Council of Foreign Relations, NYC: The Future of Greece and the Eurozone – in conversation with Standard & Poor’s Chief Economist

03/05/2016 by

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On 25th April 2015 I had the pleasure to engage in an open discussion with Paul Sheard, Chief Economist with Standard and Poor’s, at the Council of Foreign Relations in New York. Watch the video of our discussion and/or read the transcript below.

SHEARD: Yanis Varoufakis is on the faculty of economic studies at the University of Athens, and of course, most notably, I think for this occasion, the former minister of finance of the Hellenic Republic, Greece.

And I think it’s fair to say, Yanis, that you had one of the most colorful and controversial tours of duty as a finance minister in the modern era. So what I’d like to do is open up the conversation first of all by going back to that—those very fateful 10 days or so in the last week of June and the first week of July last year, which really did make anybody who was paying attention—make their head spin.

Just to frame this a little bit for the audience, to remind you, when Syriza had come in, I think the program that was in place at the time—that was in January—had about a month to run. Then you had a four-month reprieve through to the end of June. And then, just a few days before that deadline loomed, I guess the Eurogroup made a “take it or leave it” offer to Greece and Mr. Tsipras surprised the world by calling a referendum. Various other things happened. I think the banks were closed, so it was this pretty hairy stuff.

For about, you know, seven or eight days later, that referendum was held and there was a resounding “no” to the Eurogroup proposal. But then, that very night, things took a big turn, about 180-degree turn. Mr. Tsipras then announced that he was going to essentially negotiate with the Eurogroup with a view to accepting some kind of package, and at that point you resigned as the minister of finance. I think I’m—correct me if I’m wrong—more or less have that right.

So I’d love to start by just getting your view on this. What was going on in that week or so and how should we understand the history books, exactly what happened?

VAROUFAKIS: That 10-day period seemed to the outside world as if it was the moment of truth. It wasn’t. Even before that 10-day period had begun, my heart sunk. I knew that the cause was lost. It had been lost sometime in March-April. I can explain why. And we were going through the motions.

I was hoping that a strong referendum result would energize my prime minister to pick up where we had left off. And I can explain what I mean by that. But in the end—well, the referendum result itself was a major surprise to me. My wife, Danae, who is here with us today, can confirm that on the afternoon of the referendum I sat on my desk—on my desk—at my desk and I penned my fifth—no, fourth letter of resignation, on the assumption that we had lost the referendum, that the “yes” had won.

And a few hours later I found out that the incredible Greek people had voted 62 percent. Every single constituency in the land had voted “no.” And I just couldn’t believe my eyes. And I thought that that would hopefully re-energize our team and the prime minister. It didn’t. I walked into this office. He said, it’s time to surrender, just when the Greek people had backed us. And I tried for three hours to dissuade him. I failed, so I walked out and resigned.

This opportunity to address you and to have this discussion with you is precious to me because of the major disconnect between what was going on and what was being reported by the mainstream media—actually by all the media. Never before in my life had I imagined that it was possible to have such a gap, a chasm between reality and reported reality.

SHEARD: So would you like to amplify that and maybe also—you made some reference to the game was essentially up in March or so of last year but continued right through to the dramatic events at the end of June, early July.

VAROUFAKIS: Allow me to just frame the discussion as succinctly as I can by saying that the problem began, for argument’s sake, maybe starting in 1821 with the Greek Revolution. No, the problem began in 2010 when the Greek state went bankrupt—well and thoroughly, deeply, irreversibly insolvent, and the great and the good in Europe—that included the Central Bank, Chancellor Merkel, Wolfgang Schäuble, the president of the commission, the president of the Euro Pool Group, the IMF, and the Greek government—decided to treat a case of irreversible insolvency as a case of illiquidity, to pile up on the shoulders of the most bankrupt European nation that lacked a central bank to have its back, the largest loan in history on conditions of guarantee to shrink nominal GDP.

And that would never end well. It was a typical case of extending the crisis and pretending that it was solved. And of course eight months later—nine months later, in 2011, 2012, there was a need for another “extend-and-pretend” loan, and then another one, and the another one.

And the only reason why I accepted the challenge of doing something that I had never imagined I would ever do in my life, which is go into politics, to run for parliament, only because the prime minister—the man who was going to be prime minister invited me to be his finance minister—was because he and I had a simple agreement. I was not a member of the party, so I was an outside within the party and within the Eurogroup, not a very enviable position to be in.

The agreement we had was very simple: We’re not going to take another loan from European taxpayers until and unless the Greek private sector stabilized. It’s really very simple: No more “extent and pretend,” and we would go down in flames rather than sign on the dotted line of another such agreement.

And the reason why I’m saying that the last 10 days was neither here nor there really was because from day one—well, actually, no, day three, I moved into the ministry on the 27th of January. Prior to that, Tsipras and I had agreed that the moment the troika lenders threatens us with bank closures—because it was clear that that’s what they were going to do, and we had agreed on how to retaliate if they did this—

SHEARD: Because they could basically cut you off, cut the Greek banks and banking system off from the euro system settlements.

VAROUFAKIS: Well, the eurozone is a remarkable set of institutions. We have a central bank without a state and states without a central bank, so there’s nothing easier than closing down the banking system of one of those member states when you’ve got—especially after the deleveraging and the credit crunch following 2008, you have a death dance between insolvent states and insolvent nation state domiciled banks. And if the Central Bank cuts liquidity off or signals an intention to think about cutting liquidity off, it’s finished.

