While Greece burnt, and the Parliament of the Hellenic Republic was insincerely accepting impossible conditions for implementing yet another unworkable fiscal adjustment plan, the buzz in Frankfurt’s financial district was an exciting, fresh German Plan A.[1] For the first time in two years, since the euro Crisis began, Germany’s captains of finance could be seen to have re-discovered a spring in their step. The new optimism stems from a new Plan which is predicated upon a long delayed recognition and two strategic choices:

Germany’s belated epiphany is that, without a major redesign of the euro architecture, a number (>1) of eurozone member states are irretrievably insolvent. As for the two strategic choices, the first is Berlin’s conclusion that German politics have no stomach for, or interest in, a structural redesign of the euro system.[2] The second choice involves a massive bet in attempting to save the eurozone by shrinking it forcefully while, at the same time, authorising the ECB to print trillions of euros to cauterise the stumps left when the states earmarked for the chop are severed.

The detail not yet ‘worked out’ concerns the identity of the countries to be shown the door. The consensus opinion in Frankfurt was that Greece and Portugal are certainties. Few expressed the view that Portugal is too close to Spain to cauterise effectively while others went against the grain of majority opinion suggesting that Ireland ought to be liberated too. My impression is that, current thinking, has settled on Greece and Portugal, with a questionmark over Ireland.

But let’s take matters one at a time:

The epiphany: It is the insolvency, stupid!

Granted that there is a grey zone separating an insolvency from an illiquidity problem, Europe’s denial that Greece has been insolvent for two years now will go down in history as the ultimate (though powerfully motivated) error. It did not have to be that way. Had Greece been given debt relief (of the sort that is now taken for granted) back in January 2010, and had Europe focused on the mess of its banking system (instead of putting all its eggs in the austerity-plus-loans basket), things might have turned out quite differently. But, it was not. Instead, Greece was forced to shed 15% of GDP while taking an additional 20% of debt on its weary shoulders. This sealed its fate once and for all. As for the much debated reforms, their fate was sealed at that time too: no reforms can be effected meaningfully in an imploding social economy.

Recall how, at first, Germany was insisting that there would be no bailout, no debt restructuring, no interest rate relief. One by one these holy cows were slaughtered. Then came the notion of interest rate reductions, the debt restructure (euphemistically named PSI), more loans. It was too little, too late. When this cascade of German ‘concessions’ failed to stem the inexorable movement to insolvency, a few days after the October 2011 Summit (where the latest PSI and Bailout Mk2 were agreed), Germany ceased to deny that Greece may be forced out of the euro. It was at that point that Germany also began making noises that Greece is a special case. Today this litany has ended too: Portugal is quietly put in the same ‘too hard’ basket. Perhaps Ireland too, even though this is a point of contention: many within the German elite insist that Ireland, though also insolvent, ought to be kept within the ranks as a reward for having ‘internalised’ the austerian ‘logic’ even before the powers that European be imposed it upon the Emerald Isle…

In effect, two years of the wrong, poisonous, medicine has forced the surplus countries into an impasse. Instead of reassessing the medicine that is causing the eurozone’s gangrene, they are now turning to their last resort treatment: Amputation of the worst affected limbs, followed by ECB-administered cauterisation. The only pending issue, as far as they are concerned, is how much of the eurozone to amputate.

Cauterisation and the Weimar trauma

My Frankfurt interlocutors, upon being challenged on the realism of containment following the traumatic events which will undoubtedly follow the severing of ‘gangrenous limbs’, admitted that cauterisation would cost trillions and would involve unremitting money-printing by the ECB. In their view, the ECB would have to attempt: (a) to keep afloat the banks of Italy, Spain, France, Belgium, Germany and Holland, and (b) to smooth the severed countries’ tortuous path to oblivion (by keeping at least some banks functional during the tumult that will surely follow).

The remarkable part of this new consensus is that it shows that Germany’s fear of inflation-inducing money-printing has vanished in the face of the euro Crisis. Or perhaps that it was always a mirage. That the supposed Weimar-trauma had nothing really to do as such with the money supply getting out of hand, with hyper-inflationary effect, and everything to do with a penchant to retain maximum control over the eurozone’s economic policy. For if it transpires that Berlin will indeed give the green light to the ECB to print trillions as a means of cauterising the eurozone stumps, as well as preserving in a state of suspended animation countries like Greece and Portugal, it is clear that the hitherto presumed German conviction that such an infusion of freshly minted money will prove disastrously inflationary was never genuinely entertained.

The key to this new Plan, and the optimism it has inspired within Germany’s financial community, is twofold: First, it shows that Germany is certainly unwilling to re-design the eurozone’s flawed architecture, in view of its revealed preference for, God forbid, inflation over the institution of a surplus recycling mechanism plus a unification of the eurozone’s banking system. Secondly, it suggests that Germany is not yet ready to ditch France.

This second point is crucial. My German sources acknowledged that France is not up to Germany’s strict standards as a monetary union partner. They consider France to be a chronic laggard, a fundamentally deficit-oriented economy, a state whose ambition constantly, and irritatingly, overreaches its potential. But they feel that there is a political need to give the eurozone, i.e. the Franco-German axis, one last chance. France is, therefore, still tolerated. And with it Spain and Italy will also be given another chance, courtesy of as many LTROs (i.e. oodles of ECB-printed money for Italo-Spanish banks) as it takes.

If they pull it off, they hope they will have managed to salvage the European political project (which they will try to argue is on track, with promises that the countries amputated are always welcome to rejoin once they have their houses in order) and to avert the massive drop in exports that would be  inevitable were Germany to cut loose all countries except similarly surplus countries.

