Is Greece still viable? (Is Europe?): my piece in Deutsche

[The following piece was commissioned by Click here for the article as it appeared on Deutsche Welle’s website.]

“Perhaps it is historically true that no order of society ever perishes save by its own hand.” [John Maynard Keynes][1]

Most Greeks, deep down, know that Keynes was right. Our current destitution and indignity are the natural repercussions of our own past errors of commission and fallacies of omission. Modern Greece has been skirting the edge of a debt crisis since its inception. After its mini postwar industrial revolution unravelled during the 1970s, it kept pulling back from the abyss through frequent devaluations and bursts of austerity. Entry into the eurozone removed the main instrument of containment in exchange for the empty promise of some alternative shock absorbing mechanism.

For almost a decade after the euro’s birth, Northern European commercial capital kept flowing into countries like Greece in search of returns higher than those the stagnant core economies could deliver. A semblance of convergence was thus founded on a series of bubbles that kept the underlying structural imbalances well hidden. In countries like Ireland, the bubble inflated within the private sector (with the connivance of the state). In Greece, the same bubble sprang up within the state sector (aided and abetted by the developers and the private banks).

From Crash to Bailout to a festering wound

Once the bubbles started bursting (first in Wall Street and Europe’s larger banks, then in Dubai, later in Greece and, finally, in the rest of the periphery), a postmodern 1930s was upon us. Just like in 1929, the Crash of 2008 sparked off

a)    the unravelling of the common currency of the era (the Gold Standard then, the euro today),

b)    the implosion of the deficit countries (which were forced to shoulder the burden of adjustment), and

c)    recessionary winds that blew across the world.

While these sinister developments were universal in scope, the question on everyone’s lips remains: Is Greece viable? Do the Greeks believe it to be? Why are the targets set by the troika never met?

I am very much afraid that these are the wrong questions. It is not a question of whether Greece can be viable within the eurozone but whether the eurozone, as currently constructed, is viable with or without Greece. Put, differently, the question those outside of Greece need to ask is: Why are we still talking about Greece, two long years after its implosion?

Of course the reason is that the expensive remedies applied to the festering wound that is Greece are worsening, rather than improving, the infection. One explanation is that Greece was a recalcitrant patient who refused to take the medicine as prescribed. There is a large element of truth here. However, the Greek state’s incompetence at introducing the agreed reforms is preventing us from seeing the deeper cause: the way that the eurozone bound together the fates of our peoples by means of an edifice that (a) magnified the underlying imbalances and (b) could not absorb a shock like that of the financial meltdown of 2008.

When the eurozone’s weakest link snapped, its government added to the country’s past mistakes another grave error of commission. It denied its bankruptcy and sought loans under conditions that were impossible to meet. In Keynes’ words:

“Greece’s insincere acceptance… of impossible conditions which it was not intended to carry out made Greece almost as guilty to accept what she could not fulfil as the European Union to impose what they were not entitled to exact.”

[Naturally, these are not Keynes’ precise words. But they are close. All I had to do to produce the above ‘quotation’ was to substitute ‘Greece’ for ‘Germany’ and ‘European Union’ for ‘Allies’.[2]]

While pondering the implosion of Greece’s social economy, Keynes’ insights regarding the great paradox that was the Versailles Treaty are quite instructive. Just like Germany in 1920, so too Greece in May 2010 grudgingly accepted its ‘punishment’ in the form of a ‘treaty’ that placed impossible demands upon it. And just like the Allies were to discover in the 1920s, the imposition of these conditions not only depleted the capacity for recovery of the weak, defeated, demoralised nation but, alas, it is proving a constant drain and torment for Europe’s strong nations.

Now what?

To err twice in two years is imprudent. The second bailout package, comprising more loans and deeper austerity, together with the fraudulent ‘voluntary’ haircut negotiations, must be set aside. Until a rational plan is in place that renders both Greece and the rest of the eurozone viable, the Greek state must spend not a euro more than it takes in taxes, while all loan repayments are suspended. An end must be put to the scandal of asking German taxpayers, in the name of ‘solidarity’, to guarantee loans that the Greek state passes on to banks already living off the kindness of the ECB and the taxpayers.

As for Germany, it must decide swiftly between disintegrating the eurozone and reinforcing it by adding to our monetary union that which has been missing from the outset: a mechanism for shifting surpluses to the deficit regions in the form of productive investments(as opposed to handouts or loans). Turning failed states like Greece into sundrenched wastelands within the eurozone, and forcing the rest of the currency area into a debt-deflationary spiral, is a most efficient way of undermining the long term viability of Europe’s core. Even if one thinks that Greece would be getting its just deserts, do the hard working Germans deserve to be quickmarched in that direction? I do not believe they do.

[1] Chapter VI, p.238, The Economic Consequences of the Peace, Harcourt Brace New York, 1920

[2]  “Dr. Melchior: A Defeated Enemy” in Two Memoirs (1949), as reprinted in Collected Writings, Vol. X: Essays in Biography, at p. 428. Naturally, I have replaced the word ‘Germany’ with the word ‘Greece’ and ‘the European Union’ for the word ‘Allies’!

Commissioned by


  • I consider the analogy with WWI reparations — and Keynes’ major contribution to that debate — to be disturbingly apposite. It may make Germany think a little more about what they believe and what is the real meaning of Europe’s current policies. {This is not placation, Dean: it is informing the victims of propaganda about the truth.}

    Well done, Yani!

  • Dear Yanni,

    First, I would like to thank you very much for providing a psychologist like me with a clear understanding of the financial situation past, present and future. No other economist, that I know of, has been able to analyse it so eloquently for the general public, thus providing an immensely important service to voters, but also to individuals anxious to figure out how to personally respond to the current crisis.

