After the world financial crisis of 2007/2008, Greece became the world’s Lehman Brothers. In 2010, France, Germany and all other major European economic forces tried to impose loans upon Greece that it could never pay back and, some Greeks claim, were really a way to bail out French and German banks.
According to former Greek finance minister, Yanis Varoufakis, much of the money that the European banks were trying to get Greece to take was to cover up a series of lies that German Chancellor Angela Merkel had told her parliament in order to protect German banks and a circle of insiders who were, as Varoufakis tells WhoWhatWhy’s Jeff Schechtman, not the smartest guys in the room.
It’s a story that starts with the Greek economy and ends with Donald Trump.
|Welcome to Radio WhoWhatWhy. I’m Jeff Schechtman. We all understand the butterfly effect, the idea that even a small butterfly flapping its wings can have impact thousands of miles away. Perhaps nowhere is this more true than in the world of economics and international finance. Events that happened years ago in opulent boardrooms of banks, and in the flag-draped conference rooms of nations, is in so many ways directly linked to both the political and economic world we live in today.
|The economic bubbles in the U.S. and Europe, the rising tide of anger and political extremism, particularly on the right, can almost all be traced back to small economic decisions, sometimes lies that, layer after layer, gave us the world today.
|My guest, Yanis Varoufakis, is the former Greek finance minister, and he was, as they say, present at the creation. He takes us on one of the most comprehensive and clarifying looks inside this cloistered world in his new memoir: The Adults in the Room. Yanis Varoufakis is a former finance minister of Greece. He’s taught for many years in the United States, Britain, and Australia, and is currently a professor of economics at the University of Athens. It is my pleasure to welcome Yanis Varoufakis to Radio WhoWhatWhy.
|It is a great pleasure, Jeff.
|For our listeners that may not remember, talk a little bit, a very brief kind of refresher course with respect to the financial crisis that Greece faced from 2007 into 2009.
|The Greek crisis was a direct repercussion of the Wall Street collapse in 2008. If you want, we, our downtrodden nation, Greece, was the Lehman Brothers of Europe. Wall Street in its infinite wisdom, for two decades was producing oodles of private money, as I call it, none of those exotic derivatives, new forms of debt, which started behaving like a form of private money. That private money flooded, beginning from Wall Street, Europe through the French and German banks. And because of the common currency that we have in Europe, those monies found their way to all corners of the European Union, and in particular, to the most indebted, or deficit, I should say, regions like Ireland, Portugal, Greece, Spain, Italy.
|Greece was a very particular case because we had the best performance in terms of growth rates. We were being hailed in the 2000s as the miracle of Europe. We were growing at 5, 6, 7% every year. It was, of course, all Ponzi growth based on the tsunami of money that was coming through the French and the German banks. The difference, however, with Lehman Brothers, with your Lehman Brothers, Jeff, was that when Greece went belly up, something remarkable happened. Do you recall what happened when the CEO, Mr. Fuld went to Hank Paulsen, your Treasury Secretary in 2008 in the fall, and famously asked for a bailout? Hank Paulsen said no, and Lehman Brothers collapsed.
|What happened with Greece was quite remarkable. The CEO of Greece, the Prime Minister of Greece at the time, someone that I knew quite well, went to the creditors, went to the rest of the European Union and the International Monetary Fund and said something similar. “We need a bailout because we are bankrupt,” and the answer that he got was, “You’re not going to get a bailout, and you’re not allowed to go bankrupt,” which, if the CEO of Lehman Brothers was told that, he would have laughed in the middle of a ridiculous situation.
|So for a few months, this travesty continued until the great and the good, Washington DC, and Berlin, and Frankfurt where the European Central Bank was stationed, and Paris, and the Greek oligarchy, the Greek ruling class decided to do something quite remarkable. Not only did they try to hide that bankruptcy, that has happened many times in the world of finance in the past. You will remember the Savings and Loan scandal in the United States. They did something even worse than that. The huge loans, the largest loan in human history was given to Greece in 2010, was given on condition that the Greeks would shrink their income.
|The income that was not enough to pay the old loans would have to be shrunk, and then pay the old loans that could not be paid even before the incomes were shrunk and the new loans. A 10 year old will tell you this cannot end well. So we entered the debt inflationary spirals, something like a Great Depression. The Grapes of Wrath could have been written all over again for Greece in the period between 2010 and 2015. Five years later, the Greeks were so fed up with this that they elected somebody like me as a finance minister to go to the corridors of power in Washington, Frankfurt, Paris, and Berlin, and say to them, “No more toxic loans. Let’s sit down and redesign the situation.”