Will it work? Three reasons it won’t

Any Greek or Portuguese or Irish government that serves its people’s interests would point-blank refuse to play ball. The idea that exiting the eurozone is a simple matter of devaluing is dead wrong. It confuses the correct view that Greece and Portugal and Ireland would have been better off outside the euro with the quite different, and catastrophically erroneous, view that exiting is the optimal strategy. In this sense, our governments have no reason to go along with Germany’s amputation strategy. But then again, the Greek government had no reason whatsoever to choose the Bailout Mk2 agreement, and the strings that it came attached with, over a simple default within the eurozone (which I was advocating; along with Wolfgang Munchau). And yet it did. Why? Because the politicians of the Periphery have neither the stomach nor the interest in disobeying orders issued from the North. Why that is is a matter for historians and psychologists. For now, we must take it for granted, unfortunately. Which leads me to the sad conclusion that, even though Germany has no way whatsoever to force certain countries out of the eurozone, the moment the Greek, Portuguese or Irish PMs get their marching orders, they will immediately start marching their way out of the eurozone.

But will it work out for Germany the way that Frankfurt financiers currently hope it will? That massive ECB-money printing can create circumstances which shield the rump eurozone from banking sector tumult, following two or three ‘exits’, there is little doubt. After all, the ‘markets’ held steady for 48 hours after Lehman’s was ‘amputated’. And then? Similarly, Germany’s new Plan A is doomed. Here are three reasons:

The first reason is that, in the short, run, just like in the case of Lehman’s, the Frankfurt optimists are assuming that they know the unknowable (just like, prior to 2008, they assumed they had created riskless risk). The interconnections between the Portuguese banks with those of Spain, and of the Greek banks with those of France and Germany, are of the sort that will only see the light of day when disaster strikes. And when they do appear in full Technicolor their sight will be terrifying.

The second reason is that the massive liquidity injection into the Italian and Spanish banks, not to mention the French and German ones, will operate like large cortisone doses injected into a cancer patient. They will cause temporary relief but, at the same time, they will give the underlying malignancies time to grow nastier, bigger and deadlier. In short, the remaining eurozone’s banking sector will turn into a monster version of Japan’s zombie banks of the 1990s, brewing en masse the next banking crisis and embedding the virus of recession everywhere, from Spain to Germany, from France to Italy.

The third reason is structural. The eurozone’s troubles stem from the lack of a pan-European system of supervising the banks, of managing public debt and of planning for aggregate investment. None of these three constituents of the Crisis will be dealt with if Greece, Portugal and possibly Ireland are amputated – even if the stumps are effectively cauterised. This means that on the Morning After, Italy will be the next Greece and Spain will be the new Portugal. The internal imbalances of the eurozone, after a brief lull, will start rearing their hideous heads again, and, in conjunction with the zombie banks and the recessionary environment, it will not be long before another round of amputations will become ‘inevitable’.


Clueless for so long, Germany now has a Plan. According to this New Plan, some deficit countries will be amputated in order to give the Franco-German axis a final chance. The price Germany is willing to pay for this is the ditching of its ‘psychological’ rejection of hyper-energetic money-printing on behalf of the ECB. Thus cauterised, the festering wounds of Greece et all will cease to threaten the eurozone or to give rise to suggestions for a fundamental re-design of monetary union.

When will this Plan come out of the shadows and be discussed in public? After Mr Sarkozy, on whom Mrs Merkel has invested much, wins the French Presidential election, was the answer I was given. Then, Germany will ‘suddenly’ realise that the impossible conditions the Greek government pretended to accept have not been met. And then the ball will start rolling. Tragically, it will keep rolling well past the point willed by Berlin and Frankfurt. Even if contagion is initially arrested by Super Mario, the deeper causes of the eurozone’s current troubles will continue to work unimpeded and, before too long, Germany will realise that the amputations must go on until all is left attached to its economy are the rest of the surplus countries. Then, just like it has now accepted inflation as the price to pay for implementing this New Plan A, Germany will accept the need for deep deflation, following the loss of export markets, that will come as part and parcel of the next-next Plan: of ditching France.

Why not do as I and Munchau suggested instead?  Because they prefer this to recapitalising their banks and  because deep down they know that without a SRM it is all hopeless. They hope against hope that Italy and Spain… They may even be willing to issue Eurobonds with them but not with the likes of Greece.

They err in a number of ways. First, cauterisation will not work. The gangrene will spread. Secondly, even if it works,  Italy and Spain will eventually   Evoke the new Greeces of the rump euro one. Thirdly, the LTRO is setting the euro one up for the next Crash.

The recent LTRO, and its forthcoming extension, is the blueprint.

Germany had done what it could for Greece. The time has come to cut losses. To identify the countries that are still potentially solvent, and act swiftly. How? First, by smoothing the path back to their own currencies of the chronically insolvent

[1] This post could be entitled ‘Letter from Frankfurt’. Over the past three days I was in Frankfurt, filming a documentary on the Crisis for Channel 4. This post’s contents reflect the impression I got from talking to people in the financial establishment.

[2] Such a major re-design would involve bank recapitalisations and the unification of the european banking sector; thoughts that fill the soul of German bankers and financiers with horror. Germany’s politicians, in view of the expected backlash, thus have no interest in re-designing anything…


    • “Do you even have any idea what gdp is and how it is calculated?”

      No, only you are smart. All others are stupid.

      “Every mercedes that is being imported to Greece and then sold to a consumer adds to the greek GDP.Id love to know why this is a benefit.”

      Well, to have a Mercedes is of more benefit than to build one and not have it.

    • “No, only you are smart. All others are stupid.”
      I didnt call anyone stupid,but claiming that “Well, to have a Mercedes is of more benefit than to build one and not have it.” is indeed stupid.
      If thats the case then global trade should may aswell stop.Do you have any better arguments to prove that the Greek economy has benefited?
      The only benefit was from a consumer’s point of view.Greek consumer suddenly found import products cheaper than the domestic ones.That sure isnt no benefit for the economy as a whole.
      1)Domestic industries had to flee because they couldnt compete in prices any more,thus more joblesness.
      2)This increase in imports caused the trade balance to become increasingly negative which means more money exited the economy than the money that entered the economy.
      3)when this money outflow happens the only way to make up for the loss is government budget deficit. (since we have a fixed exchange rate and devaluation is impossible).
      You still call this a benefit for the ECONOMY?