    From my perspective, I see a number of ego defense mechanisms, as we call them, operating on a national scale, which undemine rational behaviour and prevent people from following your “Modest Proposal” and these mechanisms act in addition to any economic interests present on the part of various groups. Let me explain myself: Ego defense mechanisms are distortions of reality our own self creates in order to avoid painful realisations and emotions. The more painful the realisation, the greater the distortion. Some of the mechanisms at play here are denial (it’s not happening…), projection (somebody else is responsible…), reaction formation (we are not stealing, everybody else is…), rationalisation (the crisis is a natural consequence of capitalism…), etc.

    In addition to the above, I’m afraid we are witnessing some negative “national” psychological characteristics which influence behaviour in countries like Germany, France, Austria, Greece and others. Even the president of the World Bank gave a relevant warning to Germany in his speech a couple days ago, if I am not mistaken. As somebody who has studied, out of a personal interest, the history of WWII and the biographies of a lot of the then leaders, I’m seeing some frightening similarities. Let’s all hope Greece is not Poland and history will not repeat itself…

    Please keep up informing people as much as possible! Thanks.

  • Interesting and thought – provoking, as usual. Still, I think you “undervlue” the importance of internal reforms.

  • “As for Germany, it must decide swiftly between disintegrating the eurozone and reinforcing it by adding to our monetary union that which has been missing from the outset: a mechanism for shifting surpluses to the deficit regions in the form of productive investments(as opposed to handouts or loans). ”

    Germany needs to understand that, this time; it is their responsibility to undo the mistake so brilliantly highlighted by Yanis above.

    Germany must take the lead; to engage with the investment of a new “Marshall Plan” to replenish the prosperity of the rest of Europe.

    • If my taxes will be routed to the PIFGIS, I ans most other Germans will vote forparties that will get us out of the labor camp that Germany would turn into with such a mechanism.

      This is against the German constitutuion and against the public will. This will lead to war, not peace.

    • Bavarian:

      Whether you are an “Arbeit Macht Frei” labor camp or not is for us to decide, not you.

      Just go back to work and keep producing.

    • Dear Yannis and Chris,

      Bavarian Trader’s reply, just highlights the immense importance of the psychological factors outlined in my own reply. These provide the explanation why your points CANNOT (and will not) BE UNDERSTOOD by the majority of Germans and other Europeans, besides any existing financial interest. For a contrast, just imagine the Americans back in the 50’s saying NO to Marshall because their taxes would eventually flood postwar Germany and rebuilt it from scratch! These Americans could see past their own defense mechanisms…into their real interest…

    • Haris, Greece has been getting a EUR 4 billion “Marshallplan” via the EU every year for the last 20 years and an interest subsidy for the last ~15 years (start of conversion was 1995) that is equal to roughly 80% interest expense.

      The second point is, what exactly do you want to rebuild? What industries would be able to prosper in Greece without eternal need for transfers? No offense, but you need more than money and infrastructure to have successful businesses. You need a supplier network, well managed authorities, a tax system that does not prevent people becoming employees of a company (no chance to cheat) etc.

      If you look what East Germany is today, you can see what I mean. they are nothing else than suppliers, to OEMs in West Germany. Very few companies survived and even fewer (non “generic” supplier) companies were set up there dispite the EUR 1000 billion West Germany dumped into East Germany.

  • Three things are eternal: death, taxes, and sovereign default. Creditors continue to provide billions of euros to governments, despite a long and dolorous history of default.One might imagine that the threat of losing access to future credit might be enough to discourage sovereign default, but there are ample reasons to believe otherwise. “Markets have short memories” is practically a truism.

    Just try imagining there was no EU

    Engineering an Orderly Greek Debt Restructuring

    For some months now, discussions over how Greece will restructure its debt have been constrained by the requirement that the deal be “voluntary” – implying that Greece would continue debt service to any creditors that choose retain their old bonds rather than tender them in an exchange offer. In light of Greece’s deep solvency problems and lack of agreement with its creditors so far, the notion of a voluntary debt exchange is increasingly looking like a mirage.

    Three alternative approaches would achieve an orderly restructuring but avoid an outright default:

    (1) “retrofitting” and using a collective action clause (CAC) that would allow the vast majority of outstanding Greek government bonds to be restructured with the consent of a supermajority of creditors;

    (2) combining the use of a CAC with an exit exchange, in which consenting bondholders would receive a new English-law bond with standard creditor protections and lower face value;

    (3) an exit exchange in which a CAC would only be used if participation falls below a specified threshold. All three exchanges are involuntary in the sense that creditors that dissent or hold out are not repaid in full.

    Yes we cannot
    The dark deal of the European elites : the choice of accelerating poverty.
    Beyond any economic logic, the economics of self destruction.

    Vérités et mensonges sur la crise financière en Europe

    • ” “Markets have short memories” is practically a truism ”
      How short exactly?Do we have for example any info on how long it took Argentina to get back to the markets (if ever) ?

  • Dear Yanni,
    I’ve followed your appearances on TV and I like what you say when you’re given a chance by the moderators (seldom…) or by your co-panelists (also seldom…). I suggest you be a bit more aggressive when you’re interrupted. But that’s not the point of this reply. The point is that I would love to see a post from you on what this country should do as of now, in order to get out of this mess (if possible) in layman’s language for non economists to understand. Can Greece come out of this mess and continue in the euro zone? If yes how? What steps should be taken? If not and we have to go back to the drachma, then what? Also steps to be taken? Up to what point, can national pride be browbeaten without extremely dangerous consequences that we haven’t even begun to see or even dream t about ? I believe there are a lot of people that are not in academia that would like to have a clear view from you

    • If I can respond with my 2 cents.

      First off default.

      Little or no debt servicing costs after leading to less government spending

      Greek government would not be able borrow so it would have to shrink and balance it’s books.

      Greece’s international trade account would have to be balanced because the country would still be in the Euro and it cannot print Euros.

      Why would Greece still have the Euro after a default? Why would it not, after a default Greece would immediately come into line with the Maastricht Treaty.

      To balance the trade account taxes would have to be reduced along with regulations so Greece was an appealing place for people to set up a business, whether they be Greeks or foreigners.

      That’s it.

      Bad points.

