• Understandably given the chaos in the Greek situation, your predictive powers seem to have failed you re: last elections:
    *there has been a winner of elections – Syriza tripling its voting power…
    *no coalition of the two ruling parties is likely to occur…
    *Papadimou is definitely out of the picture..
    *election outcome in June may be important enough to contribute to changing Eurozone climate, particularly following Hollande at the helm now…
    *don’t underestimate Greek and Eurozone-wide repercussions following Syriza’s probable rise to power in June elections and beginning to implement its counter-Memorandum policies. Unless in the intermediary period between elections, the powers-that-be (external, internal) manage to sabotage, block and reverse the current political tide and the will of the people. The Greek people must be prepared for the latter to happen…!!!

  • Is it plausible that Germany show real leadership and undertake, under the auspices of the ECB and the German state itself(to make it palatable to its electorate), investment in the eurozone periphery and hence recycle its surpluses to reignite growth. For the want of a better phrase ‘a belevolent occupation’ in Eurozone in order to save itself?

    • “investment in the eurozone periphery”

      This is an oxymoron!

  • SYRIZA seems to disappoint. The common problem of all continues to exist. They can not even agree on the definition of terms. These people (politicians) are an amazing breed.

    I was watching two politicians ,one of SYRIZA and one of DL (Democratic Left) ,only to notice once more that while the gap between them can easily be filled ,delve into the play of disagreement by focusing on totally subjective interpretation of terms ,exactly where and when is not needed ,especially today.

    Specifically they couldn’t agree between the terms ,impeach and renegotiate. Between the phrases ,”impeach the memorandum” and “renegotiate the terms of the memorandum and gradually disengage from it”.

    People want a coalition ,a partnership of parties. They want to stay in the euro ,while see changes for the better (continuation of the reforms but with growth) no matter the pain. SYRIZA had every chance to take that opportunity. Everybody was ready to support this party. Tsipras had no “certain of future outcomes” reason of not accepting..

    These are no times for such games. If elections again ,i may vote for a more flexible left party (a small left party i did vote anyway) that seems to have a say and people listen (maybe DL). Mind you ,i didn’t vote for SYRIZA the first time although i accept the suggestions of the party like hell.

    Now ,as i have said before ,if people are not ready we will revert back to the old structure and way of doing things.

    This means that if elections again ,i expect either for ND to take the lead once and for all or for SYRIZA. A third outcome is the repetition of these days. No good if delaying is catastrophic.

    This one time i wanted what happened ,so as to have a chance of escaping from the old structure in Greece. Maybe that is exactly what will happen if the majority votes for SYRIZA.
    But ,if SYRIZA becomes government and doesn’t show flexibility ,continue to be absolute as these days ,i see more trouble cometh. Ofcourse who can say what Tsipras will think and feel when he sits at the same table with the european partners?

    I would like to see:
    1) people not choosing the extremes
    2) people not choosing the old structure
    3) politicians and people spiritually maturing and seeing the common ground 🙂
    4) politicians and people understanding that being absolute is only good for broader and morally higher principles that act as guidelines.

    SYRIZA could implement the plans it has ,not immediately but gradually.


    • I can’t say I disagree with you. Some nice thoughts and well balanced approach.

      One thing I see, is that you fail to grasp the meaning of “extremes”. People do not gravitate to what is perceived to be an extreme but when they realize that they are under attack by something else which is equally extreme.

      Explain to me how Merkel and Shauble are not extremists. Pasok and ND were extremists as well. They knew their policies were highly prejudicial to Greece, the current and future generations, still they went on their merry ways prententing to be “serious centrists”.

    • @ estrangeiro

      You are right.

      But i do not fail to grasp the meaning of “extremes”.
      Allow me to say that in the not so far past i wrote about the fallacy of categorizations.
      For that i mentioned the usual political categories of left ,right ,center and how they confuse us when being uninformed about the policies and the individual characteristics of every party and person.

      I chose to vote for higher principles ,be it broader and more absolute by their nature principles that encircle the lives of all people ,no matter the culture ,hoping for a change of structure ,mostly in our own minds.
      These principles can be found at every conventional right ,left or center party.

