The Grexit deal, Varoufakis, and anti-Greek sentiments

The deal yesterday morning between the Greek PM and the Eurozone Finance ministers is an agreement to reform before talks. By tomorrow evening, the Greek parliament has to accept 4 pieces of legislation on a large range of issues (pensions, labour markets, taxation), after which the other 19 Eurozone countries will start negotiations on another bailout. The European Central Bank has refused any loosening of the conditions for more loans to banks, meaning that Greece will have to keep up its end of the deal whilst its banks are essentially bankrupt and the rest of the countries take their time to negotiate and decide whether they agree with the outcomes.

Any negotiated bailout will need unanimity to go ahead. So the Fins, whose government is dependent on the ‘Real Fins’ who are adamant that there will not be more money going to Greece, would have to agree. The Dutch liberal party PM, who brought a long list of broken Greek reforms to the attention of the Eurozone meeting (backed up by the Slovenians and others) would have to break an election promise not to send any more money to Greece. The German parliament, which is being inundated with stories of Greek corruption in the German press, would have to agree. The Baltic, Irish, and Portugese governments would also have to agree to more money for the Greeks, when the Greeks failed to push through the reforms that they did implement the last 6 years.

Forget it. Not gonna happen. Discussions on whether the reforms are useful or whether they would push Greece into another recession are beside the point: the outside money has dried up and Greece will have to live within its means whilst its government and its banks are bankrupt, so you should see the agreed-upon reforms as the first step of Greece outside the Eurozone. A tragedy for the population of Greece.

From an Australian perspective, you would be forgiven for being bemused at this turn of events as the Australian media and commentariat has by and large taken the perspective that the Greeks are victims. I don’t really know why the Australian media has adopted this stance because this is certainly not what the Europeans, or even the UK commentators on average think. Take the recent interview with the UK conservative William Hague who describes Varoufakis as “a demagogic and now departed finance minister who regards as “terrorism” the simple act of lending money and expecting it back one day”. Perchance the Australian media follows the perspective of the half a million ex-Greeks in Melbourne?

But if you follow the European news, you will be struck by how widespread the anti-Greek sentiment has become. Stories of broken promises, sabotaged reforms, outright corruption, tax evasion, and wilful obstructionism are daily fare. Not just in Germany, but in the whole of Northern Europe, the Baltics, and the Balkans. The Greek people have lost a lot of good-will in the last 5 years and get blamed for the actions of its politicians and economic elite. Rightly or wrongly, the sense that the Greeks have betrayed the trust of other Europeans and need to suffer for that betrayal runs deep.

The last 6 months in particular have been disastrous for the image of Greece. Varoufakis, admired here in Australia, is seen as a figure of ridicule and derision by the rest of Europe, even by many on the left-side of politics. His pronouncement that the rest of Europe was engaging in ‘terrorism’ when it put conditions on new loans, was a terrible mistake. His constant belittling of the other Eurozone partners in the media and the grand-standing on democracy and how Greece was a ‘victim’ cost the Greeks. The latest Eurotop saw the result of this: a Greek denouement that was well-prepared by both the French (who appear to have helped Greece write its latest proposals and got the Greek PM to meekly accept everything) and Northern Europeans (who ambushed the Greek PM on reforms and spending).

I read the full interview of Varoufakis once he was ex-minister. It makes painful reading. He tells of how he tried to have academic debates with the Eurozone ministers he was negotiating with. They would have none of it, but he seems to have persisted for 5 more months. He tells of how the preparations for a possible grexit went no further in Greece than a few discussions with 5 others in the ministry. He hence tried to enforce his idea of debate on the people he was begging for more money and did not seriously prepare for the eventuality that there might not be agreement. As a commentator said, Varoufakis showed up for a gun-fight with a latte! Painfully amateurish. He then proudly relates how he supplied a Greek victimhood story to his current PM in 2010 and the Syriza party since then, who bought it hook, line, and sinker. He thus dragged his PM and a whole party with him in his personal mission to reform the European establishment and mainstream economics by means of open debate. Instead of living such dreams, he should have pushed through reforms within Greece (rather than reverse the reforms of the previous government), and prepare his country for a grexit.

What happens in the coming weeks? I still think a grexit is coming and that it on balance will be better than the alternatives. Exactly how is hard to know, though I am willing to have a guess. The Greek parliament will probably accept a few new laws by Wednesday, followed by temporary easing of the Emergency Liquidity Assistance conditions on Greek Banks that will keep the banks afloat a few days. Negotiations will then start, but I think stories will quickly appear in the media of how the Greek ministries are not implementing the new laws and how the follow-up laws on the judicial system that are supposed to be approved by Wednesday next week are not what they were agreed to be. That will be enough of an excuse for several countries to veto any proposed deal, which then means the Greek banks will be visibly bankrupt, at which point the Greek government will have little option but to introduce a new currency. Varoufakis himself flags the first two moves in a grexit: the introduction of IOUs to pay the bills and direct control of the Greek central bank.