      Pensions. People approaching retirement age would have to be taken care of. Maybe that would be a better use of the 100 billion Euro bailout.

      Like I said, my 2 cents.

  • The former Chancellor of Germany had sharply criticised Angela Merkel recently for her stance towards Greece. Addressing the German Economic Forum in Hamburg, Schmidt said: “It would be wiser not to insult the Greeks and to refrain from sacking ten million people along with their former governments and then lashing them. It is way easy for a fat German, with a population of 80 million, to corner the helpless Greek.” Schmidt concluded that: “If the Europeans fail to save Greece, then to hell with them.”

  • I feel like giving up when i see that speculators like Soros see and mention the OBVIOUS in contrrast with the ones who supposed to see it:

    “Either way, it is Germany that dictates European policy because at times of crisis the creditors are in the driver’s seat. The trouble is that the cuts in government expenditures that Germany wants to impose on other countries will push Europe into a deflationary debt trap. Reducing budget deficits will put both wages and profits under downward pressure, the economies will contract, and tax revenues will fall. So the debt burden, which is a ratio of the accumulated debt to the GDP, will actually rise, requiring further budget cuts, setting in motion a vicious circle.

    To be sure, I am not accusing Germany of acting in bad faith. It genuinely believes in the policies it is advocating. Germany is the most successful economy in Europe. Why should not the rest of Europe be like it? But it is pursuing an impossibility. In a closed system like the euro clearing system, everybody cannot be a creditor at the same time. The fact that a counterproductive policy is being imposed by Germany creates a very dangerous political dynamic. Instead of bringing the member countries closer together it will drive them to mutual recriminations. There is a real danger that the euro will undermine the political cohesion of the European Union.”

    • Or maybe Germany has outlined what it thought were outrageous demands that it thought the Greek government would never consider but lo and behold, the Greeks went for them.

      Germany must be wondering what exactly it has to do for the Greek government to say no and default

  • Excellent points! We need less theory, less history lessons, less of the blame game and more direct tactical direction in detail as to what is needed for this country called Greece. Whilst, Yanis does a superb job of laying the foundations of how Greece evolved into this state and the involvement of the greater Europe, we now need real solutions. What are they? In simple language and in details.

  • A post as I have already put in your “About section” on Sept. 27 of last year, and to which you (regrettably) never commented; the solution is really not that hard…

    “The issue which has swept down the centuries and which will have to be fought sooner or later is the people versus the banks.”
    Lord Acton

    “It is well enough that people of the nation don’t understand our banking and monetary sytem, for if they did, I believe, we would have a revolution before tomorrow morning”
    Henry Ford

    “Give me control over a nation’s currency, and I care not who makes it’s laws”
    A.M. Rotschild

    “Congress shall have the power to coin money and regulate the value thereof.”
    US Constitution, article 1, section 8

    Professor Varoufakis,
    In my opinion the current financial crisis is the perfect time to alter the financial system in such a way that it actually benefits citizens (instead of bankers) worldwide, beginning in Greece. Everybody in his right mind knows that Greece is broke and won’t pay up. Therefore the Greek people should not only default on its current insane debt, but also reintroduce the drachma, so it will regain its sovereignty. Even if Greece is allowed to default partially on its debt, but forced to stay within the euro, it will have gained nothing as more austerity measures will be introduced to repay the rest and a fire sale of Greek public property will start, supposedly to make the Greek economy more efficient but in reality to transfer property at rock bottom prices into private hands. Therefore the Greek people will even have less say over their own economy, slaving away to pay of its probably still unbearable debt. The last part on how to regain your sovereignty is the most crucial and will probably lead to a lot of opposition from the “powers that be”, that is that the issuance of the new Greek currency will have to be in the hands of the Greek parliament, i.e. the Greek people, instead of private bankers. Then and only then will the Greek people be free from their “pay masters”. Hopefully, then the rest of the world will follow.

    “If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered…I believe that banking institutions are more dangerous to our liberties than standing armies… The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”
    Thomas Jefferson

    When will you realize that this is the only viable option for the (Greek) people, if we don’t want to be enslaved by a global bankster cabal for the rest of our lives and our children too…

    • Thanks for your comments and heartfelt analysis. As you probably know, even though I was vehemently opposed to Greece’s entry into the euro, I beg to differ on the merits of bringing back the drachma once caught in the euro’s net. Greece is too small to regain sovereignty, even if it jettisons the euro. Moreover, stopping the juggernaut of financialisation is much more likely if the people of Europe oppose it than if a small country like Greece tries to do it. In your narrative, you err into assuming that Greeks are united in their aspiration to escape Bankruptocracy. We are not. The local elite is hell bent on retaining this hideous regime. The Greeks who are suffering the most under this regime must seek alliances with similarly suffering Italians, Irish, Spaniards and, yes, Germans. The problem is not the common currency. It is the fact that has been structured in a manner inimical to people and in tune with the banksters. You say we need to get out of the euro. I say we ought to redesign it against the interests of Bankruptocracy.

    • Greece is too small to regain sovereignty, even if it jettisons the euro.

      Then I guess it’s kinda foolish for Greece to maintain a military. All it does is feed the Franco-German military industrial complex. Secure Greek borders? Why?. All are welcome!

      Excuse me, Yani. I am not trying to be rude here. I know things are seriously messed up in Greece (like everywhere else it seems). It’s just the thought of Greece forever beholden to barbarians, oops, I meant “foreigners” 😉 . . . .

    • Joe,

      I mostly agree with you.

      Yanis, about smallness, if the Greek currency was backed by Gold/Silver what difference does it make re the size of the country?

      You imply that Greece is too small to go against the international banking cartel. You may be right but if they wanted to control a Greece with a commodity based currency they would have to do more than make baseless threats.

      They would have to pro-actively set up trade embargoes, pro-actively incite a peaceful or violent revolution against the ruling government, seize assets of Greek citizens held abroad etc

      You really think the international community would stand for such actions against a sovereign country?

      Actually, now I think about it…………..