      The problem is the parties themselves do not use better categorizations and do not distinguish between the broad and nesessarily absolute higher principles and the more flexible ,near everyday human activities’ principles. So except the usual extremes of fascists and racists ,left ,right etc ,we have absolute and too much interfering behaviours everywhere in the political spectrum.

      “People do not gravitate to what is perceived to be an extreme but when they realize that they are under attack by something else which is equally extreme.”

      Unfortunately that is true. The reaction of people becomes extreme. That is why i hope they soon will return to the median and instead of reacting all the time to situations others create ,we will begin to proactively act.

      So actually we agree (i think).

  • Γειά σας κε Βαρουφάκη.
    Αυτό το σχόλιο δεν έχει να κάνει με την ανάρτηση σας,και δεν γράφεται για να αναρτηθεί ως σχόλιο.
    Δεν είχα όμως άλλο τρόπο να επικοινωνήσω μαζί σας,και ζητώ συγνώμη που κατα- χρώμαι τούτο το βήμα, ενοιωσα όμως έντονη τη ανάγκη να σας γράψω.
    Θα έχετε ίσως αντιληφθεί ότι οι απόψεις σας περί μνημονίου και περι ευρωπαϊκης διάστασης της κρίσης,κυρίως το πρώτο όμως,έχουν γίνει σημαία ενός συγκεκριμένου πολιτικού χώρου,τον όποίο και “αβαντάρατε,”ας μου επιτραπεί ο όρος, προεκλογικά αιτιολογώντας το επαρκώς.
    Σας γράφω για να εκφράσω πόσο με στενοχωρεί οι απόψεις σας να γίνονται άλλοθι σε ασυνάρτητες,ανεύθυνες,λαϊκίστικες,για να μην πω κάτι πιό αιχμηρό,τοποθετήσεις ανθρώπων ζαλισμένων απο τη προοπτική της εξουσίας που ουδεμία σχέση έχουν με την πραγματικότητα.
    Είναι κρίμα να πάρει η ευχή, απόψεις όπως οι δικές σας να μην εμβαθύνονται και να ταυτίζονται στο νου πολλών, με ένα χώρο που τάζει λαγούς με πετραχήλια σε ένα ταλαιπωρημένο λαό,που είναι έτοιμος να πιστέψει ότι όλα θα γίνουν όπως ήταν πριν τη κρίση αρκεί να γίνει πρωθυπουργός ο Κος Τσίπρας.
    Δεν ευθύνεστε γι¨αυτό και το ξέρω. Δεν ξέρω αν μπορείτε ούτε αν θέλετε να το αποφύγετε.Ηθελα μόνο να το πω τίποτε πέρα από αυτό.
    Την αγαπάω την Ευρώπη Κε Βαρουφάκη,και έχω τη αίσθηση πως σας συμβαίνει το ίδιο.
    Εχοντας ταξιδέψει αρκετα στα νιάτα μου,είμαι μεγαλύτερή σας κατά 4-5 χρόνια,και ζώντας 6 μήνες το χρόνο σε μία πόλη της Ινδίας,οπου συχνάζουν όλες οι φυλές του Ισραήλ,όταν είναι ανάγκη να αυτοπροσδιοριστώ εθνικά,το Ευρωπαίος είναι πολύ πιό οικείο στην ψυχοσυνθεσή μου από το Ελληνας.
    Γι¨αυτό και οι απόψεις σας για τη ευρωπαϊκή δάσταση της κρίσης με αγγίζουν βαθιά.
    Τέλος πάντων,ότι είναι να γίνει θα γίνει..Οσο για την Ελλάδα αν πρέπει να πεθάνει , ας γίνει έτσι.
    Τελικά δεν έχει και μεγάλη σημασία τίνος την υπογραφή θα φέρει η ληξιαρχική πράξη θανάτου,του κου Τσίπρα η κάποιου άλλου. Η αλήθεια είναι πως οι πιθανότητες να φέρει τη δική του είναι πλέον πολλές πάρα πολλές….
    Σας ευχαριστώ που διαβάσατε τούτο το κείμενο και χίλια συγνώμη που πήρα το θάρρος να σας απασχολήσω ξέρω πως ο χρόνος σας είναι πολύτιμος. .
    Με ειλικρινή εκτίμηση
    κελλυ αλαμάνου