      Large trade imbalances are not benefiting anyone in the long term.Not even the surplus economy.Because this surplus is gone as soon as the deficit economy stops spending (which is happening now).

      If you wanna see who has really benefited stop looking at this gdp nonesense for its artificial.The german businessmen benefited because they increased their sales and the greek elite to some extent.
      The avg german wasnt benefited at all because his wages were frozen for years and his real wages have even declined.The avg Greek had less job opportunities due to the industry flee and experienced great inflation in basic products.
      About time you realise this is not an avg. german vs avg. greek clash.

    • Of course it is better to produce less and consume more than you can (due to the euro), but it is a short-term benefit, which will lead you to a crashing collapse in the future (as history showed).

    • @jctergal
      a trade deficit is as sustainable as a trade surplus because for one to exist it simply needs the other.whenever one of the two is altered,the other one is equally altered.relying heavily on imports is as dangerous as relying heavily on exports.

  • The comparison with Lehman makes no sense. Banks had 2 years to prepare for the amputation as it was obvious to see that the Euro will be dead soon. Lehman was different.

    “Berlin will indeed give the green light to the ECB to print trillions as a means of cauterising the eurozone stumps”

    This does not make any sense. (a) The ECB is independent (or at least it claims to be, and further you claim that no laws are broken. So either laws are broken or the ECB is independent. (b) The ECB is run by the deficit pigeons and not by the German hawks.

    • If ECB was run by “deficit pigeons” it would be printing money already…

  • “The eurozone’s troubles stem from the lack of a pan-European system of supervising the banks, of managing public debt and of planning for aggregate investment. ”

    This is also incorrect. The root cause of the problem is the different development in competitveness (unit labor cost). And exactly for this reason France, Spain & Italy need to be amputated too!

    • Both may be right. The USA has vastly differential competitive structures and labor costs among states, and yet the recycling mechanism (which is very strong) keeps the balance.

    • The US has a very mobile workforce. This compensates what it is otherwise missing to be a optimum currency area.

      In Europe very few people (esp. low wage) move to another country, when things are not well. Reasons: Social welfare systems and language barriers

  • Germany is not in a position to even think about such plans.

    The minute they look Greece the wrong way, the Merkeloids will be crossing the gates of Hades.

  • Janni, question:

    Thank you. A thrilling piece – I wish, I would be seated in a cinema, well equipped with yummy popcorn and enjoy.

    But no ….

    I have a question for you: Having lived in Greece as well as abroad, being Europolit anyway, seeing it all coming – where do you personally want to live in five years from now?

    My personal theory: Germany will be the last to suffer – and it will be the one to suffer hardest in the end. When we (I am German, live in Greece) already are back to the road of recovery (to which level is to be seen, at least we have the sun, the beaches 🙂 )



  • Ups, cut off sentence: When we in Greece are on the road to recovery, things will fall apart in the North.

  • Will you post it in greek?
    Anyway , we will become poorer i hope we will become wise too…
    As for the tales of european solidarity, it is good that are ending only with
    money loses at least for now…

    • “european solidarity”

      Please remember that Europe is a continent with 51 countries. Europe is more than the EU (27 countries), and much more than the Euro Zone (17 countries).

  • 1. “it is clear that the hitherto presumed German conviction that such an infusion of freshly minted money will prove disastrously inflationary was never genuinely entertained”.

    2. “The price Germany is willing to pay for this is the ditching of its ‘psychological’ rejection of hyper-energetic money-printing on behalf of the ECB”.

    The pre-Keynesian obsession that money printing is inherently ‘disastrously inflationary’ was never a “psychological aversion” which Berlin or the gnomes of Frankfurt ever truly entertained [witness Trichet’s LTROs which kept the cash-strapped Greek banks afloat post-2009, together with dozens of bigger EU zombie banks while inflation kept falling].

    I told you many times, Yanis [and Stuart], that your immaculate arguments for an ECB-backed or ECB-issued Eurobond were seriously undermined by such tongue-in-cheek pretensions to be more royalist than the Queen – i.e. more “anti-inflationary” than “My Merkel, right and wrong”.

    But now it’s too late to “outlaw” Keynes again on similar dubious grounds, simply because the Germans and the Eurogroup have done it already under the “fiscal compact”, with no “psychological” qualms whatsoever.

    As for Greece, the latest reports from Brussels say that the Eurogroup hyenas (Finland, Austria, Netherlands, Luxembourg) are pushing for a “meet-targets-or-exit-eurozone blackmail clause” as a precondition to approve the new bailout.

    It’s gonna be the shortest-lived “rescue” ever.

    And then, Munchau’s proposal for a “considerably increased” rescue fund – to pay for a Greek and Portuguese default “within the eurozone” AND to “shield” the rest of the euro members from contagion – makes the German plan for an exit-with-a-generous-dowry sound much more realistic and even …”anti-inflationary”, since less money will be “printed” for it by Draghi.

    C’mon folks, forget the Quantity Theory of Money and lets all help the system restructure itself without the Barbarism of 1936-46.

    John-Meynard never pretended to be a left-winger or a Theseus (killing the Minotaur in video simulations).

    • Could you please explain in plain words your disagreement with Yannis’ – Stuart’ s and Munchaus’ proposals ?
      And what do you mean with your saing about Keynes?

    • Simply put: You cannot demand that the ECB deploys its full money-supply power (estimated by Buiter at 6 trillion euros) in order to wash away the toxic debt leftovers from (public or private) credit bubbles, created during the first euro period (2002-2008), without trashing qualms about the “inflationary” effects of such a large-scale refinancing intervention.
      Whether by means of ECB-backed Eurobonds (V&H) or a massively over-leveraged (with ECB facilities) EFSF/ESM “bailout fund” (Munchau), the net effect would simply be to decongest the real economy from toxic debt traps that prevent fresh capital investment and economic recovery.
      Above all, we need to get rid of our excessive “modesty” in abiding by the defunct Maastricht rulebook that created an quasi-ECB modelled after the Bundesbank.
      Look how the Merkozy clan has broken all the social welfare and labour rules of the EU treaties as well as European or UN human-rights statutes.
      Unlike Munchau, Varoufakis et al. urge for the nationalisation of private zombie banks in order to “recapitalise” them with EU taxpayers’ money.
      I’m saying all you really need to “nationalise” is the ECB and its “eurosystem” of pseudo-“national” central banks. You would thereby take full charge of the euro money supply (that’s currently serving private banks only) to fine-tune it for the elimination of surpluses and deficits to the benefit of European peoples.