  • “As for Germany, it must decide swiftly between disintegrating the eurozone and reinforcing it”

    As for the main street Germans, which in a democracy would be the sovereign, they would love to be allowed to participate in such decision which will impact their lives, and the lives of theri children and generations to come.

    However, they political ‘elite’ of Germany refuses them the choice. There is one common goal shared by all relevant (that excludes the ‘Die Linke’ and other ultra parties, no matter if left or tight ultra) political parties in Germany: to serve the Eiuropean finance industrie’s interest, may it costs the German taxpayers whatever it wants.

  • The circle needs to be broken and a new road forward carved! Logic is missing in action and needs to be found urgently!

  • “As for Germany, it must decide swiftly between disintegrating the eurozone and reinforcing it by adding to our monetary union that which has been missing from the outset: a mechanism for shifting surpluses to the deficit regions in the form of productive investments(as opposed to handouts or loans).”

    In my view, Merkel’s strategy opts for protecting the competitive advantage of rulling European Union by being the strongest surplus country, minimizing at the same time the unknown, rather chaotic effect of a smaller E-zone, or even of a complete breakup of the common currency area.
    In my opinion, the critical question is the following: Will Italy become the catalyst to force Germany spend the “time capital” accumulated since May 2010 and reach the end point of the game, been forced to decide whether to
    (a) exit and add a G in the BRIC acronym (pls refer to [1])
    or (b) stay in the common currency area supporting the real economy (not the financial system) of each deficit country ?

    [1], Wolfgang Munchau “Germany: A Bric, or just stuck in a hard place?”

  • Dear Dr. Varoufakis,
    having followed your analyses over the past 2 years, I have often found inspiration in your modeling of the dire economic situation Europe has found itself in. At the same time, you have refrained from taking sides in the short-term tactical questions facing Greece’s plight through this period. This is consistent with your promoting a EZ-level solution, but these next few days, or maybe hours, I cannot really worry about the medium/long-term prospects of Greece or EZ, because I am terrified of an imminent danger to Greece.

    The reason for my anxiety is the following analysis of mine, of the situation:

    From the beginning (2010), the handling of the Greek crisis by EZ core was mostly aligned with internal politics (in France, Germany etc). However, this being an election year in both Germany and France, this situation is going to end in the next few months. In this respect, the EZ leaders’ tactics have paid off in sustaining the myth of saving Greece, with minimal (in their minds) cost. Now, it has come to the point where they are feeling safe that, whatever happens, Greece will not bother them any more. In my opinion, the decision has been made that Greece is not salvagable, and will be left to implode as soon as their elections are over. To this end they have formulated the following tactic:

    offer yet another blatantly non-viable plan, this time so extremely irrational that it is assured that it will fail within 2012. This is clearly evident from the demands (aka conditionalities) and goals (primary surplus), which are at complete odds. Given this demand, there are two plans

    Plan A: In the case that, against reason, Greece agrees to the plan, set up the program’s funding in such a way that will allow them to cancel by year’s end it with minimum economic and political cost. They will explain to the electorate that they are fed up with Greece not achieving its “commitments” and move on.

    Plan B: If Greece rejects the plan (one way or the other), they will go to their elections claiming to their electorate that “they tried by Greeks don’t want to do their duty”. Again, this will take them through elections with minimum political cost.

    I strongly believe THEY DON’T CARE what plan Greece will accept. But, unfortunately, Greece cares VERY MUCH, because Plan A has a catastrophic side-effect: PSI. With PSI, Greece will agree to transform its public debt, from domestic debt to foreign debt. Contrary to what people are made to believe by the media, the current debt of Greece is domestic (it doesn’t matter what the nationality of the debt holders is, all it matters is the legal framework of the debt).

    The private sector knows well that Greece will be unable to pay this debt, domestic or foreign, haircut or not. Transfering the debt to british law won’t make it more viable, i.e., they won’t get money back, but will allow them to use it for other purposes, such as turning Greece into a corporate protectorate, exploiting Greece’s greatest asset (if you are a banker): its sovereignty. Thus, they will use the debt in the coming years to set up a pupper regime through which they will be able to promote broader goals.

    There is support for my analysis from anecdotal evidence, the strongest of which is (imho) the stance of IMF’s representative, Mr. Tomsen. Recall that 2 years ago, it was Tomsen who appeared more reasonable among the troica. I consider likely that Mr. Tomsen’s instructions this time are to just present an unsustainable plan, and it is ok if Greece rejects it. If the past few days’ reporting is correct, Mr. Tomsen (perhaps out of consience) has made every effort to drive the Greek government to Plan B.

    I am terrified that Mr. Papademos and the party leaders, afraid of the political consequences for them (even afraid for their safety) if the country “goes to default” in March, seem bent on accepting Plan A, and the catastrophic PSI, no matter what.

    Thus, I believe it is imperative to let the political leaders and the Prime-minister know that, WE REALLY WANT THEM to choose Plan B. WE WILL APPRECIATE IT if they do!!!
    But we will be very angry if they take the route of Plan A.

    (N.B. Of course you may argue that many Greeks really want them to choose Plan A. But, speaking with **everybody I know**, leftist, right-wing, rich, poor, you name it, these past few days, I haven’t found a single soul rooting for Plan A–at most, people are afraid or uncertain about Plan B’s consequences, but not much more.)

    If you think I am nuts, or just wrong, I apologize for bothering you. If however you believe there may be merit in my analysis, please use your recent publicity to promote the message to our politicians that we really want them (and will appreciate it very much) if they choose Plan B.

    Yours sincerely,
    Vasilis Samoladas

  • The euro was badly designed on purpose — because Germany looked upon the euro as the new deutsche mark. Several economist had pointed out at the euro zone’s inception that it was unable to deal with asymmetrical shocks — or “black swans” as Taleb calls them. To redesign the euro means basically two things: (a) that the ECB becomes a lender of last resort and the price setter for the issuance of bonds and, (b) that the surplus countries will also bear the costs of adjustment. Germany opposes the evolution of the ECB and the second issue has remained unsolved since 1945 when Keynes and White clashed. So, how can one be optimistic about the future of the euro– especially since European leaders are out of contact with their people?