  • Dear Mr. Varoufakis,
    I think it is high time you explained to your fellow citizens in plain Greek what an immediate exit of Greece would mean to their everyday lives. I follow your interviews and writings and acknowledge that you were courageous to point out the uselessness and dangers of the so called bail-out packages that the two major political parties were pushing down the people’s throat the years before. The sorry state of the Greek economy vindicates your views completely.
    I urge you now to do the same and warn the people of the dangers of a disorderly exit. It was not difficult for you to amass numerous followers when speaking against the austerity. Now it would take more courage to say that it is not the time to jump off the train. Europe is coming around and is gradually changing towards what you were proposing. It would add insult to injury if at the time of the coming Eurobond, Greece tries to stabilize it’s stillborn Drahma. I respectfully ask you to ponder that leaving the Euro is not simply changing currency, but it entails a complete geopolitical reorientation of Greece, which will turn to less forgiving and democratic internal and external “saviors”.
    Mr. Varoufakis you proved a competent economist but now is your chance to be a moral citizen. It is an ethical imperative of a civic society, that people who were fortunate enough to acquire knowledge and receive education would give their insights to the less fortunate compatriots. This imperative is even stronger when these educated people have a such a large exposure in the popular media as you. At any rate no citizen would gloat and laughingly comment that his country is a failed state.

    • You write: “I urge you now to … warn the people of the dangers of a disorderly exit. It was not difficult for you to amass numerous followers when speaking against the austerity. Now it would take more courage to say that it is not the time to jump off the train.” First things first Konstantine: From day one of my public involvement in this debate, I have done nothing else than to argue, until I was blue in the face, that an exit from the euro would be calamitous for the people of Greece and would, to boot, bring about a postmodern version of the 1930s to Europe as a whole. My arguments against the Greek bailout-austerity package was that it was bound to fail and that its failure might force Greece out of the euro, with the calamitous results that I had prognosticated. So, you are effectively asking me to warn Greeks and assorted Europeans that a Greek exit is going to be a terrible thing. You are two years too late. “Been there done that”, as my 8-year old daughter likes to say. (One request: When it is clear that you have not followed by texts and speeches, do not say that you have. You had no obligation to do so and, thus, it is inelegant to way you did when you so clearly did not).

  • If Greece Exits, Here Is What Happens

    Now that the Greek exit is back to being topic #1 of discussion, just as it was back in the fall of 2011, and the media has been flooded by groundless speculation posited by journalists who have never used excel in their lives and are merely paid mouthpieces of bigger bank interests (long live access journalism and the book sales it facilitates), it is time to rewind to a step by step analysis of precisely what will happen in the moment before Greece announces the EMU exit, how the transition from pre to post occurs, and the aftermath of what said transition would entail, courtesy of one of the smarter minds out there, Citi’s Willem Buiter, who pontificated precisely on this topic last year, and whose thoughts he has graciously provided for all to read on his own website. Of course, take all of this with a huge grain of salt – these are observations by the chief economist of a bank which will likely be swept aside the second the EMU starts the post-Grexit rumble.

    From Willem Buiter

    What happens when Greece exits from the euro area?

    Were Greece to be forced out of the euro area (say by the ECB refusing to continue lending to Greek banks through the regular channels at the Eurosystem and stopping Greece’s access to enhanced credit support (ELA) at the Greek central bank), there would be no reason for Greece not to repudiate completely all sovereign debt held by the private sector and by the ECB. Domestic political pressures might even drive the government of the day to repudiate the loans it had received from the Greek Loan Facility and from the EFSF, despite it having been issued under English law. Only the IMF would be likely to continue to be exempt from a default on its exposure, because a newly ex-euro area Greece would need all the friends it could get – outside the EU. In the case of a confrontation-driven Greek exit from the euro area, we would therefore expect to see around a 90 percent NPV cut in its sovereign debt, with 100 percent NPV losses on all debt issued under Greek law, including the debt held, directly or directly, by the ECB/Eurosystem. We would also expect 100 percent NPV losses on the loans by the Greek Loan Facility and the EFSF to the Greek sovereign.

    Consequences for Greece

    Costs of EA exit for Greece are very high, most notably the damage done to balance sheets of Greek banks and nonfinancial corporates in anticipation of EA exit.