On the 3rd of December, 2014, more than a month before our election, the Central Bank, through its representative in Greece—the governor of the Bank of Greece, which was of course part of the European system of central banks—did something unique in the history of central banking globally. He came out with a statement out of the blue signaling his concern about the liquidity of the Greek banks.

You know the story about the two men who meet at the golf club and one of them says, I made my money by burning down my business and, you know, claiming the insurance. And the other one says, well, I had a similar experience; mine was flooded. And the first man asked, how did you start the flood? (Laughter.) In the case of, you know, the 3rd of December—

SHEARD: How do you start a run on the banking system?

VAROUFAKIS: Yeah. Well, it’s very simple. If the Central Bank announces the possibility of a liquidity crisis of the banks, that’s it; it happens the next morning. So we had a bank run—a slow-burning bank run before we came in. And we knew that this was going to happen, and we knew as it happened.

Thursday I was at the ministry. President Dijsselbloem of the Eurogroup visited in my office. We had warm-up meetings with all the aids and committees and all of that and then we had a tête-à-tête meeting, a bilateral meeting. Immediately, the first thing he said to me is, what do you intend to do with the existing problem?

Now, let me remind you, ladies and gentlemen, the existing problem was a fiscal consolidation problem that was attached to the loans, which reduced nominal GDP by 28 percent, increased unemployment from 8 (percent) to 28 percent, ensured that there was no bank credit even to profitable firms, and effectively crashed the economy.

So I said to him, look, Jeroen, this is a problem that clearly has not worked. And the reason why I’m here, why I was elected, was because the Greek people have had enough with it.

Now, at the same time, I understand that the states have continued it, which means that we have a commitment to the program because previous governments have signed it. But, look, in democracies, like Europe is a democracy, when there are two clashing principles—on the one hand the principle of continuity and on the other the principle of rationality and democracy—what do you do? You find common ground. And he turned around and said, well, that won’t work. If you insist on renegotiating this package, your banks will be closed on the 28th of February. That was on the 27th of January.

So this was a clear clash that was engineered on the other side. And the only way of averting it—and this was our outside option if you want in game theoretical terms, or our leverage—we had a bunch of bonds, Greek government bonds, old Greek government bonds, that the ECB had purchased under Jean-Claude Trichet in 2011. And these—this was the last slice of that Greek debt, which was in Greek law. So it was not in U.S. law, New York law. It was not in London law. It was in Greek law. So all I had to do was to sign—I didn’t even have to take it to parliament.

I had the document ready, a ministerial decree to postpone payment of these bonds by 20 years. And that would be hugely detrimental to Mario Draghi’s quantitative easing, because he had a major clash with Jens Weidmann, the president of the Bundesbank, who was taking him to the Constitutional Court of Germany for violating the charter of ECB by doing QE. And the only way that QE was allowed to continue was the pledge by the president of the ECB that there would be no haircuts at all, no restructuring of any paper at all that the ECB ever buys, as if this is a credible promise, but nevertheless—especially the euro. (Laughs.)

And if I restructure that paper, QE would be in trouble. So as long as we signaled to the other side that if you close down our banks—a unilateral threat—but if you close down our banks, then we will restructure that debt. This would be, in my estimation, sufficient to bring the two parties together to do what? To find the compromise. And unfortunately, and the reason why it was lost in March/April, members of my government signals to Mario Draghi, don’t worry about Varoufakis, we won’t let him do it. So it was all finished by then.

SHEARD: So that was your leverage, that was your—you mentioned game theory. You’re well-known as an expert on game theory. I think you’ve written books, et cetera. And many people, I think, in the markets who knew this were looking at you and saying, well, the minister must be using game theory here. That was your leverage. You didn’t mention another form of leverage that many people thought you had, which was the ultimate, if you like, threat, whether it was credible or not, of exiting the eurozone. But it seemed that what happened there was you didn’t have a lot of leverage there because some people in the euro group were actually perhaps saying maybe Greece should leave the eurozone. So did you get out-bluffed? Or was that never something that you—

VAROUFAKIS: No, it was never a strategy of mine. And I’ll tell you why. But let me touch upon the game theory. I spent 20, 25 years teaching game theory and researching game theory. And anyone who has ever been taught by me will confirm that my lesson—my lesson—my message to my students was: Game theory is a wonderful edifice, aesthetic, mathematical model by which to train your mind. But do not confuse that which is interesting with that which is useful. And if you try to apply this in negotiations—in real life negotiations, either in the corporate world or in politics—then you are a danger to others and to yourself. (Laughter.)

So I’m clean of this. And actually, I wrote an op-ed in The New York Times immediately after I became finance minister with a title—the telling title—“No Time for Games.” Greece was a bankrupt state, still is. We did not have either the moral or the analytical reason to play games and call bluffs. My view was very simple. When you’re bankrupt, you do not take another loan until you restructure your loans and your operation. This is what the bankruptcy law in Wall Street will tell you. This is what any proper bank will tell you. It’s not left, right, it’s just common sense.