    • So, your approach is more “aggressive”. Maybe you are right, maybe it is just that the time hasn’t yet come (as all say, Italy will be the keypoint).

      Anyway, thank you for our e-conversation.

  • As I have mentioned in previous comments to related posts
    [ ( and ( ] assuming that Hollande’s possible victory will not violate the Franco-German common strategy (by France adopting a wait-and-see stance ahead of Germany elections next year), all eyes should focus on Italy. Sooner or later, we will reach the strategic node: ITALY a. playing the role of peripheral countries being amputated or b. exiting the E-zone (or at least, threatening to do so). The latter will lead to the end game: Germany will leave alone, or together with the North

  • could we have this article in Greek please? thanks a lot. i wish your voice along with other free and Greek voices were heard during this darkening times in Greece

  • “The recent LTRO, and its forthcoming extension, is the blueprint.”

    Exactement! Draghi’s move to shore up banks with LTRO is the first step to protect banks before full cauterization is attempted.

    “Germany had done what it could for Greece.”

    That must be your most cynical line in this post, Yanis. Germany’s politicians and pundits only preached the anti-inflation gospel to further cripple Greece in preparation for ejecting them from EZ?


  • Some interesting theories with a lot of greek self pitty. Why don’t you sum up all the billions of subsidies and cheap credit having been wasted in Greece? Why don’t you lead a revolution to get your the money back from crooks like Papademous and all the Greek billionaires having shifted their money from Swiss to Luxembourg…?
    After all, who is Germany? Is it “Heinrich”, who gets paid 4,81 EUR/h (Belgian unions are running a campaign on that right now…)? Or is it the paneuropean traitors called government?
    You Greeks should stop blaming other people and get your ass up. Destroy the communist EU, I am with you. But stop blaming low wage Germany and stop demanding other peoples money. Get some self respect.

    • 1. German power consortiums or the German people are to blame?

      You say that, the Heinrichs whose pay has been eradicated through the two last decades, have nothing to do with the crisis.

      At the same time that you want to avoid blame for the German people, you blame the Giorgous and Yannides of Greece, which encounter the same problem.

      Greeks work more hours (per capita) than any other Western nation and are second in the world behind S.Korea. Still they receive the lowest wages in the EU as a % of GDP (around 30% while in France and Germany around 50% GDP is composed of salaries) and nominally one of the lowest in the EU.

      I think no reasonable Greek has blamed Germany. First, they blame their inadequate leadership and second they consider the responsibilities of German banks, which in order to avoid paying the price of their mistaken investments (such as Greek bonds) transfer the cost to the EU states and the German taxpayer.

      Furthermore, as Yanis Varoufakis did, a lot of reasonable Greeks, insisted that Greece should STOP receiving loans from the EU and IMF.

      2. Who owes to whom?

      Sure Greece has a net inflow of subsidies from the EU budget (Germany’s share in this is around 20%-30%) of some billions per year. Let’s suppose it is 2 billions for the last 20 years. This is around 60 billion (including interest).

      At the same time, Germany owes to Greece the war loan (it has nothing to do with war reparations, it is a loan than Germany extracted from Greece and it has been signed and acknowledged by Hitler himself).

      This loan amounts to 160bn in today values.

      If we add up the war reparations and the Greek gold extracted through the occupation, the total sum goes beyond 500 billions.

      Moreover, in 1994 Greece had a current account deficit of 0.6 billions. After eurozone entrance, the CA deficit grew to almost 17% of GDP to more than 40billion a year.

      That means, that within the eurozone Greece lost almost 200 billion in trade and current account deficits more, than it would have lost outside the eurozone.

      Therefore, who owes to whom is a little complicated story.

      3. Who is to blame

      Of course the Greek people are to blame, because they elect corrupt and inadequate politicians. Politicians who look the interest of banks and other entities first, than the interest of the Greek nation.

      Greek politicians, do not have the determination to ask for what belongs to the Greek state and instead beg for loans and bail-outs.

  • “the supposed Weimar-trauma had nothing really to do as such with the money supply getting out of hand, with hyper-inflationary effect”

    That is absolutely right. The reasons underlying the German perception of the crisis have always been cultural, not historical. The irresistilbe umpulses to moralize (Moralisieren), to panish the ones incapable of adopting the very German virtues and to impose these virtues to everyone else are the real driving force of Merkel’s eurozone politics.

  • There has been a tendency in Greece – and not just in Greece – because of the European project, with its internationalism and determination to deride and overcome the nation-state, for some Greeks – Yanis included – to reject or downplay Greek identity in favour of a European or even global identity.

    I’ve heard Yanis say on several occasions that he prefers to be classified as a European, not a Greek – (I think I have this correct, apologies if I haven’t); so my point is this: have recent events made people in Greece realise that there is no such thing as European solidarity; that there is no such thing as a European, let alone a global, identity; that the European project is a myth – Greece also believed in it as a means to tackle its problems with Albania, Skopje and Turkey – and that there now needs to be a re-evaluation in Greece of the rush to ditch national identity in favour of a European identity as well as a rethinking of whether the EU can solve Greece’s defence and strategic concerns?

    • On a personal note, the better a citizen of the world I become the more Greek I can be. The less jingoistic and nationalist the more in tune with my Greekness. I insist on seeing every place I am at (either in Greece or wherever) as a XENOS, a foreigner. Then I can know it better and can appreciate it more. Perhaps this is why my daughter is called XENIA.

    • To Yiannos K.