It seems the Greeks have not printed a new currency in preparation of a grexit. I hope for their sakes that the ECB has been more forward looking and has printed it for them.


Author: paulfrijters

Professor of Wellbeing and Economics at the London School of Economics, Centre for Economic Performance

13 thoughts on “The Grexit deal, Varoufakis, and anti-Greek sentiments”

  1. Not having a ready supply of printed drachma currency is a problem that needs to be resolved, but it can be fixed in a matter of weeks. It will take a bit longer to fix the ATMs.

    However, in a Grexit, the substantial currency-related problem is the need for dual currency general ledger systems in the banks, the government and everywhere else. As an intellectual exercise dual currency general ledgers are simple. But the IT infrastructure required to install and test such systems is immense and necessarily time consuming.

    When Greece went onto the Euro it simply fixed the exchange rate between drachmas and euros. Although there was a period of dual currency in the economy, it was simple to handle because of there was a fixed exchange rate, and that fixed exchange rate was supported by the ECB.

    Dual currency poses much more difficult issues for Greece when leaving the monetary union. Assets, liabilities, revenues and expenses will be denominated variously in drachmas and euros as the transition takes place. Because the newly issued drachmas must have a floating (and likely depreciating) value against the euro, genuine dual currency general ledger accounting systems are required.

    Global banking giants aside, most commercial banks have some multi-currency systems, but they are typically small applications that are used for managing FX positions and the accounts of overseas branches. The ledgers from these systems are generally imported to the main banking general ledger for only a small number of aggregated lines. Even so, these small multi-currency systems are often clunky and complex. These small systems are in no way capable of running dual currency accounts for a national bank. Many businesses will have the same problem.

    There are lots of issues in trying to manage a moderately orderly Grexit, and the dual currency general ledger problem has been on the menu since 2012. There are smart people in Athens who know these things.

    But when your banks are struggling financially, and your government is struggling financially, it is difficult to find the resources and intellectual focus to get ahead of the impending crisis. That is the situation in Greece.


    1. Hi Casey,

      yes, very good points. The practicalities of the grexit take time, focus and resources, and it would have been better for all concerned if the effort would have been made in the past. I sort of presumed that the ECB would have made contingency plans (including a contingency currency), but it increasingly looks as if none of the major institutions or governments have truly prepared for a grexit, even though the current situation is widely taken to be unsustainable.

      There are couple more such remarks to make on the current deal. For one, the assets in that independent fund are not likely to be worth anywhere near 50 billion, and the legal difficulties of selling SOEs are formidable (the legal system in Greece is not exactly conducive to such things. Just imagine how the issue of labour rights, which differ between the public and private sector, might lead to legal troubles!).
      The ability of the Greek ministries to actually write the new legislation and implement it must also be in doubt, as many of the smart youngsters have left and the demoralised and politicised ones are the ones most likely left and in charge.

      The issue of the bridging loans will similarly prove to be problematic. The UK is already protesting at the use of EFSM money (not to be confused with the EFSF or the ESM!) to tide the Greek banks over, and the ECB and the IMF would most likely be in severe breach of their own rules if they were to provide more liquidity to Greece. The EFSF funds wont last long as it is not such a big pot, and after that the only realistic source I can see is bilateral loans whereby particular countries lend Greece money. France is the most likely country to do this as it has pushed hard for the current deal and ratified it in parliament even before the Greek vote, but it will be interesting to see if France is truly prepared to take the step to send Greece money, given its own budgetary problems and the implicit realisation that it is not liikely to ever come back (the French would then in effect take the place of the Germans, not an enviable position!).

      In short, I seriously hope that behind the scenes there are now concrete steps taken for an orderly grexit. The slow-motion grexit we have seen so far is taking a terrible toll of the Greek economy – with the latest estimates saying tourist numbers and industry activity is down and GDP may be down by 4% again this year.


  2. Media organisations try to get readers, viewers, and listeners, and so they present stories that people want to see. They are businesses and part of the advertising industry. The product is people’s attention sold to advertisers. The content and stories are not the product, and there is no requirement for the stories to be complete, unbiased, or to provide an accurate impression. So, you get different reporting in different markets – whatever will attract the most attention. This much should be obvious to any adult who can read or owns a TV.