And this is why I find myself in—you know, it took a very deep crisis in Greece to create circumstances where someone like me, I’m a left-winger, can say the same thing to a left-wing audience and to an audience of bankers and be met with agreement. So there was no bluffing. Now, given that there was not going to be any bluffing. I would never use Grexit as a tool, as a method for gaining leverage. Why? Because I didn’t believe in Grexit. I don’t believe in the euro. I think we should not have created it. I campaigned against it. But I also implore people, especially friends of mine and ideological friends of mine, to make the sharp distinction between static and dynamic analysis.

It’s one thing to say we should not have gotten in. It’s a very different thing to say we should now get out. Because once you’re in, the path that led you in does not exist for you to backtrack, to reverse upon. You fall off a cliff, to put it very bluntly. Go back to—

SHEARD: You’re at a different part of the game tree now.


SHEARD: You can’t go back.

VAROUFAKIS: And you can’t go back. That’s it. There’s an irreversibility, yeah?

SHEARD: So let me—I’d like to bring the discussion—

VAROUFAKIS: (Don’t be mad at us ?).

SHEARD: I’d like to bring the discussion to, you know, the contemporary situation, where the negotiations over that program—although it was announced and the European Stability Mechanism signed off on it, et cetera—the actual first review, and to bring the IMF in particular back into the game, is still going on. And the IMF position seems to be a little bit, I guess, similar to yours, that they take issue with the debt sustainability analysis. On the other hand, the euro group do not want anything that looks like a nominal haircut. And then you would have people who claim that, you know, the Greek government maybe has been dragging its feet on different reforms. So there seems to be still a stalemate, that seems to be getting closer to resolution, if we take the recent few days. But that’s my question.

VAROUFAKIS: Have you listened to the discussions between Poul Thomsen and Delia Velkouleskou that was leaked by WikiLeaks? It’s worth a listen, or a read.

SHEARD: I did. I listened to that.

VAROUFAKIS: It really is worth it.

SHEARD: I did listen to that. But what is your assessment of the situation on the ground now, the Greek economy, and, you know, is this Grexit risk—you may not want Grexit—but is the Grexit risk going to start to loom large again?

VAROUFAKIS: To understand what went wrong last year, and the reason why my removal has not helped, you’ve got to understand that there is a major tussle between three basic forces—powerful forces. One is Dr. Wolfgang Schäuble. He’s a force in himself. Then there’s Merkel, a force in herself. And the two forces clash mercilessly over not just Greece, over the eurozone. They have completely different views. And one of the tragedies of being a pipsqueak little country like Greece, whose population is suffering the ill effects of a great depression, is that you have to wait until the elephants stop tussling and trampling upon you.

And then, of course, there is the IMF. There are different agendas here. The IMF is particularly incensed with itself for having allowed itself to get into the Greek problem in 2010. They blame Strauss-Kahn. They should blame everyone in there. But nevertheless, they have violated their charter to be there because the IMF has no right to lend to an insolvent state. They lent to an insolvent state in 2010, and then they lent again in 2012. And last year, they consented once more. They didn’t lend in money, but they played along with the extension in potential. So they want to find a way out.

The first time I met Poul Thomsen and Christine Lagarde, they were more radical than I am. I was trying—you know, I was struggling to find a balance between what was necessary to do with the Greek debt, and what was politically palatable in Berlin in order to find an agreement, to be pragmatic about it. So knowing that a nominal haircut is political poison for the German leadership I was not proposing one. I was proposing very straightforward debt swaps, things that financial engineering conjures up within five seconds. So take—we had the debt of 30 billion, but those bonds that I mentioned before with the ECB, spikey, short-term, nasty. Well, park them on the ESM. And now we’ll take a 30 billion (dollar) loan from ESM and give it to the—to the Central Bank, receive from the Central Bank the super profits that they made, because they, of course, purchased those bonds far below par, put them in an escrow account. Don’t give them to me. I don’t trust myself. I’m Greek. (Laughter.) Put them in an escrow account and have that escrow account repay the IMF in the next two years. It will be enough.

So that way—and then tie up the repayment schedule to the ESM to nominal GDP growth and with certain minimum levels of nominal GDP before you trigger the repayments. In the end, they took these proposals of mine. They applied to Ukraine, not to Greece. Somebody benefited.

SHEARD: They kind of did half of it with the terming out of the debt, though, in this 86 billion (dollar) package.

VAROUFAKIS: The 86—well, no, what did they do with the 86 billion (dollars)? They did none of this. What they—what they did was they took another 86 billion (dollars) from one pocket of the troika and gave it to another. But there was no debt restructuring there.

SHEARD: But there has been terming—lengthening of maturity, correct?



VAROUFAKIS: No, not now. There was in 2012. But still the—(chuckles)—the debt is absolutely unpayable, as the IMF says. So just to give you, Paul—let me—let me give you an example of the situation we found ourselves in. It was just absolutely maddening.

Twenty-fifth of June was when—you mentioned before I was presented to the Eurogroup with the ultimatum. It was the first time I received a single sheet of (aid forwarded ?) from the creditors.

During those periods, those five months of negotiations, we—my office would give them constantly debt-swap ideas, ideas about reforms, about a new IRS independent of the ministry, asking for the help of the German Finance Ministry. All that—you know, a lot of paper was going their way. I had received not one page of (aid forwarded ?) from them. And the international especially financial press was reporting that we had no proposals and we were stalling.

OK, so the first piece of paper arrives 25th of June, right—five days before the banks were meant to close. And I look at it. I was given 10 minutes prior to the Eurogroup meeting. Can you imagine it? It was 120 pages. I went through it very quickly with my team, two or three people, and I walked in there. I heard the views of the leaders of the institutions, and then I started unpacking it and asking them questions.