      Expressing my personal opinion, what you say is true and false at the same time. In order to put an end to this mess is to put each argument in its corresponding logical environment.

      It’s like popular sayings.

      Actually there is european solidarity. The proof that such thing exists is the strong propaganda against Greece by german, french and english mass media the last two years. If there was no european solidarity, there would be no need for such propaganda.

      As far as greek foreign policy is concerned about Albania, Skopje and Turkey, this was a good thinking framework but with wrong goals and a bad implementation.

      If a member of your family demanded from you not to see a new friend of yours ever again, would you do it?
      But this ,not so unusual situation, does not cancel the fact that you will listen carefully what your family say.

      So, there is a bond between european nations, but this is not an “exclusive” bond.

      As far as greek identity is concerned, if we conquer it, no one can strip us of it. The question is what we do. This is not a story with a predefined ending. We must fight for what we believe it matters.

      Greek politicians in power share an big part of responsibility of how things turned out. I would never forget Diamantopoulou in BBC, heavily discrediting Greek people.

      The biggest problem with corrupt politicians, as it turns out, is not that they have become rich. It’s that they can be easily blackmailed… .

  • Teachers do not put all students of a school in the same class. And they have good motives to do that…

    Yet, the fact that nations learn to develop economies, as individuals do to build their lives, does not come to awareness.

    Among other things, different currencies serve to delimit different classes, different stages of economic learning at the collective level.

    Amassing different countries at different stages of evolution into the same class, named EMU, created a mess the only way out is, IMO, to restore proper “learning spaces” through national currencies.

  • I think this is a crackerjack article.
    I posted this morning a piece based on various sources that chimes exactly with this one:

    Please don’t view this as spamming….I’m going to point my readers at this piece because it is extremely informative….and when it comes to the many-wrong-headed Hydra formally known as the EU, two heads are better than one.
    The Slog


  • Κύριε Βαρουφάκη,
    μου αρέσουν τα άρθρα σας (είμαι θερμή υποστηρικτριά σας) και θέλω να τα κοινοποιώ είτε με e-mail είτε μέσω fb. Σας είναι δύσκολο να τα στέλνετε και στα ελληνικά;
    Επίσης και για μένα την ίδια είναι δύσκολο, γιατί έχω χάσει την επαφή με την γλώσσα, αρκετά χρόνια τώρα και δυσκολεύομαι. Ευχαριστώ.

    • Καταλαβαίνετε τι μου ζητάτε; Δεν διαθέτω μεταφραστές… Έτσι κι αλλιώς τα βασικά τα δημοσιεύω στα ελληνικά στο

  • “Germany was insisting that there would be no bailout, no debt restructuring, no interest rate relief.”

    And our politicians should have strictly kept this promises. Unfortunately, thanks to the pressure of the GIPSIFs and the ROTW, and of course the epidemic plague called finance industry, Merkel caved in and shoveled over heaps of good money after the bad.

    Anyway, the plan you describe here doesn’t exist. Not in the minds of Germany’s political ‘elite’. Because all of them are extremely aware that the sovereign would get rid rapidly of any party and politician who attempts (no matter how cleverly disguised and/or spin-docotored) to print more and more money essentially for banks and foreigners. Never underestimate the main street Germans.

    Considering this strange piece you might soon also start to fantasize about ‘Anschluß Economics’, like the shrill Auerback…

  • This cartoon summarizes what is going on in Europe this week. Greece is charlie Brown, obviously:

  • I guess you got all this from your phone calls with Mrs Merkel? A lot of simplification, conspiracy, unfounded claims but an entertaining piece.

    From what I remember, the EU and Euro treaties contain a no bailout clause and until now government spending was a purely national thing. When things got worse in Greece, it was the Greek parliament that has repeatedly decided to go for loans-for-spending-cut packages. A default within the Euro zone was possible at any time and still is — just let the parliament decide.

    I never got the impression that the Frankfurt banking scene has significant political influence in Germany. Frankfurt is not London.

  • If you believe that the alleged plan will cause a mass failure of eurozone banks (I’m not quite as optimistic but it’s in the realm of the possible), shouldn’t you be, tactically, supporting the plan? Restructuring/controlling the banking industry is unlikely to be done without catalyst events: the eurozone needs a Lehman moment (which I think on balance was quite positive for the US, without it the situation would probably be worse than it is now). Non-bankers have little to lose: banks do very little with regard to the real economy that can’t be routed around.

    • A nuclear holocaust would also end the banks’ awful reign. This is no reason to support it, however sincerely one may wish for an end to Bankruptocracy.

    • Civilians did okay in Iceland it seems when they did their nuclear banking reset (there was a subsequent baby boom I’m told). I suspect doing it at the eurozone/global level would be similarly benign, despite the difference in scale, and great fun to watch as well.

  • @Crossover
    “Do you even have any idea what gdp is and how it is calculated?
    This chart proves nothing else other than that the south had import oriented growth.Every mercedes that is being imported to Greece and then sold to a consumer adds to the greek GDP.Id love to know why this is a benefit.”

    ===> … uh? … that is wrong. Here is the proper formula:

    GDP = private consumption + gross investment + government spending + (exports − imports)

    • agreed….what is private consumption ? not only greek products are consumed….

    • “M (imports) represents gross imports. Imports are subtracted since imported goods will be included in the terms G, I, or C, and must be deducted to avoid counting foreign supply as domestic.”

      Gdp only shows the level of economic activity,it isnt showing how healthy or wealthy an ecoomy is.the current account balance or the trade balance are more appropriate for such an examination.

  • You missed one player in that game- the US.
    For Ireland’s debt negotiations it was the US blocking any debt relief or default.
    From the Irish Times:
    “The deal was torpedoed from an unexpected direction. At a conference call with the G7 finance ministers, the haircut was vetoed by US treasury secretary Timothy Geithner who, as his payment of $13 billion from government-owned AIG to Goldman Sachs showed, believes that bankers take priority over taxpayers. The only one to speak up for the Irish was UK chancellor George Osborne, but Geithner, as always, got his way. An instructive, if painful, lesson in the extent of US soft power, and in who our friends really are.”

