A New Deal for Greece – a Project Syndicate Op-Ed

Photo of Yanis VaroufakisFor the Project Syndicate page click here.

ATHENS – Three months of negotiations between the Greek government and our European and international partners have brought about much convergence on the steps needed to overcome years of economic crisis and to bring about sustained recovery in Greece. But they have not yet produced a deal. Why? What steps are needed to produce a viable, mutually agreed reform agenda?

We and our partners already agree on much. Greece’s tax system needs to be revamped, and the revenue authorities must be freed from political and corporate influence. The pension system is ailing. The economy’s credit circuits are broken. The labor market has been devastated by the crisis and is deeply segmented, with productivity growth stalled. Public administration is in urgent need of modernization, and public resources must be used more efficiently. Overwhelming obstacles block the formation of new companies. Competition in product markets is far too circumscribed. And inequality has reached outrageous levels, preventing society from uniting behind essential reforms.

This consensus aside, agreement on a new development model for Greece requires overcoming two hurdles. First, we must concur on how to approach Greece’s fiscal consolidation. Second, we need a comprehensive, commonly agreed reform agenda that will underpin that consolidation path and inspire the confidence of Greek society.
Beginning with fiscal consolidation, the issue at hand concerns the method. The “troika” institutions (the European Commission, the European Central Bank, and the International Monetary Fund) have, over the years, relied on a process of backward induction: They set a date (say, the year 2020) and a target for the ratio of nominal debt to national income (say, 120%) that must be achieved before money markets are deemed ready to lend to Greece at reasonable rates. Then, under arbitrary assumptions regarding growth rates, inflation, privatization receipts, and so forth, they compute what primary surpluses are necessary in every year, working backward to the present.

The result of this method, in our government’s opinion, is an “austerity trap.” When fiscal consolidation turns on a predetermined debt ratio to be achieved at a predetermined point in the future, the primary surpluses needed to hit those targets are such that the effect on the private sector undermines the assumed growth rates and thus derails the planned fiscal path. Indeed, this is precisely why previous fiscal-consolidation plans for Greece missed their targets so spectacularly.
Our government’s position is that backward induction should be ditched. Instead, we should map out a forward-looking plan based on reasonable assumptions about the primary surpluses consistent with the rates of output growth, net investment, and export expansion that can stabilize Greece’s economy and debt ratio. If this means that the debt-to-GDP ratio will be higher than 120% in 2020, we devise smart ways to rationalize, re-profile, or restructure the debt – keeping in mind the aim of maximizing the effective present value that will be returned to Greece’s creditors.

Besides convincing the troika that our debt sustainability analysis should avoid the austerity trap, we must overcome the second hurdle: the “reform trap.” The previous reform program, which our partners are so adamant should not be “rolled back” by our government, was founded on internal devaluation, wage and pension cuts, loss of labor protections, and price-maximizing privatization of public assets.

Our partners believe that, given time, this agenda will work. If wages fall further, employment will rise. The way to cure an ailing pension system is to cut pensions. And privatizations should aim at higher sale prices to pay off debt that many (privately) agree is unsustainable.

By contrast, our government believes that this program has failed, leaving the population weary of reform. The best evidence of this failure is that, despite a huge drop in wages and costs, export growth has been flat (the elimination of the current-account deficit being due exclusively to the collapse of imports).

Additional wage cuts will not help export-oriented companies, which are mired in a credit crunch. And further cuts in pensions will not address the true causes of the pension system’s troubles (low employment and vast undeclared labor). Such measures will merely cause further damage to Greece’s already-stressed social fabric, rendering it incapable of providing the support that our reform agenda desperately needs.

The current disagreements with our partners are not unbridgeable. Our government is eager to rationalize the pension system (for example, by limiting early retirement), proceed with partial privatization of public assets, address the non-performing loans that are clogging the economy’s credit circuits, create a fully independent tax commission, and boost entrepreneurship. The differences that remain concern how we understand the relationships between the various reforms and the macro environment.

None of this means that common ground cannot be achieved immediately. The Greek government wants a fiscal-consolidation path that makes sense, and we want reforms that all sides believe are important. Our task is to convince our partners that our undertakings are strategic, rather than tactical, and that our logic is sound. Their task is to let go of an approach that has failed.