|One of the things that you talk about is that these loans and that this bailout had multiple objectives. That, yes, it addressed the issues that Greece was dealing with, but it also served a lot of other interests as far as European nations and European central bankers were concerned.
|Jeff, the situation was actually far worse because in the case of the Greek bailout, almost none of the monies lent to Greece were lent to Greece for the purposes of, as you put it, to sort out the Greek problems. It was a bailout of the French and the German banks that was disguised as a bailout for Greece. The reason is very simple. We do not have something like the Federal Reserve in the European Union.
|In the United States, when Wall Street collapsed, the Fed effectively, through a variety of means, just shifted all the toxic stuff from the books of the Wall Street banks onto its own books. Thus, the financial sector of the United States was refloated. The European Central Bank does not have the right, according to its own charter, to do that which the Fed does, It cannot take all the bad assets from the European banks and put them on its own books, and leave them there for the archeologists of the future to discover them, which is what the American central bank, the Fed, does.
|So once the French and the German banks went bankrupt, it was a question of shifting these bad assets, these losses, onto the shoulders of taxpayers. Now, the German Chancellor could not go to the Bundestag, the federal parliament, and say to her own members of parliament that she needed the second bailout for the same German banks. I say second bailout because she had already bailed them out a year before, in 2008, 2009, just like the United States.
|The reason why they needed the second bailout was because all their loans to particular European states like Greece, Italy, Portugal, Ireland, Spain were going bad. So to stop this process and to bail out Deutsche Bank and Societé Generale, the French and the German banks, they did something rather cynical. They extended a huge amount of money, a new loan, to the Greek state, but it was not money for the Greek state. It was not money for the Greeks. It was money that went through the Greek treasury straight back to the German and to the French banks. That was portrayed to the global community as an act of solidarity to the Greeks, when it was nothing more than socialism for the French and the German bankers.
|One of the things that becomes clear as you write about it in Adults in the Room is that it’s a little bit like covering up a crime. There were lies that were told, and then there were constant decisions that were made affecting international economics that were there to cover up previous lies.
|It’s very much like Macbeth, isn’t it, or Sophocles, an ancient Greek tragedy. You have these characters that commit a crime against logic primarily, and then they have to commit a second one to cover up the first one, and then a third one to cover up the second one. Once the Chancellor of Germany lied to her own parliament and said that the bailout to Greece was an act of solidarity to the Greeks, and that the German people and the German taxpayers would get every penny back with interest, and this was a downright lie. You do not get your money back when you lend to a bankrupt entity, especially if you lend to them on conditions of austerity that would shrink the incomes from which you have to get your money back.
|Angela Merkel and her circle of advisors knew that precisely. The reason why they lied was because they were in a state of panic. They had to bailout the German banks, and they wanted to push this through their own parliaments very quickly. Once they had made that statement in the federal parliament, then they became prisoners of their own device, because it was impossible politically for Merkel to go back to the same parliament and say, “Oh by the way, remember that speech I gave you? I was fibbing. I didn’t really mean it, that we’re going to get our money back. We gave this money to the bankrupt Greek state knowing we were not going to get it back, so let’s now restructure their debt.”
|Of course, restructuring our debt, the debt of the Greek state, was absolutely essential. It was a prerequisite for ending the never ending Greek crisis. Merkel knew that. Her advisors knew that, but once they had committed the crime against logic and against their own parliament, of lying to them, it was impossible for her. Mrs. Merkel is still in power in Berlin, and she’s in power because she’s not come clean about this. Had she come clean about this, I very much doubt it, that her own Christian Democratic Party would have reelected her. In essence, the sorry state that Greek finds itself in is collateral damage of the games politicians played in Berlin and other places in order to cover up the way in which they salvaged and bailed out their own absolutely ridiculous bankers.
|Why wasn’t there more pushback when you look at this? I mean, you talk about Chancellor Merkel knowing what she was doing, and certainly others in France, and in the IMF, and Christine Lagarde, who you write about, all knew what the game was. Why was there not more pushback from somewhere given how unreal this whole thing was?