  • Besides Germany, the US has a major say in whether to default or not. In Ireland is was reported after the negotiations.
    “The deal was torpedoed from an unexpected direction. At a conference call with the G7 finance ministers, the haircut was vetoed by US treasury secretary Timothy Geithner who, as his payment of $13 billion from government-owned AIG to Goldman Sachs showed, believes that bankers take priority over taxpayers. The only one to speak up for the Irish was UK chancellor George Osborne, but Geithner, as always, got his way. An instructive, if painful, lesson in the extent of US soft power, and in who our friends really are.”

  • This is just the France is not Italy is not Spain is not Portugal is not Ireland is not Greece story all over again, this time about “amputation” rather than “market attack”.

    These people have learned nothing. Just like French banks started faltering in August 2011, followed by the loss of France’s cherished AAA, so this time it will end with France being amputated.

    But, by this logic, when all that’s left is the Neuro rump of Germany, the Netherlands, Finland and Luxembourg, one of two things will happen. Either the Neuro will appreciate so fast that its export-dependent economy will crash, or else one of the four countries will find itself a net importer with respect to the other three, and be amputated in its turn. That is, the Neuro monetary union can ultimately only be a union of one, unless it is Germany that finds itself in the position of the internal net importer.

    Now, wouldn’t that be ironic?

    • You are forgetting the capital inflow into this area will boost the domestic economy which is (as not many know) much bigger than the export dependent economy.

  • Yanis
    After reading your article(s), and after taking in your very informative talk, I am still perplexed as to why our politicians continue to toe the line they’re on. I know you’ve answered this question more than once. Your talk last night, when juxtaposed next to what we’re going through as a country, manages to magnify the stupidity of those in power.

    • @Dimitris
      There is no simple answer. One can cite the literature, particularly concerning Latin America, on the concept of a comprador bourgeoisie — whose interests lie outside of the state where they live and relate to international finance, political power and even the lifestyle of the world’s richest countries and cities. With this analysis, you can understand that such a class does not act for the interests of its own country, nor even for its own class, per se. Certainly, I place Papandreou, Papadimas and Samaras in this category — and much of the rest of the Vouli.

      Another explanation lies in the history of modern Greece. The state was established as financially dependent on the “Great Powers”, and was continuously trying to borrow and repay loans from those countries in the nineteenth century and later. There were even entire political parties (such as the British Party) devoted to raising more money and improving relations with the relevant Great Power. After the civil war, the US Marshall Plan provided the greatest per capita contribution to Greece across the whole of western Europe. Since 1981, the EU has channelled moneys (much of which has fostered corruption and poor resource allocation) to Greece — continuing, in politicians’ eyes, the Great Power funding tradition.

      Yet another view might emphasise the structural constraints that appear impossible to address — such as tax collection and corruption. (You may recall that Papandreou was whining about these all over Europe, as soon as he became PM.) With this mentality of despair, Greek politicians perhaps look to Europe to solve their problems, instead of taking the approach of people like Kolokotronis or El. Venizelos, who we feared or hated by the western powers. In other words, it’s the easy way out (while claiming all the time, loudly, to be taking the difficult road “for the sake of Greece”).

      Whichever way you look at it, Greece’s politicians are a disgrace to the country — as especially to the poorer sections of the population. The appropriate word for their actions may yet prove to be “treason”.

  • Four conditions are appropriate.

    First, countries that can — that is, those where the ratio of government debt to gross domestic product is 90 percent or less — should reverse their projected budget tightening in 2012 and 2013. Those countries are Austria, Finland, France, Slovenia — and, above all, Germany.

    Second, the European Central Bank should lower its refinancing rate to 0.25 percent from 1 percent — an action that it has resisted because of an unjustified fear of inflation.

    Third, euro-area authorities should set aside at least $1 trillion for a European financial safety net — a far larger amount than what has been publicly discussed so far — to persuade markets to stop betting against debt markets of solvent countries.

    Fourth, new loans from the euro area, channeled through the I.M.F back to the euro area, should not be repaid until all existing I.M.F. loans to euro-area countries have been entirely repaid. A change in this treatment is necessary before China, the Persian Gulf countries and other potential contributors are comfortable with throwing a lifeline to a region more prosperous than their own countries.

  • It is very quiet here this morning! What is going on? Are you guys at the bank picking up your Euros before they will be exchanged to New Drachmes?

    I hope you all will manage in time. I do not want any harm to any of you! In any case, for every country that exits the Euro (Grexit, Portexit, etc..) I will donate 100 liters of beer in front of the ECB in Frankfurt! You are all invited! Cheers!

  • Hellenic Parliament, 12 Feb 2012, M.o.U. discussion

    After 1’40”

    “… We are called to vote a draft with dots instead of numbers (whereas, the numbers are to be filled later).”

    Is he lying?
    If not, is this a Democracy? Isn’t it a violation of the Constitution?
    In which other country, are the members of Parliament forced to vote (sign) blank cheques?
    (this 13’ speech has some other interesting points)

  • I guess that on Friday, Feb 17, you will post on
    Could you include there an analysis on-further to your current post- whether the IMF (or american elite) is able/willing to overthrow the new German plan???

  • What strikes me (and could to my understanding be another piece of the puzzle you are presenting): Some days ago, the ECB lowered the conditions for collaterals banks could hand in for fresh money.

    Central banks had to apply for it. Via press release we’ve learned, that Ireland, France, Spain, Italy, Cyprus, Austria and Portugal did so. (

    But Greece did not. Why? Not because Greek banks are well capitalized, are they?

    What’s behind that? Were the Greeks told, not to apply, because …. ECB does not want to collect even more collaterals from a country, that soon will default or be “amputated” from the Eurozone?

    What is your guess on that?