  • While I agree with much of what you said. You and your prime minister have stated that this is not a Greek problem, but a European problem. I fully agree. The time for stop-gap measures has passed. Even with an agreement in hand, Greece or some other country will just cause another crisis.

    What must happen now and in the context of your current negotiations is to agree on a Framework Agreement that leads to a true fiscal union over a time period of – let’s say – 20 years. This gradual transition gives everybody the time to overcome constitutional hurdles, while committing themselves to this process. Only if the pillars of a true monetary union are in place, will we avoid future crises. This would be at the center of my negotiation, because Greek sacrifices will result in nothing unless we aggressively fix the structural problems of the monetary union. If there is no political will to do this, the Euro will eventually fail and Greece should simply default now.

  • Reblogged this on Gestaltz and commented:
    The last two sentences strike me as a perfect summary of the impasse:

    Our task is to convince our partners that our undertakings are strategic, rather than tactical, and that our logic is sound. Their task is to let go of an approach that has failed.

  • Dear Yianis,

    From all of the respect I have for your academic work as well as your efforts in tackling the so called ‘self-perpetuating’ crisis (I fully agree with this term), I need to warn you about the serious consequences of the current negotiation failures to the entire Greek public. Not only that your popularity is declining (such as the popularity of the whole Tsipras’ government) – which, in fact, implies a possible return of New Democracy in the future – but at the same time you seem to be trapped within the two edges: on one hand, a Grexit that seems to be inevitable, on the other, it seems really hard for you to play the Grexit card, after you have so much condemned this move, supposedly being Catastrophic. When such cases arise, leaders have to construct a different discourse, that negate their previous declaration, in a way that it cannot be seen as a defeat. Remember, Machiavelli, this great passionate republican being sent to prison after the Medici coup, which usurped democracy in Florence. But he escaped torture and regained his position in government after he approached the Medici; he wrote the Prince, and set up a new discourse. It is the same with your case. The time for Grexit has come, but you have to propose it, in a way that it will not be presented as a threat to the Greek public, but as a friendly solution. Otherwise, the public is getting more and more tired, and will soon start hating you. Hatred against your government might result to a potential rise of Golden Dawn to power, or to the consolidation of the TINA to the minds of millions of people, who believe in your cause. You have no choice: you must be loved or be feared. Hitherto, you seem to be loved by the Greek people, and feared by your enemies. But you gotta know, you must escape hatred. If you cannot escape hatred, nothing will save your government.

  • @Varoufakis sez:

    “Three months of negotiations between the Greek government and our European and international partners have brought about much convergence on the steps needed to overcome years of economic crisis and to bring about sustained recovery in Greece.

    What does ‘sustained recovery’ mean? More car sales in Greece? More tract house ‘villas’, more hotel ‘resorts’, casinos and construction projects? More flat screen TVs and smart phones? More cafe’s and restaurants? More jobs selling Chinese-made junk to people with no real income (but access to Frankfurt credit)? What is recovery? Is it banks in rude good health or is it the purchase of more German submarines, tanks and aircraft? Is Greece to compete with China or Taiwan as industrial producers, with Portugal or Bulgaria?

    Nobody seems to understand the new world we all live in now, a world that has been bankrupted already by resource-depleting ‘lifestyles’. If this is what Varoufakis defends he has lost already no matter what the agencies and institutions agree to.

    Europe burns through 12 million barrels of imported crude oil per DAY, every barrel is paid for with borrowed euros (BP). As a consequence Europe is absolutely bankrupt; monetary flexibility is a myth; the price of the euro is set at gas stations by millions of motorists buying (or not buying) fuel . Central banks and fiscal establishment in Brussels are irrelevant. Europeans are slaves to the common currency regime because the euro = gasoline.

    The first thing the Greeks (and Japanese, Chinese, Americans and the rest) must do is face reality. What is underway in Greece and elsewhere is ‘Conservation by Other Means™’. There is no return to the ‘good old days’ of wasteful consumption and auto-centric ‘development’. It’s over, it is untenable; untenability IS the crisis … this should be clear to both the Greek government, the IMF, the ECB and the monetary establishment. The second order of business is for the Greek government to begin to issue euro payments to banks as well as individuals/firms in Greece who do business with the government. If Greek government can issue collateral by fiat it can issue payments the same way. By doing so the Greeks can end the artificial ‘money shortage’ that is strangling them and buy some precious time.