    Greece is a different case — over and above the euro. We do have to answer the question of whether “Greece is viable”. If we do not –then we simply sweep all problems under the perennial carpet. Unless we dismantle the client state, Greece will not be viable — either alone or in the euro zone. In the last two years unemployment has increased by some 400.000 people — all of them from the private sector, which is paying dearly for the default of the Greek state. ΓΣΕΕ is striking on behalf of its mebers — i.e. on behalf of state enterprises. Who is striking on behalf of the private sector? Most people do not seem to realize that new measures become necessary because the country is not implementing any structural reforms? And it has refused to do so since 2002 at best. Now it is being forced to implemet them and it is protesting like “a widow in bed”.

    The real question is whether the South and the periphery of the EU can manage to overcome German ideological commitment against inflation (itself a vestige of the Weimar Republic) and world reluctance (including the USA) to force surplus countries to share the burden of adjustment. On top of this, the world financial crisis has shown the deep problems associated with the nature of globalization. Globalization circa 21st century is similar to the one that occured in the period rougly from 1870 to 1914. At that time World War I stopped it. Now, World War II has contributed to its (re)creation. As long as the financial system remains outside the preview of economic policy andas long as economists refuse to realize that their “slavery” to ideology prevents them from offering practical advise and real insights, there is litle hope of taming the excesses of capitalism.

    • “the second issue has remained unsolved since 1945 when Keynes and White clashed”

      Not sure about that, but AFAIK, the Treaties explicitly forbid cross subsidizing between eurozone members.

      Plus, the electorate was always promised it would never have to pay for other nation’s debts. Yes, promises by the political ‘elite’ in any country don’t mean a lot, but still, that’s what was said and written in the contracts.

    • Excesses of capitalism? “…ideological commitment against inflation”

      You say those things as if they were bad.

      Are you aware that it is the Greek government with the problem, not the Greek private sector?

  • Just like Germany in 1920, so too Greece in May 2010 grudgingly accepted its ‘punishment’ in the form of a ‘treaty’ that placed impossible demands upon it.

    The Americans placed a moratorium on German war reparations in 1931; the moratorium became permanent a year later. Lucky Germans 🙂

    But lucky or not, the Germans did fight back. When the French and Belgians invaded the Ruhr Valley in 1923, as payment in kind, the German workers of this industrial region resisted by means of work stoppages, sabotoge, etc. (Rickards, Currency Wars)

    Until a rational plan is in place that renders both Greece and the rest of the eurozone viable, the Greek state must spend not a euro more than it takes in taxes …

    Greece spend not a euro more than it takes in taxes. Well, that’s a bit of a probem. See, rumour has it that the Greeks don’t pay taxes 😉

    Have you seen the “name-and-shame” list of Greek tax dodgers? The top cheat on the list allegedly owes the Greek state 561.567.594,98 euros. The top five cheats together? Over 1 billion euros! Of course, it begs the question, “Have the Greek authorities arrested any of the tax mooches?”

    • Greeks do pay taxes. Through the nose, these days. All it would take for the government to be able to live off its taxes is a reduction of 0.5% of GDP. Our leaders have just agreed to a huge reduction of 1.5% of GDP in order to concede to the ridiculous austerity conditions demanded by the EU. It is obvious Greece should say no, default and reduce government expenditure by 0.5% instead, awaiting a fresh debate in Europe about a sustainable path not only for Greece but for the rest of the eurozone too.

    • Yanis, some time ago, you did agree to review my own proposals for the creation of millions of private sector jobs through The Capital Spillway Trust. More recently, I did return to the Bank of England asking them for further input; they have remained silent, so I must assume my thinking, (regarding taking the junk status bonds, proposed for a “haircut” and reforming them into vanishing bonds; in turn to be used as free enterprise equity capital investment into new very small micro businesses), has not been rejected out of hand. Is it not time for that review?

      Also, through another contact I have in the USA, I have asked if Michael Hudson would also give his opinion.

    • “Greeks do pay taxes”

      Sure, but as all reports state by far not what they owe according to the laws. If they did, Greece would have a primary surplus immediately. So the question must be: why should other nations support one which is not willing to collect the due taxes from its people?

    • Very Serious Sam Greeks pay less taxes than the Swiss. There was a post ehre a week ago that showed taxes collected / GDP. You can assume that Greeks pay much less than the Swiss even thought the official tax rate are much higher.

    • Greeks do pay taxes. Through the nose, these days.

      The rich (and powerful) — whether through crooked bargains with governments, lobbying, etc. — pay very little or no taxes. Yes, I know I just stated the obvious for just about every country in the world, but for small countries, especially small countries such as Greece, the effects can be devastating. Why? Because most tax revenue is based on income. Once we exclude the incomes of the rich what is there left for governments to collect? Not much.

      And with Greece, unfortunately, it’s a double whammy because of its massive military spending over the decades. Is it any surprise then that it finds itself in a fiscal mess?

      One more thing if may add, please. I know that Greeks have one of the lowest per capita incomes in Europe. I don’t believe it would be an exaggeration to say that most Greeks probably spend just about all of their wages on necessities such as food, clothing, and shelter. When you think about it, they are basically doing the governemt’s job of income redistribution (is that not what taxation is, basically — income redistribution by government?). AND, by so doing, they are keeping the money in Greece where it belongs! So I don’t get worked up about it if they don’t pay their taxes (though they should 😉 ) However, the same can not be said for those Greek plutocrats. They not only hoard their money (stolen money mostly, to be precise), but take it out of the country at the first sign of trouble.

      Anyway, I kinda wish right now that I didn’t say anything about Greeks and taxes. I mean it’s a mess is what it is. A bloody mess.

    • “Because most tax revenue is based on income [in Greece].”

      That is the case in most countries. If you include VAT you get about to 80% of revenue in many.