    Greece has been fairly corrupt for a long time, but Greece’s economy has not dropped by 25% within a few years for a long time, if ever. The corruption is a problem, but the measures put in place by Europe have made things 4 or 5 times worse than things would be without those measures. They are unhelpful measures for everybody involved, creditors, debtors, and bystanders. Criticising these measures does not mean you think Greece is blameless.

    I agree that Greece needs to get its own currency, and the Greek government needs to act responsibly, clean up corruption, etc. But Greece wants to see itself as part of Europe, and much of Europe wants Greece to be European. I think this can still be the case without Greece using the Euro, but Greeks particularly don’t see it that way.

    Yanis Varoufakis was representing his voters, and he acted in accordance with what he was elected for – that’s democracy, and on the face of it it was his job. Although I don’t agree with the approach, I admire him in many ways – he certainly exhibits a completely different set of faults to most politicians. Much of what he says is taken out of context and often misreported to make interesting stories, but yes, it has been ineffective. Many things have been done too late, or not pursued enough, and miscommunicated, but I don’t think it has made things any worse, because events so far have been under control of European leaders as a group, and this group has its own strange dynamics.

    It is clear that the Greek government has not had full sovereignty since 2010, and Europe is taking more control right down to regulations about the use by dates on milk and the size of bread rolls. European bureaucrats approve the bills going to the Greek parliament and write them if necessary, so there is no danger of Greeks lacking the resources to write laws. Greece for 3 or so years went along with most reforms, and only really tried to resist about a year ago. Europe has prevented Greece from implementing many reforms because they were not part of a “settlement”, particularly in the last 5 months, even when they were reforms directed at enabling repayments of debt. European leaders are acting for their own purposes, not in the interest of their own people, and not making any genuine attempts to fix the problems with Greece.

    The whole thing is a sorry tale of crap, and there is plenty of blame to go round. We should agree to apportion it using the European formula for subsidising butter mountains.


    1. Hi anonymous,

      what a beautifully written and well-articulated reply. And so reasonable!

      Still, I must respectfully disagree on the main points. Greece has had a spectacular economic downturn for a country lend and sent so much money. That the government reduced spending to barely manageable levels was going to be inevitable as soon as the pre-2008 credit bubble burst, and compared to other countries that have had to service their own debts the Greek government is still spending rather a lot. The whole austerity story falls apart if you look at it (just try coming up with a definition of austerity whereby Greece went through austerity and some of the other countries that had to service their own debt did not!).

      Varoufakis might have meant well, I do not know. But I have started to agree with his former colleagues from Sydney who were referred to in a recent New York Times article as having said that Varoufakis is the most narcissistic man they have ever met. I have started to agree with former troika officials and Greek government advisers who praise his communication skills and ability to spin a convincing narrative, but who point out his lack of command of details, his political naivite and his incessant penchant for unhelpful grand-standing.


  3. I am unanimous in my opinions (and anonymous).

    Greece hasn’t really been sent much money. Most of the amounts published are really delays in repayments – i.e. new debt to pay off old debt.

    The working definition of austerity to use is one of the simplest – that government austerity is occurring when government expenditure is dropping. Ireland, Spain, and so on had government austerity for a year or two or maybe three, and they started growing again when their austerity stopped. Greece’s has never stopped. Their government expenditure is now about 70% of what it was, and if it continues to drop at anything like the rate it has since 2009, GDP will continue to drop. This needed to stop in 2012, or be more gradual. You can cut 1-2% per year and the economy still grow and it can help the debt position, or you might cut 7% for a single year, but if you cut 7 or 8% for years on end, it’s self-defeating. I guess the cuts and tax changes could have been better focussed too.

    With regard to Varoufakis:
    * narcissistic – check;
    * communication skills – check;
    * convincing narratives – check;
    * lack of command of details – check, but he worked overseas till late 2014;
    * politically naive – check;
    * unhelpful grand-standing – check, but I haven’t seen anybody do anything helpful;

    But, I don’t see the relevance. He’s a side show. Europe has been in control since 2010, and European leaders are doing things for their own purposes. I notice you didn’t address that point.