    We have recently discussed at length what we think would happen should Greece leave the euro area (Buiter and Rahbari (2011)), so we shall be brief here. Note that we assume that Greece exits the euro area and does not engage in the technical fudge discussed in Buiter and Rahbari (2011), under which it technically stays in the euro area but introduces a second, parallel or complementary currency.

    The instant before Greece exits it (somehow) introduces a new currency (the New Drachma or ND, say). Assume for simplicity that at the moment of its introduction the exchange rate between the ND and the euro is 1 for 1. This currency then immediately depreciates sharply vis-à-vis the euro (by 40 percent seems a reasonable point estimate). All pre-existing financial instruments and contracts under Greek law are redenominated into ND at the 1 for 1 exchange rate.

    What this means is that, as soon as the possibility of a Greek exit becomes known, there will be a bank run in Greece and denial of further funding to any and all entities, private or public, through instruments and contracts under Greek law. Holders of existing euro-denominated contracts under Greek law want to avoid their conversion into ND and the subsequent sharp depreciation of the ND. The Greek banking system would be destroyed even before Greece had left the euro area.

    There would remain many contracts and financial instruments involving Greek private and public entities denominated in euro (or other currencies, like the US dollar) that are not under Greek law. These would not get redenominated into ND. With part of their balance sheet redenominated into ND which would depreciate sharply and the rest remaining denominated in euro and other currencies, any portfolio mismatch would cause disruptive capital gains and losses for what’s left of the Greek banking system, Greek non-bank financial institutions and any private or public entity with a (now) mismatched balance sheet. Widespread defaults seem certain.

    As discussed in Buiter and Rahbari (2011), we believe that the improvement in Greek competitiveness that would result from the introduction of the ND and its sharp depreciation vis-à-vis the euro would be short-lived in the absence of meaningful further structural reform of labour markets, product markets and the public sector. Higher domestic Greek ND-denominated wage inflation and other domestic cost inflation would swiftly restore the old uncompetitive real equilibrium or a worse one, given the diminution of pressures for structural reform resulting from euro area exit.

    In our view, the bottom line for Greece from an exit is therefore a financial collapse and an even deeper recession than the country is already experiencing – probably a depression.

    Monetising the deficit

    A key difference between the ‘Greece stays in’ and the ‘Greece exits’ scenarios is that we believe/assume that if Greece remains a member of the euro area, there would be official funding for the Greek sovereign (from the Greek Loan Facility, the EFSF and the IMF), even after the inevitable deep coercive Greek sovereign debt restructuring, and even if NPV losses were imposed on the official creditors – the Greek Loan Facility, the EFSF and the ECB. The ECB probably would no longer engage in outright purchases of Greek sovereign debt through the SMP, but the EFSF would be able to take over that role following the enhancement and enlargement of the EFSF later in 2011.4 If Greece remains a member of the euro area, the ECB would likewise, in our view, continue to fund Greek banks (which would have to be recapitalised following the Greek sovereign debt restructuring), both through the regular liquidity facilities of the Eurosystem and through the ELA.

    In the case of a (confrontational and bitter) departure of Greece from the euro area, it is likely that all official funding would vanish, at least for a while, even from the IMF (which would, under our most likely scenario, not have suffered any losses on its loans to the Greek sovereign). The ECB/Eurosystem would, of course, following a Greek exit, cease funding the Greek banks.

    This means that the Greek sovereign would either have to close its budget gap through additional fiscal austerity, following its departure from the euro area, or find other means to finance it. The gap would be the primary (non-interest) general government deficit plus the interest due on the debt the Greek sovereign would continue to serve (the debt issued under foreign law other than the loans from the Greek Loan Facility and the EFSF, and the debt to the IMF), plus any refinancing of this remaining sovereign debt as it matured. We expect the Greek General Government deficit, including interest, to come out at around 10 percent of GDP for 2011, while the programme target is 7.6 percent. General government interest as a share of GDP is likely to be around 7.2 percent of GDP in 2011, which means that we expect the primary General Government deficit to be around 2.8 percent of GDP. We don’t know the interest bill in 2011 for the IMF loan and for the outstanding privately held debt issued under foreign law. If we assume that these account for 10 percent of the total interest bill on the general government debt – probably an overestimate as interest rates on the IMF loan are lower than on the rest of Troika funding – then we would have to add 0.72 percent to the primary deficit as a percentage of GDP to obtain an estimate of the budget deficit that would have to be funded by the Greek government, say 3.5 percent of GDP. We would have to add to that any maturing IMF loans and any maturing privately held sovereign debt not under Greek law. This is on the assumption that even those creditors under international law that continue to get serviced in full, would prefer not to renew their exposure to the Greek sovereign once they have been repaid. In addition, future disbursements by the IMF under the first Greek programme would be at risk following a Greek exit. This would create a further funding gap.