    Greeks can use the time gained to reconfigure their economy around conservation and husbandry: for Greeks to get rid of their useless, non-remunerative cars, to cease importing fossil fuel, to cease borrowing across state lines and to learn how to live within Greek means. One way or the other the Greeks (human race) is going to do these things whether they want to or not.

    Cannibalizing the world’s capital/resource endowment for fun is at the heart of the ongoing crisis in Europe and elsewhere. The human technology experiment including its myriad mechanical toys is coming hard up against the limits set by thermodynamics. Physical forces do not negotiate, conditions are set and humans adapt … or else. The inevitable outcome should the Greeks stubbornly carry on is that the country becomes Somalia … (or South Sudan, Nigeria, Ukraine, Bosnia, Iraq, Liberia, Sierra Leone, Kenya, Republic of Congo, Chechnya, Yemen, Syria, etc.) … or some kind of hybrid mafia gangland dependent upon smuggling and murder.

    The inevitable slide into the rat hole will not do Varoufakis’ or Syriza’s reputation any good, either. Not much of a choice, is it?

    • Yes, I completely agree with your points, and more importantly, so did Varoufakis before he became Greek FM. See the interview I did along with another host, here: http://www.opednews.com/articles/Will-Greece-or-the-EU-Blin-by-Scott-Baker-Assets_Austerity_Debt_Finance-150208-883.html
      and his comments on a Sovereign Currency alternative specifically.
      Varoufakis is right to reform the tax collection especially for the higher end where taxes are notoriously undercollected, but the middle class Greek cannot take any more austerity, and the country itself needs more money in circulation.
      And as I said in my article, the interests of the banks and of Greece are not aligned, and the former means to harm the latter but taking over public assets. I am shocked and saddened that privatizing public assets is even on the agenda at this point. This won’t even buy time, it’ll just add “tools” the the already beleaguered Greek citizen.

    • You obviously wanted to get your views off your chest, BUT:

      “More car sales in Greece? More tract house ‘villas’, more hotel ‘resorts’, casinos and construction projects? More flat screen TVs and smart phones? More cafe’s and restaurants? More jobs selling Chinese-made junk to people with no real income (but access to Frankfurt credit)?”

      Speaking from Greece to someone obviously not here, and who obviously hasn’t followed what has happened in Greece over 6 years, this is a truly insulting fantasy statement.

      – The number of cars in Greece has almost halved since 2009.
      – The construction industry has collapsed 82% – and this number would be worse if EU-funded metro works were not underway, and a contracted railway extension and highway finished. There are no tract houses in Greece and most homes are fully owned. Mortgages were only introduced in Greece with the euro, by foreign banks, and take-up was limited. Real estate prices have collapsed 40% and flats and houses stand empty through emigration, impossibility to rent.
      – There are only 3 licensed casinos, all pre-dating the crisis, 2 by 75 years.
      – The minimum wage is 530 EUR/month before taxes – provided you are lucky enough to be paid and are above 25. Below age 25 the salary is 430/ month.
      – Cost of food is higher than Germany. Utilities and taxes have risen through the roof and inability to pay means your property can be taken.
      – Unemployment insurance is available for only 9% of workers. Meanwhile there is no social welfare, no dole, no public housing and unemployment means that you have no access to medical care. Public hospitals and clinics have been shut down on islands and in remote communities.
      – 42% of families survive on one family member’s pension. This can involve 3 and even 4 generations.
      – Half of children in Greece are at or below the poverty line.
      – Some pensions have been reduced to 100EUR a month.
      – A quarter of Greeks depend on charity meals and food hand outs.

      I mention this to suggest to you that ‘Greek values’ are NOT as you assume, that you have made a mistake and that you go and preach elsewhere.

    • I very much agree to Elenits here. If followed the austerity politics forced upon Greece over the last 5-6 years one simply can’t state what you did, steve from virginia. (Though you surely have valuable ideas in general, the marketradical countries ignore climate changes, people fly like there was no tomorrow, poor people in the USA collide with 1% super-rich, and so on. But none of this has any meaning in this minute for Greece – after the horrors EU, Troika, and the always hiding Merkel (Schäuble, CDU, FDP, SPD, the horrible green party of Germany) did to Greece.
      scottonthespot, who doesn’t read steve’s article the way Elenits did, stated that the middle class (even naming that so is not longer accurate by the way, austerity destroyed much of the middle classes and impoverished it) cannot pay more taxes. Of course not. But that is what “the institutions” want.