So the first question went to the Central Bank. I said, I notice here that in your funding proposal you are cannibalizing the bank recapitalization fund to use it to repay the ECB in the short term. And where will the recapitalization funding come from? And then the answer from Benoit Coeure and Mario Draghi was what we do—we will replenish this by means of a new loan from the ESM.

And then I look at Wolfgang Schäuble and I said, Wolfgang, do you accept that? They are embedding a third program into the second program. To make the second program—to extend the second program, they are creating a new program, a new loan, and they’re embedding it in the second one. Can you pass this through the Bundestag? He said, no, I cannot pass it through the Bundestag. There is no—and he started shouting at Draghi. The two of them nearly had a fistfight, seriously, in front of me. Then I asked—

SHEARD: I think you’re making some breaking news here, Yanis. (Laughter.)

VAROUFAKIS: Well, you know, I’m not an insider. (Laughter.) And that’s why I—as I said at the beginning, this is why I appreciate having this exchange for—you know, in order to go beyond appearances and beyond what was reported.

And, OK, so then I asked Christine. I said, I see here there is a DSA analysis, a debt sustainability analysis. Does this have the approval of the IMF? Because the way I look at it, the figures don’t add up, and I can’t believe that your staff in Washington, D.C. have approved it. She concurred: they haven’t, and that the IMF is not backing those numbers.

But then I said to her, so is this also an ultimatum from you? Is this an ultimatum from the troika or only from the Commission? Does the IMF say to me that this is take it or leave it? And she had to say, yes, but we have to look again at the numbers. So what kind of an ultimatum is this? (Laughter.) So they started fighting amongst themselves. And Dijsselbloem, the president of the Eurogroup, interrupts it and says to me, again, you have to tell me now whether you’re accepting it or not. And if you insist on renegotiating the numbers, it will be casus belli—casus belli.

And I said, this is not a language that I understand, Mr. President. And in any case, I would like to ask the Secretariat whether the president of the Eurogroup has the authority to threaten the minister of finance with casus belli. There was a kerfuffle in the Secretariat. (Laughter.) There was an adjournment of 10, 20 minutes. And then—there were phone calls being made. I was just watching that in a combination of amusement and horror.

And then the Secretariat—somebody from the Secretariat said, Mr. Minister, we have to inform you that the Eurogroup is an informal meeting of finance ministers. It is not constituted European law or treaty, and therefore it does not exist legally. So the president of the Eurogroup is at will to do what he wants. (Laughter.) I mean, this is the situation we were facing.

SHEARD: And that’s basically when the referendum got called.

VAROUFAKIS: And at that point the prime minister said, OK. And I think he had a point there, even though we disagreed on—by that time we had very serious disagreements, but he had a point. Here is a piece of paper that Europe—organized, civilized Europe—is giving a small bankrupt nation and saying take it or leave it.

Now, I was not elected to have a clash with Europe. At the same time, I was not elected to accept a piece of paper that was not worth the paper it was written on from a funding-financial-fiscal-reform point of view. So what do you do at that point, as a responsible government? You take it to the Greek people and you say, well, here is this. Study it. We will give you recommendations. The opposition parties can give you recommendations. The troika can come to Greece and campaign in favor of that piece of paper. And you decide. (Chuckles.)

At which point I had finance ministers telling me, are you serious? You’re going to ask voters to make complicated decisions about their future? I said, yes, it’s democracy. (Laughter.) It’s a terrible system, as Winston Churchill said, but it’s the best of all alternatives, isn’t it? Do you know any better system? So, you know, that’s how it worked.

SHEARD: Greece has been in the news, obviously, in the last—well, more than a few months for another issue, of course, which is that it is at the front line of the refugee crisis in Europe. What effect is this having on the Greek economy, the administrative capacity? You know, that has also, you know, always been a question mark in Greece. And how does this refugee crisis kind of change the calculus, if at all, of all of this stuff that we’re talking about, which is still ongoing, trying to reach agreement about, you know, what to do with the Greek rescue package, et cetera?

VAROUFAKIS: In a humane, well-functioning Europe, the two issues should be utterly independent. One has to do with our own terrible monetary architecture. This is a family feud, a mess. We should just find a way of correcting it, of fixing it.

The second issue is a humanitarian issue. There are people who are knocking on your door in the middle of the night, drowning, wet. They’ve been shot at. They’ve been chased out of their homes by various vulgar armies. At that moment, what do you do?

I think the best strategy and the best policy was articulated by a 90-year-old woman on Greek television a couple of weeks ago. She’s a poor woman, somewhere in—(inaudible)—the Greek-Macedonian border. She has a farmhouse. She has a few sheep. She’s poor. And there were about seven or eight migrants, refugees, that were loitering around her place, and she was feeding them. And this television crew invades her property and shove a microphone in her face and say, why did you let them in? And she said, oh, they were hungry.

To me, that is the solution. You know, when somebody knocks on your door in the middle of the night, you do not do a cost-benefit analysis and you don’t mix this problem with whatever problems your household has. Europe has many problems, but this should be kept completely separate.

Let me say that, on the question of what kind of an impact it had on Greece, by taking you back a few years. You know, when the Iron Curtain collapsed in 1991, does—is anyone familiar with the fact that 1 million refugees from the other side of the Iron Curtain came into Greece? One million. We have a small country of 10 million, so 10 percent of an influx within a few months. Half of Albania came to Greece. Just literally, half of the population of Albania came to Greece.

