9 billion … I submit to you, colleagues, that this is not something Wolfgang can pass through the Bundesbank.’ Sensing the tension in the room, I proceeded to explain why.
I remind you that the €10.9 billion kitty of the HFSF was approved as part of the second bailout agreement for the purpose of recapitalizing Greece’s weak banks. Suppose that we all turned a blind eye to this and agreed to cannibalize this kitty to repay the ECB this summer, as the institutions propose. What happens tomorrow or in the next few months if the ECB, in its role of our banks’ supervisor, deems that Greece’s banks need more capital? With the HFSF kitty gone, there will be no money to do it. When I asked Benoît Cœuré about this he replied that, if it came to this, then the HFSF kitty will be replenished by new loans from the ESM [European Stability Mechanism] – from your taxpayers, that is. And here lies the problem: for this to happen, Wolfgang’s parliament, and other parliaments, will need to approve a third bailout, a third programme for Greece. But the whole point of the institutions’ proposal was to extend the second bailout, a second programme, in order to avoid a third bailout, a third programme. But by cannibalizing the HFSF kitty to pay the ECB you are embedding a third into the second programme. This is both illegal and illogical. And the only alternative is to repay the ECB by allowing the Greek banks to buy €7 billion more of Greek government T-bills. I cannot propose this to my parliament. Can you, Wolfgang? And remember, colleagues, that we must answer these questions now. We do not have a right not to reach an agreement today.
After the previous night’s discovery that Chouliarakis’s team was plotting an alliance with the opposition, I had refused to have him at my side in the Eurogroup. Euclid, who had stepped in to replace him, now whispered in my ear, ‘Impeccable!’
Wolfgang’s intervention in response was a gift to me and a blow to the troika.
Are we being asked to agree that Greece will finance its obligations by the issue of T-bills in November to replace the monies from the EFSF buffer? Is this a joke? To replace the EFSF buffer by T-bills? Come on!… Looking at the debt sustainability analysis, you can see no hard analysis for a three-year programme. I must repeat myself: I cannot see a way out of the SMP problem in 2015 … And I would have to ask for all of those changes to be approved by parliament. Do you imagine that that would work?… I cannot imagine that I can convince my parliament.
As Wolfgang told the troika that its final offer to us was worthless, one that he could not take to his parliament, I whispered to Euclid, ‘This is why I like this guy,’ fully aware as I did so that our intelligence service would probably relay this back to Maximos as further evidence that I was Wolfgang’s stooge.
The Slovenian minister, having missed the significance of Wolfgang’s intervention, continued as if nothing had happened: ‘The only thing we could do today,’ he asserted, ‘is to say to Greece, “Take it or leave it.”’ Malta’s representative shared his concern that the concessions the troika was offering Greece were so lenient as to bring into doubt the Eurogroup’s credibility. A few others spoke too, but with Wolfgang opposing the commission and with Jeroen and Draghi silent, our opponents were backed into a corner.
Having requested the floor again, I turned to Christine Lagarde and asked, ‘Is it the view of the IMF that Greece’s debt is sustainable under the proposed agreement?’ When her turn came to speak, Christine tried to avoid the issue but in the end conceded that Greece’s public debt ‘had to be looked at again’. I interjected that to my mind this meant that the SLA I was being pressured to accept lacked the IMF’s seal of approval. Not only was it insufficiently comprehensive, it was unsustainable. Not only would it be impossible for Wolfgang to push it through the Bundestag, it was also in contravention of the IMF’s internal guidelines.
Christine looked off-colour. It later transpired that the previous night the IMF had been pressured into withholding its latest sustainability analysis of Greece’s debt. No doubt the reason was that, as the New York Times reported, ‘having run the numbers, the fund now accepted the central argument being made by Mr Varoufakis: Greece was bankrupt and needed debt relief from Europe to survive.’6 As I discovered a little later, the silencing of the IMF during the Eurogroup of 25 June had caused a rebellion at its Washington headquarters. People I know who work at the fund confirmed that ‘things reached breaking point’, and Christine’s leadership was looking shaky.
Before Christine had a chance to respond, Wolfgang dived in once more. ‘The institutions’ paper is not acceptable to us,’ he said. ‘There can be no new money … We do not want to extend even by a month … There can be no new financing so they must rely on more growth.’
Despite Wolfgang’s clear position, Jeroen continued to put pressure on me to accept the institutions’ proposals. It was as if he had not heard Wolfgang at all. I admit that I was almost enjoying myself when I asked Jeroen, ‘Does it mean that either we accept the institutions’ document or else? Is it, as a colleague said, a “take-it-or-leave-it”? I’m asking because I need to convey this to my government.’