    Assume the Greek authorities end up (very optimistically) having to find a further 5 percent of GDP worth of financing. This could be done by borrowing or by monetary financing. Borrowing in ND-denominated debt would likely be very costly. Nominal interest rates would be high because of high anticipated inflation – inflation that would indeed be likely to materialise. Real interest rates would also be high.

    Although the Greek sovereign’s ability to service newly issued debt would be greatly enhanced following its repudiation of most of its outstanding debt, the default would raise doubts about its future willingness to service its debt. Default risk premia and liquidity premia (the market for ND-denominated Greek debt would be thin) would raise the cost of borrowing in ND-denominated debt. Even if the Greek authorities were to borrow under foreign law by issuing debt denominated in US dollars or euro, default risk premia and liquidity premia would likely be prohibitive for at least the first few quarters following the kind of confrontational or non-consensual debt default we would expect if Greece were pushed out of the euro area.

    So the authorities might have to finance at least 5 percent worth of GDP through issuance of ND base money, under circumstances where the markets would inevitably expect a high rate of inflation. The demand for real ND base money would be very limited. The country would likely remain de-facto euroised to a significant extent, with euro notes constituting an attractive store of value and means of payment even for domestic transactions relative to New Drachma notes. We have few observations on post-currency union exit base money demand to tell us whether a 5 percent of GDP expected inflation tax could be extracted at all by the issuance of ND – that is, at any rate of inflation. If it is feasible at all, it would probably involve a very high rate of inflation. It is possible that we would end up with hyperinflation.

    The obvious alternative to monetisation is a further tightening in the primary deficit through additional fiscal austerity (of something under 5 percent of GDP), allowing for some non-inflationary issuance of base money. Because Greek exit would be in part the result of austerity fatigue in Greece, this outcome does not seem likely.

    A collapsed banking system, widespread default throughout the economy, a continuing non-competitive economy and high inflation with a material risk of hyperinflation would make for a deep and enduring recession/depression in Greece. Social and political dislocation would be certain. There would, in our view, be a material risk of a downward spiral of dysfunctional politics and economics.

    Consequences for the remaining euro area and EU member states of a Greek exit

    For the world outside Greece, and especially for the remaining euro area member states following a Greek exit, the key insight would be that a taboo was broken with a euro area exit by Greece. The irrevocably fixed conversion rates at which the old Drachma was joined to the euro in 2001 would, de facto, have been revoked. The permanent currency union would have been revealed to be a snowball on a hot stove.

    Not only would Greek official credibility be shot, the same thing would happen for the rest of the EA member states in our view. First, monetary union is a two-sided binding commitment. Both sides renege if the accord is broken. Second, Greece would only exit from the euro area if it was driven out by the rest of the euro area member states, with the active cooperation of the ECB. Even though it would be Greece that cuts the umbilical cord, it would be clear for all the world to see that it was the remaining euro area member states and the ECB that forced them to wield the scalpel.

    It does not help to say that Greece ought never to have been admitted to the euro area because the authorities during the years leading up to Greek membership in 2001, knowingly falsified the fiscal data to meet the Maastricht criteria for EMU admission, and continued doing so for long afterwards.6 After all, what Greece did was just an exaggerated version of the deliberate data manipulation, distortion and misrepresentation that allowed the vast majority of the euro area member states to join the EMU, including quite a few from what is now called the core euro area7. The preventive arm of the euro area, the Stability and Growth Pact (SGP) which, if it had been enforced would have prevented the Greek situation from arising, was emasculated by Germany and France in 2004, when these two countries were about to be at the receiving end of its enforcement.