    • I find myself asking why does the Greek government think it is useful to name the people it alleges have committed tax fraud and not arrest them?

      Do we see the Greek government naming people who have been caught drinking and driving and saying it has not arrested them?

      Why does the Greek government want to shame itself with regards to it’s alleged incompetence in collecting taxes.

      Is it possible because the government does not have a case, maybe the government says it cares but actually doesn’t, or maybe the government is vilifying tax avoidance/evasion in general because it believes that this could be the most effective form of non violent political protest against the austerity measures.

  • Hi Yanis,

    as I follow the discussion here in Germany, the newest strategy seems to be the following: comparing Greece’s welfare system and/or wages to those of countries like Portugal and even Bulgaria. E.g. they are saying, see the minimum wage in Portugal is lower than Greece. Or, would Greece adopt the wage level of Bulgaria, its problems would be solved.

    So, I fear, even though we do not want to compare countries, people are influencing public opinion by spreading – what I fear is – half truths, using figures which appear to be “hard facts”.

    So, even though I can come up with some counter arguments myself, I would be grateful if you – as an economist – would comment on such comparisons and especially on the kind of arguments I mentioned before, as they seem for to be a new level of propaganda.

  • Vasilis: “The euro was badly designed on purpose — because Germany looked upon the euro as the new deutsche mark”

    Actually the EU leaders at that timed promised to the German people and all others, that wanted a currency like the German Mark, that the Euro would be like the DMark. The DMark was the only currency in the EU that was not in the hands of politicians. Of course politicians from other countries hated that, since the devaluation of their currencies (ITL, FFR, etc.) clearly showed that someone else maneged better than they did.

    the design flaw is not the aspiration of being like the German Mark (even if this is far from the achievement). the design flaw is a currency union uniion across national borders. it never works.

  • In response your response;

    “Pressure mounts on Greece over bail-out
    Sarkozy and Merkel say political parties must accept deal”
    Headline in the FT online Feb. 6, 2012

    Is this the Greece you’re envisioning? Because if it is, you’ve handed over your sovereignty to a bunch of bankers, represented by their agents, the politicians.
    Stating that Greece needs the euro, now that it has been introduced, is like saying to a smoker turned lung cancer patient;”Well, now that you have lung cancer, you might as well keep on smoking”.

    Your argument that Greece is a small country, and therefore can not go it alone is of course utter non sense; how about Denmark, Switzerland, Norway or for that matter Iceland. That brave little country defied the international banking cabal and is now well on its way to recovery. This is not to imply that things will be easy; but things will be even more difficult living under an EU/ECB/IMF financial dictatorship (because let’s face it, that’s what it is).

    Furthermore, what I have argued is that not only should Greece ditch the euro, but even more importantly that it should start printing its own money (as in printed by the government; ie the people), and not leave their money-creation-out-of-thin-air to a bunch of private banks for private interests. I realize full well that is the most difficult part, as this directly interferes with the source of the power of the international banking cabal, and it will require a great deal of courage and vision.

    Of course the Greek people should not the only ones walking down this path of regaining (financial) sovereignty, this goes for all peoples worldwide. But Greece has to face the music sooner than other countries as it is in dire straits. This is in the interest of the 99% of the Greek people and all peoples everywhere else, and as far as the 1% is concerned; they have had their chance, and they have utterly blown it.

  • Hello again Professor.

    In your recent submission to, as well as in your interview to Mr. Hatzinikolaou you refer to collateral the ECB receives from private bans as “πατσαβούρια” (something of no or insignificant value).

    My question is what exactly do you mean by this term and how do greek “πατσαβούρια” compare to the ones from countries such as Spain, Portugal, Italy and Ireland. Especially after a greek default won’t greek bonds be rated D? Is that the same as higher rated bonds from other countries that will be submitted to the ECB in exchange for the all needed money our insolvent banks will need?

    I am asking because this is, in my mind, crucial to your prosposal of defaulting within the Euro.

  • It’s Time To End the Greek Rescue Farce
    by Stefan Kaiser

    Whether it be an escrow account or a budget commissioner, the latest demands by Germany show just how absurd negotiations over Greece’s future have become. It is high time to bring an end to this tragicomedy.

    For the past two years, Greece has wrangled with the euro-zone states and the International Monetary Fund (IMF) over its so-called “rescue.” Austerity measures have been agreed to, aid has been paid and private creditors have been forced to accept “voluntary” debt haircuts. Despite all this, Greece is in even worse shape today than it was then. Its economy is shrinking, the debt ratio is rising and the country and its banks have been cut off from capital markets. There isn’t even the slightest sign that the situation might improve. Something has gone very wrong with this rescue.

    But none of the protagonists seem to have grasped this. They continue to negotiate as if things are business as usual, they let one “final ultimatum” after the other pass and they persistently fail to realize that their discussions have started to verge on the absurd. It would be a lot better to end this farce.
    For weeks now, the Greek government has been negotiating with private creditors and the troika comprised of the IMF, European Union and European Central Bank (ECB) over a second bailout package. But it is already clear that this aid package will not save the country. It appears it will only delay a Greek insolvency — and it will serve to create new hardships for the country’s population.

    It is time for politicians to admit that their carrot and stick strategy has failed. The idea that the country can be freed from its debt quagmire though austerity programs and aid pledges tied to conditions just isn’t going to work. It won’t even work if private creditors forgive part of the country’s debt.

    Broken Promises

    For months, Greek government politicians as well as the so-called rescuers in Berlin, Paris and Brussels have all been deceiving themselves. Each supposedly final rescue package is followed by yet another, and austerity pledges aren’t being adhered to.

    That has a lot to do with domestic political considerations. German Chancellor Angela Merkel and French President Nicolas Sarkozy must convey to their voters that they have the situation and, especially the Greeks, under control. Meanwhile, the government in Athens must, out of self-preservation, limit the burdens to its own people as much as possible.

    That’s why both sides repeatedly agree to promises that everyone knows they will not be able to keep. The current rescue package, for example, officially agreed at the euro summit at the end of October, already has to be improved because it has become too small.