Do you know what happened? Nothing. They’re still there. Some of them—their kids are some of my best students at the University of Athens. They have an impeccable Greek accent. I can’t tell the difference between their accent and the accent of Greeks. I only notice their surname being different. Greece is a much stronger, much richer country as a result of this influx of migrants.

Europe is rich enough, powerful enough, big enough to be able to deal with this without anyone noticing the problem. You can take half of them, take them—put them outside of Glasgow. It’s empty. The food would get better in Scotland. (Laughter.) The reason why we have this xenophobic, moral panic about refugees is because the economic foundations of Europe are very brittle and they are becoming more brittle by the day due to the inane handling of an inevitable crisis of a currency which was not meant to survive the trials and tribulations and shockwaves of global capitalism.

SHEARD: Well, I think that might be an opportune point to actually go to our members. So I’d like to invite the members here to join the conversation. Remind you this is on the record. Could you indicate your interest in speaking, wait for the microphone to come, stand up if you wouldn’t mind—so the gentleman in the back in there—state your name and affiliation and just ask one very concise question please.

Q: I will. Minister Varoufakis, very, very interesting. I’m Ronald Tiersky from Amherst College. I’m not a banker. I’m not a hedge fund person.

Looking back on it now, do you think it was a mistake for you to go into the government, with all that happened, or do you think it was exactly the right thing to do?

VAROUFAKIS: It is true that if I knew how we would be divided, and that the original pact we had was brittler than I thought, it might have thought twice about it. But having said that, with the benefit of hindsight, I’m pleased that I went in, because—not just for Greeks. Europeans today understand a lot better the problems of governance of the European Union as a result of having brought out to the open all these shenanigans that are taking place within. When I go to Germany, when I go to France, when I go to Spain, I discuss, come across people, citizens, very concerned Europeans who can see the disintegration of Europe and all the threats that this is bringing to their doorstep.

And they are appreciative of the fact that now they understand the profound problems of governance. We’ve started something which will certainly prove beneficial in the sense that an understanding, a grasp of what goes on behind closed doors—especially when what goes on behind closed doors is simply a recapitulation of failed policies for reasons that have absolutely nothing to do with economic rationality, humanism, or democracy. This is an important contribution. And I feel that I contributed something to it, even though we lost the battle.

SHEARD: To the lady down here.

Q: Thanks. I’m Lucy Komisar. I’m a journalist.

The groups, individuals, EU representatives attacking Greece said in one area that Greece was not collecting the proper taxes that were due it from individuals, from business corporations. Did you raise the question with them that countries such as France and the U.K., Luxembourg run tax havens where these businesses and individuals stash their money so that they don’t pay taxes?

VAROUFAKIS: Well, I didn’t have to because, you know, in Europe—the president of the European Commission was running the largest tax haven in the world. It’s called Luxembourg, yeah? So when he wants—he said we can talk to him. He looked at me, and he gave me a little lecture on tax collection. I said, really? (Laughter.) But, no, let me make this point. There is no doubt that we had a serious problem of tax evasion and, even worse, tax immunity in Greece. Those in power managing to manipulate the system in such a way that they didn’t have to pay tax. They didn’t have to evade taxes because they didn’t have to pay them. That is a chronic problem in Greece.

I have to say that this has improved a great deal for—so for sad reasons. The powers that be have already taken their money out long ago from Greece. And those who are left behind don’t have a way of tax evading anymore. So the degree of tax evasion has been severely circumscribed of recent, but that’s not for good reasons. But let me relate to you the most traumatic experience I’ve had, more traumatic than negotiations or anything of the sort. I saw my job for the five months I was in government as effectively having two pillars. One was the negotiations and the other was tax evasion.

So from day one, I put together, I convened a working group for homing in on the major tax evaders, yeah? So I put together two teams within the ministry, one from the equivalent of the IRS and the other one from IT, because you’ve got to realize that through austerity cuts and so on we didn’t even have the personnel to go after the tax evaders in the way that it would happen here in the United States. So the way we did it was I leaned very, very heavily upon the banks to get real-time data of all transactions within the country and without the country for the last 15, 20 years. That took two, three months, and a lot of leaning on bankers to do it, but we got it.

And then it was—I thought it was a simple matter of creating an algorithmic system, software, that would compare all the transactions from tax file number to tax file number with tax returns. I had a lot of resistance form the Greek IRS, which I didn’t control—not because it’s independent, but because it was answerable directly to the troika, our lenders. And in any case, I banged a few heads, put together this working group. Preliminary results in late May of 2015 revealed more than 480,000 tax file numbers that had evaded more than $150,000. That is a lot of money for the Greek—for the small, Greek state. And some of them it was millions, yeah?

And this group was going to come to its final findings in October of last year. And our idea was very simple. Once we had the final list, instead of going through the process of prosecuting and all that, we would just announce that this is what we’ve done, without any names at all, and we would say, OK, now here is a website. You can go there, and you have a week to pay what you think you owe. And if you do, we will give you tax immunity—immunity from prosecution—and we would turn a blind eye. That was the plan. Now, let me tell you that the greatest resistance to this came firstly from the oligarchs within Greece who were connected to the Greek IRS, with great cover from the troika.