    Euro area membership is a two-sided commitment. If Greece fails to keep that commitment and exits, the remaining members also and equally fail to keep their commitment. This is not just a morality tale. It has highly practical implications. When Greece can exit, any country can exit. If we look at the austerity fatigue and resistance to structural reform in the rest of the periphery and in quite a few core euro area countries, it is not plausible to argue that the Greek case is completely unique and that its exit creates no precedent. Despite the fact that both Greece’s fiscal situation and its structural, supply-side economic problems are by some margin the most severe in the euro area, Greece’s exit would create a powerful and highly visible precedent.

    As soon as Greece has exited, we expect the markets will focus on the country or countries most likely to exit next from the euro area. Any non-captive/financially sophisticated owner of a deposit account in that country (or in those countries) will withdraw his deposits from banks in countries deemed at risk – even a small risk – of exit. Any non-captive depositor who fears a non-zero risk of the future introduction of a New Escudo, a New Punt, a New Peseta or a New Lira (to name but the most obvious candidates) would withdraw his deposits from the countries involved at the drop of a hat and deposit them in the handful of countries likely to remain in the euro area no matter what – Germany, Luxembourg, the Netherlands, Austria and Finland. The ‘broad periphery’ and ‘soft core’ countries deemed at any risk of exit could of course start issuing deposits under English or New York law in an attempt to stop a deposit run, but even that might not be sufficient. Who wants to have their deposit tied up in litigation for months or years?

    Apart from bank runs in every country deemed, by markets and investors, to be even remotely at risk of exit from the euro area, there would be de facto funding strikes by external investors and lenders for borrowers from these countries. Again, putting under foreign law (most likely English or New York) all cross-border (or perhaps even all domestic) financial contracts and instruments could at most mitigate this but would not cure it.

    The funding strike and deposit run out of the periphery euro area member states (defined very broadly), would create financial havoc and mostly like cause a financial crisis followed by a deep recession in the euro area broad periphery. The counterparty inflow of deposits and diversion of funding to the ‘hard core’ euro area and the removal (or at least substantial reduction) of the risk of ECB monetisation of EA sovereign and bank debt would drive up the euro exchange rate. So the remaining euro area members would suffer (at least temporarily) from an uncompetitive exchange rate as well from the spillovers of the financial and economic crises in the broad periphery.

    As noted by the new IMF Managing Director, Christine Lagarde (Lagarde (2011) and confirmed by Josef Ackerman (Ackermann (2011, p.14)), the European banking sector is seriously undercapitalised. It would not be well-positioned, in our view, to cope with the spillovers and contagion caused by a Greek exit and the fear of further exits. Ms Lagarde was arm-twisted by the EU political leadership, the ECB and the European regulators into a partial retraction of her EU banking sector capital inadequacy alarm call.10 However, this only served to draw attention to the obvious truth that despite the three bank stress tests in the EU since October 2009 and despite the capital raising that has gone on since then both to address any weaknesses revealed by these tests and to anticipate the Basel III capital requirements, the EU banking sector as a whole remains significantly undercapitalised even if sovereign debt is carried at face value. In addition, the warning by Ackermann that “… many European banks would not be able to handle writing down the sovereign bonds they hold on their banking books to market levels…” (Ackermann (2011), see also IMF (2011, pp. 12 -20)) serves as a reminder of the fact that Europe is faced with a combined sovereign debt crisis in the euro area periphery and a potential banking sector insolvency crisis throughout the EU.

    A banking crisis in the euro area and in the EU would most likely result from an exit by Greece from the euro area. The fundamental financial and real economy linkages from the rest of the world to the euro area and the rest of the EU are strong enough to make this a global concern.



    Buiter Says Europe Must Act Now to Avoid a Default


    • Broadly, I support this analysis. Despite the macho assertions of the Germans, the ECB and the useless Commission, the likelihood is that a Greek exit from the euro (especially with uncontrolled debt default as retaliation for the pure viciousness of the Germans) would destroy the euro.

      My only criticism is that under no circumstance should the New Drachma be called the ND: we cannot have people vomiting over their new currency notes.

    • “we cannot have people vomiting over their new currency notes.”

      Now you know how we in Germany feel about a currency called “Euro”

    • “assume”, “assume”, “assume”. Buiter is nothing but a neo-liberal scaremonger. AND… since he’s been wrong on every prognotication he’s made for 4 years, why would you pay attention to him now?

    • The best default Greece could have

      by Wolfgang Munchau

      What would constitute an economically rational choice for Greece, given the economic and political situation? I see four options, each of which is fraught with uncertainty.