    The Greek economy is shrinking faster than assumed. And the austerity plan Greece approved last summer under pressure from its euro-zone partners is also failing to live up to expectations. That’s no wonder, either, because €50 billion of the €78 billion in total savings pledged was tied to proceeds from privatizations that, not surprisingly, have failed to generate the profits expected.

    Out of Thin Air

    The truth is that it must have been obvious to all parties concerned, including the Germans, that the figures were pulled out of thin air. What kind of investor would invest so much money in a country that, for the foreseeable future, will be stuck in a serious economic depression?

    The supposed rescue efforts have culminated in the latest German proposals. The German government would like to send a “budget commissioner” to Athens to keep an eye on the Greeks. If that doesn’t work, then the Germans also want, at the very least, to be able to impound Greek accounts if they don’t pay back their debts through an escrow account.

    The suggestions have justifiably provoked outrage. Quite apart from the humiliation these measures would entail for the Greeks, Athens would almost certainly find a way to circumvent them. In the end, Germany would wind up turning an entire nation into its enemy without even gaining anything.

    Greece Must Go Bankrupt

    Perhaps, the Greece rescuers on both sides of the negotiating table should try being honest for a change. Here’s the truth: If the country is to lastingly reduce its mountain of debt and, at some point, be able to borrow money on the capital markets again, then it needs a comprehensive debt haircut. In other words, it needs to go bankrupt.

    And it’s not just private creditors who will have to forego a large part of their outstanding Greek debts. It is also other European countries and the European Central Bank. That would be expensive for taxpayers across Europe, and it would also be economically risky. Indeed, no one knows what consequences a Greek bankruptcy would have for other crisis-ridden countries like Portugal, Ireland or Italy. But at least it would be an honest solution.

    Of course, things wouldn’t stop there. The euro-zone states would also have to build a bigger firewall around the remaining crisis countries in order to prevent contagion. They would have to help some banks that get into trouble as a result of a debt cut. And they would have to provide Greece with a real opportunity to get back on its feet and start growing under its own steam — in other words, a kind of Marshall Plan.
    All this would be very expensive, and German taxpayers would also be forced to do what they have feared from Day One — which is to pay for Greece. But this solution has two major advantages. The payments would be limited, and they would actually help Greece.

    And unlike everything that has been negotiated up until now, the solution would also be worthy of being called a rescue package.

  • “Perhaps it is historically true that no order of society ever perishes save by its own hand”?

    and what about Easter Islands’ collapse?

    • That too Orestis. We now know that the Easter Island civilisation crumbled as a result of unsustainable use of their forest resources.

  • Αγαπητέ κ. Βαρουφάκη,

    Αρχισα τώρα τελευταία να διαβάζω άρθρα σας και να παρακολουθώ συνεντεύξεις που έχετε δώσει. Οπως και πολλοί άλλοι βρίσκω τις απόψεις σας πολύ ενδιαφέρουσες και με εντυπωσιάζει η ικανότητα σας να τις αναπτύσσετε με λογικά επιχειρήματα και θα έλεγα αρκετό πάθος.

    Εχω, όμως, μερικές απορίες.

    1. Επιμένετε ότι είναι δυνατό να κηρύξομε πτώχευση και να παραμείνομε στο ευρώ. Το μόνο κόστος που φαίνεται να αναγνωρίζεται είναι ότι σ’ αυτήν την περίπτωση θα χρειαστεί να κόψομε τις (πρωτογενείς) δαπάνες του Δημοσίου κατά 0.5 % του ΑΕΠ. Νομίζω ,όμως ότι αραγνωρίζεται το γεγονός ότι αν κηρύξομε πτώχευση τα πρώτα “θύματα” θα είναι οι τράπεζες μας και τα ασφαλιστικά μας ταμεία. Αν δεν υιοθετήσομε δικό μας νόμισμα, πώς θα καλυφτούν οι ζημίες τους; Και ποιές θα είναι οι επιπτώσεις στην ύφεση αν ελλείψει πόρων δεσμευτούν οι καταθέσεις και περικοπούν ακόμη περισσότερο οι συντάξεις;

    2. Υποστηρίζετε ότι θα ήταν προτιμότερο να είχαμε κηρύξει πτώχευση το 2010 πρίν αποτανθούμε στο ΔΝΤ και τους εταίρους μας στην ΕΖ. Τότε όμως το πρωτογενές έλλειμμα ήταν γύρω στο 8% του ΑΕΠ, αν δεν με απατά η μνήμη μου, και όχι το 0.5 % που φαίνεται να υποθέτετε ότι είναι τώρα (εγώ φοβάμαι ότι είναι ακόμα αρκετά υψηλότερο). Αυτό το έλλειμμα θα έπρεπε τότε να είχε εξαφανιστεί αμέσως μια και δεν υπήρχε δυνατότητα χρηματοδότησης του μέσω δανεισμού. Δεν θα ήταν επομένως η πτωτική επίδραση στην εγχώρια ζήτηση και οικονομική δραστηριότητα ακόμα πιό έντονη απο αυτήν που υποφέραμε με την κάπως πιό ήπια προσαρμογή που μας “επέβαλε” το μνημόνιο και η ΤΡΟΙΚΑ; Επιπρόσθετα, δεν είναι λογικό να υποθέσομε ότι οι τράπεζες μας θα είχαν απο τότε χάσει κάθε πρόσβαση αναχρηματοδότησης απο την ΕΚΤ και επομένως ότι η διαρροή καταθέσεων προς το εξωτερικό που έχει έκτοτε σημειωθεί θα είχε καταλήξει σε πολύ μεγαλύτερη έλλειψη ρευστότητας απο αυτήν που έχομε υποφέρει μέχρι τώρα; Σε τί κατάσταση θα βρισκόταν σήμερα η οικονομία μας άν είχαμε πτωχεύσει τότε χωρίς να εγκαταλείψομε το ευρώ;

  • With respect to the euro/DM issue: as Blanchard has pointed out in the last 20-odd years monetary policy has been pre-eminent. It had one target: inflation. And one weapon: the rate of interest. The assumption was that as long as inflation was tamed,the output gap would be close to full employment. Fiscal policy was relegated to a secondary status — because it was influenced by policians. And, finally, the financial system was considered to be outside the preview of economic policy (see Greenspan). Well, experience has shown that the financial system can create havoc with economic policy. In response more efforts are exerted to make fiscal policy as independent of the political cycles as possible. But by adopting this stance monetarists have demonstrated that monetery policy is also a prisoner of politics. Because it is German ideological othodoxy and the German public who are against the idea of making the ECB a proper central bank.