    • If you look at you’ll note “The NCBs are allowed, as a temporary solution, to accept as collateral for Eurosystem credit operations additional performing credit claims that satisfy specific eligibility criteria. The responsibility entailed in the acceptance of such credit claims will be borne by the NCB authorising their use.” In other words, the ECB would not have collected any of the bad Greek collateral. IMHO, that statement by the ECB is tantamount to an announcement that the Eurosystem is an ex-parrot.

  • Good work, as always, many thanks.

    The metaphor could be that Germany sees itself as Hercules cutting off a few hydra heads but in order to save the beast not realising it is itself a head of the hydra biting off other heads in a hallucinogenic state brought on by the metastasising illness.
    The result being that even more infected heads will sprout as there is no real Hercules to cauterise them.

    Anyway it’s all pretty funny…

  • My questions to Mr Varoufakis:
    1) You describe the Germans (i.e. Merkel) as quite confident that Sarkozy will be elected again. What makes them think that?
    2) How could things evolve if Sarkozy AND / OR Merkel lose the upcoming elections? Do the German economists have a backup plan for that?

  • Newest rumour is that the Germans, obviously with the backing of the Papademos-Venizelos block are planning to postpone the deal somehow until after the elections, obviously trying to blackmail the electorate. Karamanlis or the tanks all over again.

  • I cannot understand why the German financial establishment is so up against the unification of the european banking sector. This really puzzles me. I can understand the (deluded) rational” against eurobonds, which is the same fear of many rich people against progressive tax systems: being forced to share part of their money with those poorer. But what do they fear from the unification of the european banking sector? Won’t it just make things more efficient and competitive, which is what they’re always talking about?

    • It does not matter. The surpreme court ruled out Euro bonds. I know that Merkel says she does not want it so she can win some votes, but she has no option.

    • When the ECB issues its own bonds it will have explicitly become the sole Sovereign in the Eurozone.

    • Actually it did. It ruled out further transfer of sovereign power. ECB bonds are not possible for the ECB at the moment. They would need a change of treaties and are a further transfer.

      So either they brake the rules (again) or it is not possible.

      The day the German savers will lose trust in the “currency” Euro it is the end of the experiment. Either by voting for anto EU(EURO parties or by selling of their Euros and fleeing into something else.

  • No. The German sovereign will kick any politician and/or political party wo starts the central printing press, no matter how cleverly disguised, into oblivion. And Merkel and the rest of the gang are perfectly aware about that.

    • Including anyone who ignore the ruling of the surpreme court against Eurobonds or stability bonds or whatever you label the burglary of the german tax payer.

  • As ever, a terrific posting, thank you. I also appreciated the comments/articles by John Ward and Maria Margaronis.

    Concerning the greek enthusiasm for Europe – in one of the many Comments to recent articles on the crisis (Guardian? Telegraph?) I came across this ‘back story’ post by Stoffel 45:

    “In the time of Chirac’s government the French approached the Greek politicians, comrades in corruption, and told them of their scheme to get into the euro. Antoni Samaras laughed and told them Greece was too poor.

    The rewards, the French said were enormous. New ports, new airports, new ferry systems, new roads – their list went on and on.

    So the French, not the Greeks, arranged a massive deposit in Greece, using Goldman Sachs. Amazingly, this was repaid. It boosted Greece’s finances enough to have the French ‘sponsor’ Greece as a worthy “Euro candidate” – and so Greece joined the euro – with French deceit. The EU Commission of course was kept fully appraised – poor countries don’t suddenly get rich – so they were part of the scheme.

    The Loans by Societe General, Credit Agricole, Paribas, Dexia (Belgium) Commerzbank (Germany) and Fortis (Belgium) were truly enormous. They were reckless, criminally negligently reckless.

    The deal with the EU was that when it got its own direct tax base, money could be just moved from EU taxpayers to the Axis (France and Germany) Projects.

    Hundreds of billions of euro were flushed into grandiose schemes in the PIIGS. France and Germany had already divvied up their share of the PIIGS to plunder.

    This pin suited gangsterism made Lehman Bros look semi-decent. Bernie Madoff is the role figure for the EU and the French and German banks.

    But the EU did not get their direct tax. The German banks were lucky to get their money back from Ireland for their casino activities there. A commercial venture, underwritten by mature banks, big banks got stuck with their hand in the empty till – and passed their loss on to the Irish people.”


    I know that some of this is true, as I experienced in 1996 when interviewed by a german project manager for the projected Athens airport. My partner & I were on a list of architects for a token ‘greek design input’ – not the design of the airport, but what was vaguely described to us as a sculptural pavillion near the runways that would be viewed but not used. [This project was abandoned].

    I was stunned at the time to learn that the new greek airport would be built and managed for 25 years by Hochtief (profits to Hochtief), then handed over to the greek state. Hochtief is a byword among architects as probably the most abusively aggressive construction companies in Germany with the lowest design standards. Since the rest of Europe at this time was commissioning the best architects to make signature airports (hard to remember those days!) I was bewildered that Athens chose?ended up with? Hochtief.

    Afterwards, during my years in Brussels [NOT in the EC!], I was told by a greek friend in the EC culture ministry that the airport and other projects had been “decided in Brussels” and “divvied up at high level”.
    The result is that Athens has an airport made of cheap clip-on panels midway through their 25 year shelf-life, all of which will have to be replaced [rebuilt] at hand-over. But at least the ‘token greek design input’ – the statues (copies) in front – are the nicest part!

    NONE of this was made clear to the public of course.