      The first would be the status quo: more austerity and economic reforms as outlined by the International Monetary Fund and the EU. One risk is that this would keep Greece in an eternal depression and a debt trap, where economic output fell faster than growth. Another is that, while on paper it might just work economically, it would almost certainly fail politically.

      Indeed, that may already be happening. Syriza, the hard-left anti-austerity party, heads the latest opinion polls. If this result were replicated at a future election, it would also obtain the coveted prize of 50 additional parliamentary seats, a sixth of the size of the entire parliament. So this would end up with the triumph of extremist parties.

      Since this option would work neither economically nor politically, it cannot conceivably be a rational choice.

      The second option would be to pursue the same plan until Greece achieves a primary balance – the fiscal balance before the payment of interest – and then to default, or at least to renegotiate the program with the IMF and the EU. This is more realistic than the first option. A variant of this option was under discussion in the negotiations last week. But there is a risk the austerity needed to reach this point is either so severe, or would take so long, that the political risk would start to have an impact as well.

      The third option is the one outlined by Alexis Tsipras, the Syriza leader. He wants Greece to cancel the program immediately, reverse some of the reforms and consider the possibility of a default on the remaining foreign debt. He claims this would not lead to an exit from the eurozone. He is saying that the EU is bluffing. I am not sure he is right about the latter. But then again, I am not sure he is wrong either.

      What would happen if Greece cancelled the program unilaterally? For a start, the EU would stop the loans to Greece. Greece would then default on all of its foreign debt. But given the primary deficit, Greece would have to impose an even bigger austerity program. Assuming it still wanted to stay in the eurozone, could the others force it to leave?

      The European treaties have no provision for euro members to leave the single currency and certainly no provision to kick somebody out. The treaty also says the currency of the EU is the euro. Technically, the European Central Bank could decide not to accept Greek bonds as collateral. It could refuse to grant a request for emergency liquidity assistance. Greece would then have no choice but to leave “voluntarily”. But this would be an incredibly hostile act.

      Wolfgang Schäuble, the German finance minister, is confident the eurozone would withstand a Greek exit. This reminds me of his judgment last year when he said the eurozone could easily cope with a voluntary participation by bondholders. This may turn out to be another in a long string of misjudgments. I expect investors to bet more aggressively on a break-up if Greece is forced out.

      There are also uncertain risks of financial contagion. As Fitch Ratings said at Friday’s coalition talks, a Greek exit would have a negative impact on the eurozone’s ratings. Tsipras has a point when he says the EU has no interest in pushing Greece out of the euro. The trouble is the eurozone may still do it because its leaders misjudge the situation.

      The fourth option would be an immediate voluntary departure. Greece has only a tiny export sector and, as Willem Buiter of Citibank has said, the initial competitiveness gains would be quickly eroded through domestic policies.

      Of the four, the worst option is actually number one. By following the EU-IMF program, Greece will end up with 10 years of depression, an inevitable euro exit and a possible breakdown of democracy. The best option, in my view, would be a strategy to achieve a primary balance by 2013 and then to default on all outstanding foreign debt, public and private. It would not be popular outside Greece but it would be hard to push Greece out of the eurozone.

      I consider Tsipras’s approach too risky. But I can see why Greek citizens would vote for him. His position is certainly more rational than that of the austerity centre-ground establishment, which can offer no perspective of an economic turnround. This is Germany in the early 1930s all over again.

      This leaves us with a choice between default later and default now. I would prefer default later because it would make for a smoother fiscal adjustment, bring a few sensible reforms and increase the probability that Greece could stay in the eurozone.

      Sadly, the political momentum is swinging the other way.

      source: FT.com




    • Dea Wolgang Munchau, “später, später nur nicht heute sagen alle faulen Leute!”

      Procrastination never solved a problem, it always made problems bigger”

    • @ Pedro

      Hey man ,why don’t you go and fight your own corrupted government?
      Is it because your life is better in Germany and you don’t care if they steal from everybody?

      Is it because you are mentally and sentimentally lazy? Or even dead?

  • Olympiakos ,champion of Europe in basketball.

    There ‘s the government….