|It’s the circle of insiders, Jeff. Who was Christine Lagarde? In 2010, when this cynical shift of bank losses, French and German bank losses to the Greek state happened, Miss. Christine Lagarde, a thoroughly nice person … I have the nicest opinion of her on a personal basis, but nevertheless, she was the finance minister of France. If they had not carried out that piece of subterfuge using supposedly Greece as the excuse of the bailout, in order to bailout the French banks, the French banks would have needed a huge amount of money from the French taxpayers. As a politician and a minister of finance, she went along with this charade.
|Once she had gone along as a minister of finance with this charade, once she was promoted to be the managing director of the International Monetary Fund, it was highly unlikely that she would have come clean about what she had done in her previous life, in her previous career. The same applies to most of the powerful people that I met there like Mario Draghi, the president of the European Central Bank. He understood precisely what was going on. He had a priority, when I was in the Ministry of Finance, to save Italy from going the way of Greece and falling out of the Euro, of the common currency.
|He had a major clash with the Central Bank of Germany, and his only chance of saving the Euro and Italy was to have a good relationship with the German Chancellor and the International Monetary Fund. The condition for that to happen, for him to have this good relationship, would be that he would turn a blind eye of the crime against logic perpetrated against my people.
|One of the things that becomes clear in your writing about this is some of the fundamental mistakes that were made at the very beginning in creating a central currency, in creating the Euro. Talk about that, Yanis.
|The Euro was created in a panicky response to the aftermath of the collapse of the American designed global system, the Bretton Woods system. You will recall that after the War, the United States took a leading role in designing the financial system. We called it Bretton Woods after the conference at Bretton Woods that took place in 1944. For two decades, the United States was overseeing a magnificent period of growth, of stability, of low inflation, of massively shrinking inequality.
|That system was a system of fixed exchange rates between the Dollar, and the Yen, and the German Mark, and the French Franc, indeed the Greek Drachma. It was being overseen by the United States, but to work, it required one prerequisite. That was that the United States should have a surplus with the rest of the world, and use part of that surplus to stabilize that global capitalist system. As you know, in the late 1960s, the United States stopped being a surplus economy. It went into deficit, and that system collapsed.
|Suddenly, exchange rates within Europe, between the French Franc, and the Deutsche Mark, and the Dutch Guilder, and the British Pound started fluctuating wildly. The European Union, which was also an American construction, between you and I, needed to have fixed exchange rates. That took many years of efforts. Every simple effort was frustrated by reality. In the end, in the early 90s, they designed a common currency, a single currency without having a federation, which is quite an interesting proposition, and quite an absurd one.
|So in effect, the common currency, which we call the Euro, was modeled on the mid-war gold standard of the 1920s. Just like in the 1920s, when you bind together disparate economies that don’t have a political common structure, they’re not a federation. What you have is an irrational exuberance at first. You will recall the roaring 20s in the United States leading, of course, to a Wall Street collapse, which is exactly what happened after our Euro gave rise to the roaring noughties in the 2000s.
|Once the financial markets crash as a result of the lack of shock absorbers and the political mechanism for controlling capital flows, the burden of adjustment falls onto the weakest of shoulders, and then in John Steinbeck’s words, the grapes start ripening for the harvest, and they start getting heavy.
|Years ago, there was a book written about the Enron financial crisis in this country, and it was entitled The Smartest Guys in the Room. One of the things that’s so remarkable about this story is in looking at all the players that made all of these so many bad decisions. That these were smart people that should have known better.
|The difference with Adults in the Room is that my adults were not the smartest people. The Enron guys, just like the Goldman Sachs boys, the golden boys on Wall Street, they were indeed very skilled people. They were mathematically highly trained. Indeed, they were very astute, but of course, they had not realized they were completely unschooled to the ways of capitalism. They thought they understood capitalism, but they did not. They understood the ways in which their own derivatives worked. They understood how to make money on the assumption that the rest of the system is holding together.
|They never got a hand of the manner in which their own actions, in aggregate, produced a micro economic environment that was [inaudible 00:18:07] … the Wall Street collapse of 2008, and the 2015 crisis in which I was involved was that I was not dealing with people from Goldman Sachs, and Enron, and J.P. Morgan, and Morgan Stanley. I was dealing with the bureaucrats and the politicians who had bailed those masters of the universe out in the past. The politicians and the bureaucrats that I was dealing with were holding on the public’s books all those losses of the financial sector, of the privateers, that the public books had inherited during the bailout of the financial sector.