    This dove-tails with the issue of who carries the burden of adjustment: of course surplus euro countries cannot revalue “their” euro. But they can reflate– in exctly the same way that they are asking (forcing) us to deflate. And because prices are generally downwards sticky we call deflation internal devaluation– we reduce income and not prices.

    On the issue of a Greek default in the EZ. Theoretically it is possible to default and stay in the euro. Practically I would have to agree with H. Vittas – it would be nearly impossible. Yet equally impossible is a return to the drachma. To start with, the technical difficulties are enormous. Secondly, the country would go through a period of turmoil until markets finally settled on the “correct” rate of exchange between the new drachma and the euro. Successive devaluations, inflation and balance of payments problems would vie with shortages in basic essentials (oil, gas, pharmaceuticals, foodstaffs) to make life miserable for all concerned.

    Yes, we are between the provebial Scylla and Charybdis. We are damned if we and damned if we do not! But an outright default offers no relief. With a managed default, there is a chance. If we return to the drachma the political and trade union pessure to print money would be irresistible. So we would inflate our way to hell. With the PSI and the rest of the paraphernelia, client relations will be put to the test and — hopefully– destroyed. The benefit for Greece with the PSI et al. is more political and less economic. We stand a chance of getting rid of the political system that led us to the current mess, of changing our habits and ethos. With the drachma we will kill all prospects of modernization.

  • Yanis, please. Let’s not make this a patriotic issue. You may pay taxes, the average Greek may, but don’t assume Greeks do as a rule. And even if it were a rule, it’s been, is being, and will be, broken. Routinely. Who ever heard of a country needing to shrink its own economy to make its tax collections sustainable? Really. Yet again, the issues of rule of law, rampant corruption and policy/enforcement are ignored or dismissed. And Greeks wonder why this is happening to them. Ask your government.

    • sam, the greek governments problems, to put it in the nicest possible way has been a gross error in economic forecasting.

      assuming tax evasion is as bad as claimed, it is an entirely forecastable phenomenon. it has nothing whatsoever to do with the problems the Greek government has now. None

  • Finally somebody seeing things for how they are;

    FRIDAY, FEBRUARY 10, 2012

    Greece and the Rape by the Rentiers

    By Marshall Auerback

    Here’s the draft of the supposed agreement to “sort out” the Greek debt problem once and for all. According to Bloomberg, here are the essentials:
    Greece’s 2012 GDP will shrink by as much as 5%.
    Greece is expected to return to growth in 2013.
    Greece will cut 15,000 state jobs in 2012.
    Minimum wage will be cut by 20 percent.
    There will be no increase to sales tax.
    The government will cut medicine spending from 1.9% to 1.5% and merge all auxiliary pension funds.

    It will also sell stakes in six companies—in particular, energy companies and refineries.
    Of course, the current thrust of fiscal policy will almost certainly guarantee that there still will be a default, involuntary or otherwise, in spite of this agreement. If you don’t have a mechanism to allow growth, then how can the Greeks service their debt, even with the reduced debt burden?

    Perhaps that’s the idea. Make the deal so miserable for the Greek people that the Spanish, Portuguese, Irish and Italians don’t even begin to think of trying to get a similar haircut on their debt.
    Certainly, the deficit reduction won’t come. It can’t when you deflate a rapidly declining economy into the ground. Common sense suggests that a drop in private income flows while private debt loads are high is an invitation to debt defaults and widespread insolvencies.

    Even with all of the concessions, the euro bosses have not officially signed off on the agreement:
    * Finance ministers of the 17-nation euro zone arriving for talks in Brussels warned there would be no immediate green light for the rescue package and said Athens must prove itself first.
    * “It’s up to the Greek government to provide concrete actions through legislation and other actions to convince its European partners that a second program can be made to work,” EU Economic and Monetary Affairs Commissioner Olli Rehn said.
    * German Finance Minister Wolfgang Schaeuble, whose country is Europe’s biggest paymaster, told reporters: “You don’t need to wait around because there will be no decision (tonight).”
    * Greek Finance Minister Evangelos Venizelos flew to Brussels after all-night talks involving Prime Minister Lucas Papademos, leaders of the three coalition parties and chief EU and IMF inspectors left one sensitive issue – pension cuts – unresolved.

    It is also worth pointing out that Greece’s pension payments on a per capita basis are amongst the lowest in Europe. Still, apparently, this plunder hasn’t gone far enough The Greek people must feel like Sabine Women right now.

    Game, set and match to the Troika.

    While we’re at it, let’s address this “Greeks as tax cheats” canard once and for all. Greece’s tax revenue from VAT collapsed by 18.7pc in January from a year earlier. As Ambrose Evans Pritchard noted:

    “Nobody can seriously blame tax evasion for this. It has happened because 60,000 small firms and family businesses have gone bankrupt since the summer.
    The VAT rate for food and drink rose from 13pc to 23pc in September to comply with EU-IMF Troika demands. The revenue effect has been overwhelmed by the contraction of the economy.
    Overall tax receipts fell 7pc year-on-year.”

    We’re one step closer to ensuring that the birthplace of democracy becomes a form of national indentured servitude. That is of course, unless Greece regains some modicum of self-respect and tells the Troika to take a hike and leaves the euro zone.

    • So you’re saying rampant corruption and tax evasion were/are not major factors? Ok.

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