      Elenits described how EU and Germany and the market-radicals (who were defended by a lot of people here over the years, greek ones like Dean Plassaras, neolib-far right people from Europe voting for german AfD and more) made the life of millions horrible, calling that “help”. Years of nightmare it was.
      I would not say that people who describe other parts of a market-radical horrors like Steve rightly does should be thrown out from discussions, but it should be clear that Greece faces since years exactly what Elenits describes.
      Ignoring the absurdities of a capitalist world gone wrong and a billion thinking they could fly 25 times per year for weekend-trips to shop somewhere (one can read, amongst many books since decades, Naomi Klein’s “this changes everything” for that) is a fact, and is/was stupid, some of us talk ourselves blue in the face since 25 years.

      Yet what you write, Steve, resembles a person in a Dickens novel that would go to Joe, the crossing-sweeper, in “Bleak house”, and telling him that he lived the wrong way and had to see that the fog and the dust in London at that time was Joe’s most urgent problem, some days before he died. Of poverty.

      And mind, to Ukraine – this is another nightmare of western geopolitics. Ukraine fits not in your description, Steve. On the contrary, the western “help” for Ukraine (and Nuland openly spoke about how the USA wanted Jazenjuk as leader, not Merkel’s choice Klitschko, who couldn’t even speak the ukrainian language right) is, at least for now, NOT associated with many hardcore austerity measures that Greece had to accept. Double moral standards, indeed….
      You see, if USA/EU want more power, then suddenly money flows in billions, but no Merkel or Schäuble are echoing what the banks and the huge companies say – at first. What Greece has to suffer, Ukraine – at first – has not. Nobody seems to notice or highlight that in our media. Ukraine is devastating poor too (even more ‘thanks’ to the civil war going on after a horribly bad US-EU-politics and because Russia and EU/USA fight about Ukraine and power). Poroshenko gets away by saying “we won’t do anything like you want from us, just give us the money.” Merkel and Schäuble might not agree over the years, but for now nobody shouts things they shout into the face of Yanis.

      It is by the way beyond words what one feels after reading bloody (yes) european and german media after Syriza seems (if that was true, one always has to ask reading our media) “sidelined” Yanis. The posh postmodern “style design analyses” of some Spiegel-“journalists” like Jurek Skrobala are continued now in the press. Journalists like this Herr Srobala are surely amongst the most ignorant people in this world. There are urgent problems now, but if you have some time in the future, type Jurek Skrobala and Varoufakis in your browser, and read. Disgusting.

      Greece would have needed a strong european opposition. But after 20 postmodern years at universities there is no strong opposition yet. We will learn in some future why countries like Portugal, Spain, Italy and others did not help. Back-room threats by the EU? Fear? Ignorance? We cannot know.. In Germany there is a small opposition, and one single tv cabaret against hundreds of embedded reports, Elenits. Argyris Sfondouris, whose parents and family was killed by german Nazis and who never got anything as recompensation from Germany at all, appeared there. It was of course not enough, maybe 2-3 millions of people watched it on TV. Even if you don’t speak german, watch the last minutes, one understands everything without words. The whole cabaret was about the horrors Germany and EU do to Greece. http://www.youtube.com/watch?v=FbRKcwhRKhc

  • “Abroad, an operation is in process by the system, and especially by the German side, to throw Yanis Varoufakis from his position as Finance Minister, probably because he is considered another barrier to Merkel’s plans to implement a Treuhand type operation in Europe, starting from Greece. Apart from the humoristic side, the war by the media is targeting Varoufakis’ reliability.”


  • Θα με προβλημάτιζε άν ΔΕΝ σε χτυπάγανε!!! Όσο περισσότερο σε χτυπάνε, τόσο περισσότερο σε στηρίζουμε!

  • Dedicated to Yanis’ fine effort. Be strong Yanis and don’t waiver. You have more friends that you could possibly imagine and we are all routing for you.

  • I take this opportunity to post an apparently interesting question:
    Certain posts have appeared recently claiming that 227bn euros have been given to Greece by her lenders since 2010, and 270bn have been paid back by Greece during the same period.
    I wonder if the Greek finance minister would care providing data on such money flow during the last 5 years, confirming or rejecting the claims.