    Yanis you are an economist on overdrive – on behalf of all of us right now! – and it is not an immediate issue for you.
    But the truth behind “European project” needs to come out SOON – to encourage a younger generation to make different & braver choices …and also, where it impacted Greece, to ‘follow the money’…

  • I always enjoyed your posts and I am a big fan of your Modest Proposal, even though I cannot really evaluate its more technical aspects since I am not an economist. It sounds like a credible solution, a way out of the current crisis and a needed step forward in the process of European integration. Even though you probably know that this – politically – is an impossible sell in the North, especially with conservative governments at the helm, you are correct to keep pushing for it. However, your persistent denial to also focus on the local origins of the predicament of the Greek economy has contributed, perhaps unintentionally, to a growing polarization within Greece. The global crisis has exposed many of the severe dysfunctionalities of the Greek economy and public administration. Greece needs to address those within or outside the eurozone. Since the onset of the crisis you have focused your analysis on the European level and with good reason; a viable solution there is a prerequisite for things to start turning around. However, since now in Greece you have become something of a ‘celebrity-economist’, anyone who opposes any kind of reform in Greece (and I am not just talking about reducing the minimum wage or cutting pensions), quotes Varoufakis. You have become the intellectual of choice for all forces of immobility within Greece, something that I suspect you do not really want – even though I do not know you personally. So, I apologize for this long reply but I would love to also hear you talk about what Greece can do domestically in order to stop being the weakest link, e.g. alternative, more just and viable ways of reducing its deficit. It is time to stop this artificial polarization between reform-minded forces in Greece and those who talk only about what Merkel needs to be doing.

    • @Mano,

      If I may, again, answer a question addressed to Yani…

      It should not really be about the deficit, per se. This is just the latest obsession of the neoliberal right, and it is not clear to balanced economists that a balanced budget is necessarily optimal. What the Troika are CLAIMING to be interested in, is reform of the Greek economy and greater international competitiveness. What they have actually done has no relation to that. Do they really think that allowing more pharmacies and taxis in Greece (God help us) is of any benefit?

      So, what is needed is reform. What reforms? I’ll give you my professional opinion, as someone who has studied the Greek economy since 1988.

      (1) Introduction of proper review of civil servants’ performance and pay, by experts from another EU country. The review should be compulsory, contain individual recommendations for promotions and demotions, and also dismissals for failure to work. There should also be removals of jobs where clearly those jobs have no function. These reforms will require changes to the Greek Constitution.

      (2) Removal of parliamentary privilege for all deputies and all ministers, other than in the pursuit of their functions as officials. Prosecution of all persons who have engaged in all forms of corruption exceeding a value of (say) 20,000 euros per year. Compulsory imprisonment for anyone convicted of such offences.

      (3) Reform of the entire legal system, with the assistance of the Council of Europe. This will be a massive undertaking and was recommended to Greece in 1980, 1981, 1982, 1983, 1984 by the European Commission. It has never happened. Basically, the Council of State is controlled by the government of the day, and has little to do with interpreting law. The courts of first instance are a disgrace, and their standards more appropriate for Afghanistan than an EU country.

      (4) Reform of the tax system, such that it cuts out the power of the Greek state for arbitrary and illegal tax impostions, guarantees certainties and legal rights for businesses and individuals, and subjects tax inspectors to random checks and prosecution for corruption. It also require evaluation of the personnel of efories, for their competence (which is roughly zero). From my own experience, I can tell you that a good proportion of the circulars of the Ministry of Finance are incorrect interpretations of law, and are illegal instructions to efories. To this,we can add recruitment of trained staff to manages taxes (along with dismissal of persons unable to retrain or carry out their job).

      (5) reform of the education system, integrating it better with the labour market and higher education in Europe. For TEI, this means actually equipping their students with vocational skills that carry some weight in the private sector; for universities, it means accepting principles of peer evaluation, publication and research obligations and more systematic training of students at all levels — Bachelors, Masters and doctorate. Also, early retirement of the Pasok and other mafia who were appointed as Kathigites and should really be cleaning toilets.

      (6) Reform of the relevant ministries, such that they can provide proper advice, access to European funds and technical assistance for SMEs in selected economic areas of activity. This would include tourism, agriculture, traditional crafts, basic industrial production, and anything else where Greece has a comparative advantage. The policy would make a stark contrast with the previous one of embezzling EU moneys with the collaboration of the private sector…

      These proposals are off the top of my head. Nevertheless, I can guarantee that they are rather more than that fake economist called Papadimas has planned for Greece.

  • There is one main issue with these arguments. They are strictly viewing the problem based on economics. They ignore the geopolitical implications.

    If Greece is desperate, it might turn to others for help at a premium. Whether this is oil from Iran, or pipelines from Russia, or loans from China. Changing the power equilibrium in this area of the world is not an easy decision. And when people are hungry, they will do anything. And there are plenty of parties with power influence ambitions.

    It is easy to cut Portugal or Ireland loose, but it can create real instability if you cut Greece loose.

    • I’m sure Russia would be delighted to provide a defaulted Greece with its essential imports of oil and gas…

  • So, Yanis, after you chastised me earlier this week, I see you’ve come to agree with me.
    You even use the same word.
    Maybe now it is I who’s owed an apology.

  • Yanis

    In your previous articles you advocated that threats to exit Greece from the Euro zone are fake. That if this ever happened, then Germany would be forced to exit the euro zone, within a week. Something has changed and you write now that 3 countries will exit the euro zone?

    • What has changed is that Germany’s financiers are now willing to try a strategy that will cause the eurozone to implode at a huge cost to Germany. Thankfully Berlin seems to understand, till now, that it would be preferable for Germany to exit than to try to force Greece and Portugal out.

  • @Crossover

    If Germany was outside the eurozone, German wages would be much higher (although this might mean an increase in unemployment). Thus, the German elite won through the euro, not only by a huge boost in (euro-fueled) German exports but also by the depreciation of the German wages.

    On the other hand, Greece would have a much weaker currency, had it not been in the eurozone. Thus, the Greek elite (which is Greek-market oriented and not export-oriented) was able to extract profits of higher value and its assets (real-estate, cash and corporate earnings) appreaciated due to the euro.

    Now through the crisis, the elites are able to squeeze Greek wages.

    This means, in a way, both elites took the gains, while most of the population took the losses in both cases.

    • Exactly, the EU and the Euro are tools to screw the people of European countries. Thank god there are places in Europe where the EU did not manage to get its hands on the currency, which belongs to the people of the sovereign states!

      Europe = 51 countries
      EU = 27 countries
      EZ = 17 countries

    • The only number that will not change over the next 2 years is 51 🙂

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