And this is—so this sounds a bit strange. But remember, during those months I was in office the press—the Greek press, television, radio, newspapers, that is owned by the oligarchs, was completely and utterly in support of the troika against me and against the prime minister. And they were getting some cover for it. OK, 6th of July I resign, 8thof July, the head of this working group calls me—I was no longer the minister, but I had appointed him—in tears, saying that the troika is trying to disband the unit. Thirteenth of August, the memorandum was signed, my prime minister had capitulated. In it, it stated clearly that this working group is disbanded and absorbed by the original IRS, which was doing nothing. So the troika is the oligarchs and the tax evaders’ best friend. It’s very difficult to explain this to people.

SHEARD: Yes, OK. The lady at the table over here. Thank you.

Q: Hello. Kay Boulware, John Jay College of Criminal Justice. Thank you, sir, for your remarks.

I would like—could you comment on the land registry system in Greece, as conductive or not conductive for investment, given that land—

VAROUFAKIS: Well, it will be conductive when it’s finished. We started about 90 years ago—(laughter)—and we’re still trying to complete it. This is a sad story.

SHEARD: And what is the issue there with the land registry? What is the problem you’re trying to solve?

VAROUFAKIS: Well, the problem is that we still—I’ll tell you a personal experience. When my mother died, she left me a plot of land. And then when I tried—you know, when my lawyer tried to look into the deeds and all that, it was discovered that it was impossible to pin down exactly what I owe—I own. And it goes back to the Ottoman Empire, the various disputes on, you know, delineating the plot of land, which is not worth anything anyway.

So this is very old land with very long memories of territorial disputes. And it’s not a technical issue. The technical tools are there for completing the land registry, but then the technicians who are responsible for computerizing and digitizing the land registry hit on the wall of these long-lasting legal battles between clans and various different jurisdictions, because Greece was not liberated all in one go from the Ottoman Empire. Anyway, it’s a mess. I’m not a lawyer. I don’t understand it, but it is taking ages.

From an economic point of view, the problem with this is that it is very difficult to establish property rights and therefore to create markets that are efficient. This is the long and the short of it, but we’re getting closer on this issue.

SHEARD: David. Sorry, over here, David Malpass.

Q: Hi. David Malpass with Encima Global.

Could you comment some on the pensions of public sector workers, including the military? And it’s not—it’s not just a problem of Greece or an issue—it applies to Puerto Rico, here, to Illinois, even to New York State. How do you—how do you compare those needs, the needs of those pension commitments, to the creditors’ needs within that kind of a debt restructuring? Thanks.

VAROUFAKIS: Excellent question. Thank you, sir. We have so many different problems with our pension system. Let me mention two or three, just in brief.

The first one is we don’t have a problem—a proper social security system in Greece, which unloads a lot of burdens onto the pension system. So in properly constructed democracies, liberal democracies, the separation of social security from pensions allows pensions—pension funds to be viable and solvent.

So in Germany, here in the United States, if you are a 62-year-old unemployed worker in a Rust Belt, and it’s very difficult for you to retrain to find a job in the area or to be retrained and to be sent to another state—you’re coming close to retirement age anyway—you go on Social Security, and then at some point, when you’re 65, 66, 67, you get transferred to the pension fund. In places like Greece—and I suppose the same thing applies to Puerto Rico and to various other states, less-developed states—there is no Social Security. So the 62-year-old will either starve or there will be political pressure to put him or her onto the pension system. And then the pension fund becomes decreasingly solvent. So that’s one example.

The second problem we had in Greece was in 2012 there was a haircut of Greek debt, but it was partial and it hit pension funds. So it was called PSI, the private sector involvement, something like that, some euphemism—Europe is fantastic at euphemisms. It was a haircut of private sector debt that was not covered by the powers that be. So the banks lost a lot of money out of the government bonds that were haircut, but immediately they got a capital infusion from the bailouts. So they were made whole in the end. The pension funds were not. The pension funds lost 20 billion (dollars). That’s a lot of money for a small country’s pension funds. So immediately their capitalization was destroyed.

And then the troika comes in with the—(inaudible)—and they say, OK, so you need—(inaudible)—in order to balance the books of the pension funds. Yes, but, you know, set aside the social justice issue; just forget about it. Just look at the economics of it. If you look at the microeconomic impacts, it adds to the debt deflationary cycle, because—I’m going to give you a very startle statistic: 1 in 2 families have no working member in Greece, as we speak. It’s that bad, 1 in 2, and they survive on the basis of some small pension.

If you reduce that pension in order to balance the books of the pension funds, you may balance the books of the pension funds in the very, very short run, but the multiplier effect, the negative multiplier effect of this pension reduction is massive. Small businesses will close in areas where it’s the pensions that keep them alive. And these people will stop contributing to their pension funds and the downward spiral proceeds.

So this was what I was struggling to impress upon the good people of the IMF, the CB, and the commission, that they must not think in terms of pure accounting; they must think of the negative multiplier accelerator effects of what they do in order to balance books, which in the end never get balanced when you ignore the dynamic microeconomic effects of what you’re doing.

SHEARD: Sounds very Keynesian. (Laughter.)

VAROUFAKIS: Well, it’s common sense. I mean, even Friedman would agree.

SHEARD: Well, Keynes was a great economist.

VAROUFAKIS: I think that Milton Friedman would agree with it.