    1. quick reactions:

      1. The question of what the money that Greece has been lent has been spent on is one on which remarkably little good empirical work exists, and it is nigh impossible to get good data on this issue (the IMF and the ECB have not made a real effort to compile that information and, oddly, even the Greeks dont seem to keep track). From what journos and others have managed to dig up though, it seems a lot was spent inside Greece, including on Greek bank recapitalisation and Greek Government expenditures. Also, of course, repayment of loans took up a large tranche and in other countries those expenses would have come from tax revenues so even those repayments really should be counted as new money, particularly if you bear in mind that the interest rate levels and repayment horizons of the new loans were so much more favourable that a very large chunk of it was more or less a gift. If you ignore the different conditions on the loans, you ignore most of the real action, a common mistake that even seems to have caught out a few Nobel laureates.
      2. ‘reductions in government spending = austerity’? Then I guess nearly the whole of the OECD went through austerity in the 80s, 90s and 00s when countries rolled back the role of the state, such as through privitisations. And given the enormous lending rates prior to 2009 of the Greeks, 70% of previous spending is quite high, only possible because others are picking up tabs that normally Greece would have to pay itself. Of course I am agreed that the reduction should have happened in one go rather than tapered. That is also what everyone else wanted to see happen, but it simply wasn’t implemented, telling you the difference between what creditors demand and what happened on the ground.
      3. See my previous posts on who actually was in charge of what. Of course other political entities have had their own agendas, but the notion that ‘Europe’ has been dictating what has happened in Greece the last 5 years is odd, to put it mildly.
      4. I think you underestimate the effect Varoufakis and his kind of ‘we are victims of a conspiracy to lend us money’ story has had. It has done great damage IMO.

      btw, I am not going to react again to a reply that is not from someone who owns up to who they are. You have been very polite, but a view only counts if one knows who has that view.


      1. I probably wouldn’t react to me either.

        The notion that Europe has been dictating what has happened is odd, but that’s probably an overstatement of my view. Europe has been significantly restricting what the Greek government can do, and has asserted control over various people within the Greek government, and over various regulations and legislation. It’s unquestionable that there has been a degree of control. You might think it slight, but it’s present.

        It is also the case that Europe can almost disable Greece’s economy at any time, as they did at the end of June via the ECB before the referendum. You can make a case that this was just Europe responding to Greek intransigence and that it was justified, but this ability has been available to Europe all along and it puts Europe in an enormously strong controlling position. This is why they have been able to carry out the amount of controlling activity that they have.

        Europe has not fully exercised all the control that it could – i.e. it has not taken over all Greek government activity to be sure, nor has it dictated all that has happened. But this is partly because it is a poorly coordinated bunch of politicians and bureaucratic bodies that isn’t able to control anything well, rather than because it isn’t in a controlling position.

        I think that due to Europe’s controlling position, a lot of blame should be allocated to Europe, regardless of how much actual controlling activity they have exhibited. Being in such a position means they have a high degree of responsibility for whatever happens. Being paralysed by lack of coordination is not an excuse.


    2. Spot on. I’m no expert in macroeconomics but I don’t think it’s controversial to observe that running a highly pro-cyclical fiscal policy in an economy in the doldrums is a recipe for disaster.

      BTW I don’t think Varoufakis would have been a side show if Tsipras could have been convinced to go along with the admittedly half-baked idea for a parallel currency – which he only seems to have bulked at at the last minute (and rightly so I might add).


  4. Over the past month, it has been fascinating to see revealed how, at the highest levels of government, so little practical thought had gone into the mechanics of a possible Grexit. Why?


    1. yes, the revelations don’t exactly fill you with confidence about the forward-looking capacity of the European institutions. At the minimum, I would have thought the ECB would have had a spare currency and associated transitional system in reserve for any country wanting to introduce a new currency in a hurry, but no.

      Why? My best guess is that they are caught in common rhetoric: the official rhetoric of the institutions (‘the Euro can never be taken back’) makes them beholden to it in that they cannot deviate from it all that much behind the scene, presumably because they are full of opposing national clans who would leak information about clandestine operations for their own purposes. Institutions full of people loyal to other things might thus be forced to tow their official lines more than institutions manned by people with the same loyalties.

      There is also some sheer incompetence and media-spin about it though, exemplified in the fear of scrutiny. It is for instance nigh impossible to find out what the bailouts have been spent on or what their Net Present Values are, because several governments object to things being too transparent. The German officials in particular don’t want to admit the full size of the bailout to their populations, with Merkel this round again objecting to reducing the nominal value of the loans, but happy to have them extended into the future at very low interest rates, which really is the same thing from an accounting perspective, but not from an ignorant observer perspective. The German officials thus seem to prefer to be accused of being austerity Nazis rather than the gullible generous donators that they in fact are.

      Another interesting observation is just how supportive the European left is of all these bailouts. And how loathe even the most ardent opponents of the bailouts are to be seen to be the one pulling the plug on them.


  5. Varoufakis aims at the target. The rest is BS and everybody knows it in their bones. He will win… If you only knew how deep is Troicas corruption you would fall into silence. All his moves are in consideration of the whole of humanity. Nothing narcisstic about that. Wake up.


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