  • Dear Mr. Varoufakis, thank you for gracing me with a reply. I follow your text and speeches but not in their entirety. I follow the news and people in the news to the best of my abilities. This does not make me a liar, as you so elegantly insinuate. But I sincerely do not take issue with that.
    You may notice from the posts you ‘ve been receiving, like the one posted by the lady just before me, that the particular party that you endorsed in your Protagon piece “Πριν από την κάλπη. Μέρος Β” i.e. SIRIZA, uses the part of your expressed views that austerity package for Greece will be catastrophic for the country. The said party and does so without equally projecting the other part of your view, namely the one that explains the dire consequences of a unilateral Greek exit from the Eurozone. The public is easily misguided by such allegations, as it already knows that you awarded the said party with a 4/10 score i.e. the highest. (Please refrain from explaining the true meaning of this score, from a game theory – decision making perspective. Because it is public perception that matters).
    Nevertheless and despite the confusion and innuendo creates by your endorsement, in your reply to my post you have steadfastly maintained “been there, done that” as your 8 year daughter likes to say.
    Allow me to elevate you from that 8 year old mentality by saying that this crisis is an escalating crisis and it is reaching a climax NOW. Maybe 2 years ago, when you gave that warning, people chose to take note only of the part that had to do with the unnecessary austerity and not the part of the fateful exit. Maybe they did so because the first part of your sayings was comforting to hear and the second part was not, because it is a given that usually people shy away from hardships and responsibilities. Maybe NOW it is the defining moment where despite the “blue-ishness ” of your head, you overcome your warning – “told you so” fatigue, walk in a TV studio and be so kind as to remind the dazed, confused and sedated Greek TV viewer of what is at stake HERE and NOW. Is that too much to ask of you ? Or you can sit back and see our country crash and burn. Nobody will blame you if you do the latter, you can play that old interview tape with your prophesies in the company of your esteemed friends from academia and humbly note that you did not wish that kind of vindication…

    • Konstantinos, of course you’re not a liar – just so pitifully informed that it seems like you’re lying. When you write without a single credible fact to support your theme, you simply present yourself as a troll disrupting the debate of people who actually are informed.

  • κ.Βαρουφάκη σας παρακολουθώ συνεχώς και σας θαυμάζω μιας και είμαι και εγώ με την σειρά μου οικονομολόγος.Keep it up!!!!

  • Mr Varoufakis,
    I am not an economist, just a person with common sense, yet I find your views to have exactly that-common sense.
    I can’t understand how SYRIZA is an extremist just because it says that the austerity isn’t the way to deal with this crisis, especially after being tried and tragically failed in more than one countries. I have always considered myself a European citizen, an identity that was reinforced after living for 3 years in a country like Australia where the people I could “meet” with in mentality, culture, political thinking, ideals etc were people from other European countries.
    However, what exactly EU represents today;; Is it the unity of the european nations or the dictatorship of Germany and the markets; Is this the Europe that people my age (I am 39) believed in; Definately not, and not because we live on less today but because we are treated like the little child that did something nauty and needs to be put in the closet for punishment until he apologized to his parents and follow them without objection to whereever they go.

    And if we don’t like what EU is today how can we change it without fighting for our beliefs (in the political field); The alternative is to wait for a small “treat” if we are “good boys” for as long as our masters think is sufficient. Who among our european friends would choose that role for himself and his children;

    • The unity of nations you are talking about is in danger of being destroyed if not already destroyed.If we want to save “our” EU first we’ll have to ensure the longevity of that unity.We have to understand this isnt the people’s fault, either Germans or Greeks.

      When we blame the Germans, we have to understand their experience after the euro was introduced.They had to live with frozen wages for 10+ years so that Germany could achieve these economic results.Now they are forced to believe they are paying to save us from the consequences of the “party” (thats what they told them) we’ve been having and they naturally oppose that.On top of that they gave up a strong currency for a weaker one (causing their purchasing power to weaken) and they rightfully say that they were never asked whether they wanted to abandon the DM or not.

      But then they too have to realise we’ve never been asked about anything,and stop acting as if everything in the last 10 years has happened in aggreement between the Greek people and the Greek gvt.Let alone nobody ever worried or said a word about the debt until 08-09,or what are the differences when it comes to debt servicing in the case of having your own currency and in the case of using a foreign currency such as the euro.

      If one sees the whole picture then its a lot harder to become manipulated by the politcians.

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