SHEARD: That was not a—

VAROUFAKIS: I don’t think that Milton would disagree with that.

SHEARD: I think a lot of economists would agree with that.

I’ll come to you, Ben, but down that table there. Yes.

Q: Thank you very much. Shane Velli (ph) from Soros.

You talked about—

VAROUFAKIS: I know who you are. (Laughter.)

Q: We have a history.

VAROUFAKIS: We have a long history.

Q: You talked about the past. If you could talk a bit about the future, because Europeans seem to be stuck between a rock and a hard place and with sort of conflicting feelings. On one hand, they’re terrified about leaving the euro—and you seem to be part of that—in part because, I agree, I think Europeans believe in what you’ve described and sort of the dynamic of that. And at the same time, Europeans are increasingly disenchanted and worried about the EU, European institutions, and the lack of democracy.

So you seem to need a new settlement to resolve these two views, and this new settlement seems to be very far away, in part because France and Germany, the two countries that should be instrumental in bringing this new settlement together, seem to be so far apart. So I know you’ve started a new movement that tries to bring about this new settlement. Could you describe about how it would work? And could you tell us if you have hope that this new settlement can come before the next 10 years, because it looks that we’re trapped into a muddle-through scenario that could last forever.

SHEARD: And if I could sort of add to that question, you know, the problems of the architecture in the European Union and the eurozone in particular of course are well-recognized even by the elites in Brussels and elsewhere, with the Four Presidents’ Report back in 2012—


SHEARD: —and then the Five Presidents’ Report—


SHEARD: —in 2015, laying out a kind of long-term roadmap. So what do you make of that? And what would your vision be for ultimately what Europe, in some sense, would need to look like architecture-wise for it really to work and fulfill its promise?

VAROUFAKIS: In Europe we have two problems, and the two questions I just received highlight them.

One is that we have created the gold standard in the middle of Europe. As we know, the gold standard is pretty good during the good times and it’s really appalling in bad times. We have a currency which is schizophrenic. On the one hand, it is—it resembles a fixed exchange rate regime where the only serious mechanism for adjustment during a crisis is exit, but then exit is catastrophic because you don’t have a peg to sever like the peso-dollar peg, which was just severed overnight. Here you don’t have a currency that has a peg with the euro to sever.

You have to create one, and it takes 10-12 months to create one. So it’s like devaluing but announcing you will do so 10-12 months in advance, so thus the panic at the idea of getting out. So it’s partly fix the exchange rate regime, and then it’s—but also it’s the same currency without really being state money because there is no state behind it, no federal state. So this is one problem.

The second problem is that, unlike the American government, unlike the British government, and unlike the German government or the Greek government, the European Union, which operates like a government, is not really a government. What is it? Come to think of it, it was created in 1950 as a cartel. The first name of the European Union, let me remind you, was the European Community of Coal and Steel. It was a clear cartel. And Brussels was the administrators of the cartel.

What does a cartel do? It sets and manipulates prices, keeps them constant, stops antagonism and competition between the French coal producers and the Germans and the Dutch, and then steel, and then automakers. Then they co-opted the French farmers by means of the Common Agricultural Policy. It was a simple attempt to bribe them to accept free trade on the basis that we will take a part of our oligopoly/cartel profits and give them to you. And maybe I’m simplifying, but I don’t think I’m simplifying too much.

And the problem with an administration whose raison d’être was to administer the cartel, especially if you graft upon it a common currency and apolitical money which, of course, can be political, because there’s nothing more political than the apolitical. The combination of a cartel administration and a monetary authority does not respond well, firstly, to crisis. It is not—doesn’t have the political legitimacy for handling the distribution of burdens during the downturn, and secondly has a deep contempt for democracy. And I experienced that. Anybody who has been inside the belly of the beast in Brussels or Frankfurt knows that democracy is only something to be accepted in name, to be denied in substance.

And this is terrible because, why? It’s highly problematic, because democracy is not a luxury. The reason why we have democratic processes is because it is the only way of regulating crisis, and regulating the fine balance between the economics and the political legitimacy which is necessary to carry a population along the path of difficult reform and adjustment, and so on and so forth. So Europe is absolutely incapable of doing that. And this is where after my resignation I had a lot of pressure from people to create a new party. And I just couldn’t bring myself to do it. What was I to promise the Greek people? If they shoved a microphone in my face, they would say, OK, so what do you—why do you—why should I vote for you?

And I would say the same things that I said a year before when I was elected. And they would, rightly, ask me: So why didn’t you do it the first time around? We had a very small window of opportunity in the context of the nation-state—of a small nation-state to affect—to reboot this extend and pretend. Had we succeeded—I think we could have succeeded. It was not predetermined that we should fail. We were divided, this is why we failed. Had we succeeded we might have rebooted the whole process in Europe. But we failed. That opportunity was lost.

And then I started looking at Europe. I was—we were going to France, we were going to Germany. And I could see genuine interest by the Germans, by the French, by the Italians, by the Spaniards, by the British now, to have this conversation that Europe has always denied itself, a conversation of what are the common threats that we’re facing as Europeans, and what can we do about it? It’s a conversation we never had. The Five Presidents’ Report does not deal with that.

You know, when the United States has a major crisis—the United States is not perfect, right? But at least when you are facing an implosion here, like you did in 2008, 10 people got around the table, oval table, square table, and they asked the right question: How do we stop this crisis from consuming us? Do you know what the Europeans ask themselves when there is such a crisis? How can we pretend that the rules that we designed can still be applied? (Laughter.) It is not the same question.