|So to give you an example, in 2010, the Greek state did not owe anything to any taxpayer, not one Euro. It was all owed to private banks and hedge funds. Then in 2010, the International Monetary Fund and the European Union stepped in and shifted all those losses away from their friends in the private sector onto the books of the taxpayers, the Greek taxpayers, the German taxpayers, the French taxpayers, and so on.
|By the time I was called upon by the Greek people who voted for me to deal with the calamity, we didn’t owe anything to the private sector. It was all owed to the public sector, and therefore had to deal with adults in the room who were not the sharpest knives in the drawer, but who were representing the interests, supposedly, of lots of taxpayers that were deceived by them.
|One of the things that you talk about is particularly among these bureaucrats and these so called adults in the room, was a kind of contempt that so many of them had. Talk about that.
|Well, the main contempt that the bureaucrats and the politicians had was towards democracy. I was astounded when in my first meeting of European finance ministers, the so called Euro Group Meeting, I gave my maiden speech, so to speak. I tried to be as diplomatic and moderate as I could possibly be. The simple point I made was, “I recognize the principle of continuity, the fact that we have a new government in Greece and I’m representing it. I was elected with the mandate to renegotiate previous agreements with you.” What happens in a democracy when two important principles clash? Well, we find a way of establishing common ground and compromising.
|I thought that was a simple, moderate beginning and that no one would object to that, and then it would be a matter of finding out what we mean by compromise. Then we could clash on that. But no, the finance minister of Germany stood up, took the podium, and lambasted me with the most spectacular denunciation of democracy I’ve ever heard. His precise words were “Elections cannot be allowed to change economic policy.” To which I, after I recovered within a few seconds from the shock, I said, “Well, I’m sure the Chinese Communist Party is going to be very happy with that statement because they believe that too.”
|So this deep contempt for democracy was perhaps the most potent sensation that permeated those corridors and those rooms.
|Finally, talk a little bit about the impact that all of this has as we look at the economy and the world politically today.
|It is quite interesting, is it not, that in this highly interdependent world of ours, we tend to forget the connectivity between various crises. Greece, as I said, was the Lehman Brothers of Europe. There’s a direct line that takes us from the events in New York City, in Wall Street in the fall of 2008, to the French and the German banks, then to a small country called Greece that is sunk as a result of this momentous shipwreck of the financial sector globally. Then you have politicians in Germany and in France concocting a bailout for their bankers that treats Greece as collateral damage, and puts it in a Dickensian debtors’ prison.
|Then in 2015, the Greek people rebel to this and elect people like me to represent them. I go to the Euro group and to the Washington, and to London, and to Paris pleading for my people and putting forward very moderate proposals. We get crushed by the exorbitant powers of the powerful, and then a year later, something remarkable happens. The British vote to get out of the European Union.
|Permit me to say, to put forward the hypothesis that Brexit would not have happened if we Greeks, our government was not crushed. I say this advisedly, but I think, confidently. Remember that Brexit won with 1.8%. It was 51.8% that gave the victory to Brexit. I have no doubt that at least some percentage points, three or four or five in that referendum went the way of Brexit, against Brexit actually. I got the distinct impression, and I think it’s a very accurate impression, that thousands and thousands of British people could not fathom voting to stay in the European Union after the way the European Union treated Greece.
|This is important because Brexit blew fresh winds into the sails of Donald Trump on the other side of the Atlantic. Donald Trump’s victory then did the same for nationalist movements across Europe, in France and in Hungary, in Poland, in Austria, in a variety of countries, Greece too. We had Nazis in the street in Greece, you’ll be impressed to find out, celebrating Donald Trump’s victory. So the interconnectedness of these processes and these political phenomena and events should never be underestimated.
|We are one global village, and to understand how the powers that be treated us in 2015 is to understand in important ways, and to illuminate the manner in which politics and power play out in the United States, in Canada, in Britain, all over the globe.
|Yanis Varoufakis. His book is Adults in the Room: My Battle with the European and American Deep Establishment. Yanis, I thank you so much for spending time with us today.
|It was a great pleasure, Jeff. Thank you.
|Thank you for listening and joining us here on RadioWhoWhatWhy. I hope you join us next week for another Radio WhoWhatWhy podcast. I’m Jeff Schechtman. If you like this podcast, please feel free to share and help others find it by rating and reviewing it on iTunes. You can also support this podcast and all the work we do by going to WhoWhatWhy.org/donate.