Looking frazzled, Jeroen replied in typical fashion: ‘There needs to be an agreement. And if you want a take-it-or-leave-it approach, that’s also possible. You can simply say yes. That is also an option. Seriously.’ Perhaps seeing that he was not getting anywhere, Jeroen called for a short break.
‘He will use it to concoct something against us,’ I told Euclid, who nodded.
During the break, when I came back into the room Wolfgang gestured for me to join him. ‘Sit down,’ he said, offering me his deputy’s chair. Our conversation lasted twenty-five minutes. Jeroen, who wanted to restart the meeting, did not dare to while Wolfgang was talking to me. Our chat was a direct extension of our earlier conversations.
SCHÄUBLE: I am very worried.
VAROUFAKIS: Me too.
SCHÄUBLE: I know. Europe is not going well.
VAROUFAKIS: Evidently.
SCHÄUBLE: I cannot see an agreement emerging here.
VAROUFAKIS: Nor do I. But is this not what you want?
SCHÄUBLE: No, I want a solution. I do not want an agreement that makes things worse in the future.
VAROUFAKIS: This is why we were elected, because that’s what these MoUs and loans did. They extended the crisis into the future pretending to have resolved it.
SCHÄUBLE: I know, yes.
VAROUFAKIS: Tell me, Wolfgang, something: if you were me, would you take to your parliament what the institutions are pushing for? To raise VAT on hotels in Samos, Lesbos, Kos and Chios to 23 per cent when the Turkish rate, a stone’s throw over the sea, is 7 per cent? Tourism is our only industry left standing. Would you do it?
SCHÄUBLE: If you do it you will have to answer to your people!
VAROUFAKIS: That’s why I’m not doing it.
SCHÄUBLE: You are doing the right thing. You have to convince your prime minister about the things we talked about last time.
VAROUFAKIS: We’ve been through this, Wolfgang. You cannot ask me to say this. Not just because I do not think it is the best solution but primarily because of a certain lack of mandate on your part.
I was referring of course to the fact that Chancellor Merkel had explicitly quashed Wolfgang’s idea of Greece taking a ‘time out’ from the eurozone.
Whatever Jeroen might have been planning during the break, watching Wolfgang and me talk amicably for so long must have put paid to it. After a neutral wrapping-up, the meeting was declared closed. Afterwards, the communiqué Jeroen put out ended with the sentence: ‘Ministers invited the Greek authorities to accept the proposal by the institutions.’ Nothing could have been further from the truth. The only way Jeroen could have got away with so false a statement was if it had the backing of someone more powerful than Schäuble, Draghi and Lagarde. The only person that could be was Chancellor Merkel.
Emergency exit
Early next morning, Friday, 26 June, Alexis gathered us all on the top floor of our hotel, which overlooked the centre of Brussels. Along with me were Dragasakis, Sagias, Euclid, Pappas, Stathakis, Chouliarakis and maybe one or two aides. Greater precautions than usual were taken to prevent eavesdropping before Alexis explained what would now happen. With no scope to reach an agreement, everyone apart from me and Euclid, who were required at another Eurogroup the following day, and Chouliarakis, who might be required for a Eurogroup Working Group, would go back to Athens. That night Alexis would convene the cabinet, where he would propose that the institutions’ ultimatum be put to a referendum, to take place just over a week later, on Sunday, 5 July, in which we would advise our people to vote no.
‘I want to make this very clear to all of you,’ he said. ‘I demand complete radio silence. It is crucial that no one finds out until we announce the referendum formally in Athens after the cabinet meeting. Do not talk to anyone – journalists, your wives on the phone and especially not to any troika people. OK?’
There was little discussion. We all recognized the enormity of what had been decided. I asked only one question: ‘Are we calling this referendum to win it or to lose it?’
The only answer I got, and I believe it was an honest one, came from Dragasakis: ‘We need an emergency exit.’
Like him, I was convinced that we would lose the referendum. In January the combined pro-government vote had only been 40 per cent, and we were now facing a whole week of closed banks and scare stories in the media before 5 July. But unlike me, Dragasakis wanted to lose so as to legitimize our acceptance of the troika’s terms.
As everyone was leaving, I approached Chouliarakis to deliver a blunt message: ‘You heard what the prime minister said. I know that you find it hard to keep away from your troika friends. If I find out that you have been talking to Wieser or Costello, I shall deal with you personally. OK?’ Chouliarakis signalled he understood.