When your policy is motivated by the second question, you have a catastrophe. And the bad economic outcomes, because you’ve asked this question, lead to terrible politics because you need increasing figures of authoritarianism, and decreasing democracy, in order to keep applying them. And so there is this vicious circle. So some of us, in a utopian twist, decided to put together a Pan-European democratic movement, the purpose of which is to have this conversation. Just being by having this conversation. We call it DIEM, as in carpe diem, Democracy in Europe Movement.

We have now, within two months, hundreds and thousands of branches that have spontaneously emerged from Finland to Portugal, and from Britain all the way Turkey, actually, which is very reassuring for me. And will it succeed? Probably not. But it motivates us to wake up in the morning and do that which we think we must do as Europeans who fear that the disintegration of Europe, this holy war between France and Germany; between east and west now, Hungary and Poland on the one hand and Greece, Germany, and France on the other hand; Britain and the continent—this disintegration, the re-erection of borders of electrified fences between Austria and Germany, for God’s sakes, this is creating a post-modern 1930s, which is going—from an economic point of view going to create a deflationary shock in the middle of a continent which is already sick financially. And this is not going to augur well for the United States, for China, for Latin America. Europe has damaged the rest of the world very significantly in the past. It has the capacity and the inanity to do it again.

So, Europe is too important to be left to the Europeans—(laughter)—and certainly to its European five presidents and rulers in Brussels and so on. In exactly the same way that the Americans in the 1940s with Bretton Woods played a significant role in stabilizing the world by stabilizing Europe, I would very much welcome participation of the United States it the stabilization and democratization of Europe. And I lament the fact that the current administration, and a lot more so the future administrations that seem to be coming out of the woodwork, are retreating from Europe.

SHEARD: Great. Time to turn to you, Benn.

Q: Benn Steil, Council on Foreign Relations.

This has been an extremely stimulating conversation, but I’d like to keep you on the issue of looking forward, and specifically at Greece. You’ve understandably condemned the strategy of extend and pretend, but obviously the German government, Chancellor Merkel in particular, needs political cover with her public to go forward. She can’t just say, OK, it’s time for us to acknowledge we’re never going to get paid back, here’s the bill. Isn’t there a way forward, perhaps, with some empathy on both sides, for an extend-and-pretend plus? That is, extending debt maturities further; extending debt holidays further; not only lowering interest rates to zero, but pegging them to the ECB’s deposit rate—that is, negative interest rates—as a way forward out of this crisis. Again, with some goodwill, could we not do it that way?

VAROUFAKIS: Well, if you look at the—a policy paper which I submitted to the German government and to the troika on the 11th of May last year, it was actually a lot less radical than what you suggest. (Laughter.) There was no haircut, not even at the level of net present value, involved. It was those debt swaps that I was referring to.

And it actually comprised three chapters. The first one was this sequence of debt swaps that would make it possible for the Greek debt to be sustainable with a 1.5 percent primary surplus ad infinitum—a target which is not too easy to achieve, but doable, and would not involve a self-perpetuating cycle between austerity and recession, OK? So that was chapter one.

Chapter two was particular—you know, the medium-term fiscal policy, which was designed in such a way as to consolidate and to ameliorate for the five, six years of the depression.

And the third part was the reforms. And we were proposing really brutal reforms. So create—wrenching out of my ministry the whole of the public revenues department and creating a genuinely autonomous, independent IRS modeled on the American IRS. We had proposals for reforming the product markets, particularly breaking down cartels, oligopolies.

In Greece, for instance—let me just give you one small example of what I mean. In the last six years, we’ve lost, as I said, 28 percent of nominal GDP. Wages came down by 42 percent in nominal terms. You can imagine why that is. Prices came down by 8 percent. Now, the only explanation of this is an increase in concentration rate, increasing monopoly power, and cartelized product markets. So we were talking about breaking those down.

We identified as major reforms the creation of a bad bank that would be partly funded by loans that we had already secured from the creditors in order to create a market for non-performing loans, to cleanse a part of the tranches of the NPLs that were impeding the provision of credit to the productive and profitable firms. And finally, a development bank that—where we would transfer the remaining public assets of the state to be managed at an arm’s length from politics, but within a public investment bank that would use the remaining public assets as collateral to create a homegrown investment fund, which, in association with a European investment bank, would restart the engine of investment growth. So this—and let me tell you, just so that you know, who the co-authors were of this, because that, again, is—signals something, and it helps ameliorate for this disconnect between the reality and what was being reported.

So, co-authors, some of them you may know. Jeffrey Sachs was my right-hand person. We wrote this together in—we were working night and day. Somebody called Larry Summers; maybe you’ve heard of him. (Laughter.) Lord Lamont, former chancellor of the exchequer of John Major—not exactly a communist. And Thomas Mayer, the chief economist—the former chief economist of Deutsche Bank.

So we presented this to the troika and to the German government. Now, it was very painful, not that they rejected it. They never rejected it. You know why? They never discussed it with us. They refused us the right to discuss it. The question is, why? But it’s a long question, maybe for another meeting.

SHEARD: Thank you very much. I think that is for another meeting because we have roll this particular one to a close. But I’d like to thank Yanis Varoufakis very much for his presentation today. (Applause.) Thank you very much indeed.

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