Yanis Varoufakis: Was Chancellor Merkel right (about Greece)?

By Yanis Varoufakis, a professor of economics at the University of Athens. Cross posted from his blog.

Is Chancellor Merkel right when she recently said: “Greece should not have been admitted into the euro area”?

Naturally. However, the way that the euro was designed, it was not only Greece that stood no chance of surviving without a major social disaster within the Eurozone. The same applies to the rest of the Periphery and, also, to… France. In short, a common currency without a substantial surplus recycling mechanism in its midst (as the Eurozone is and remains) can only survive long term if it comprises surplus countries. The Eurozone should, in this reading, consist of Germany, the Netherlands, Austria, Finland and Luxembourg. Alternatively, if France et al were to be included, we would have needed a proper banking union (as opposed to the one currently ‘implemented’), a degree of commonality of public debt, and a large scale aggregate investment mechanism which recycles surpluses in the form of productive investments in the deficit regions/countries (see our Modest Proposal for more on this).

Is the scale of adjustment that Greece is facing (after accepting previous bailouts) unprecedented?

Yes. Especially in view that the bailouts did not have the purpose of solving Greece’s problems. The original bailout was a cynical ploy for transferring losses from the books of the German and French banks onto the shoulders of the Greek, German and French taxpayers. The second and third bailouts were merely attempts to hide the truth about the first one.

Would you say that it is remarkable that Greece has been able to (just barely) keep social cohesion? 

Not really. A Great Depression tends to depress people psychologically to an extent that they become ready to accept the unacceptable. At least for a while.

Would Germany have held together if it had to implement such draconian measures?

Under no circumstances. In any case, the German leadership was the first to set aside the Maastricht limits when it had a choice between a deep recession and a milder one. Of course, it could afford to do this being the Eurozone’s surplus nation. As is always the case, the rules do not apply equally between the surplus and deficit nations of any currency union of fixed exchange rate regime.

Why is Greece getting so much of the blame for the Euro crisis when it is the bigger economies like Spain and Italy that pose greater threats to the Eurozone?

Because it was the canary in the mine. It was the first and flimsiest economy to betray the common secret that our Eurozone project was badly flawed. It was thus a prime scapegoat candidate.

Do you believe that part of the reason why Greece’s financial crisis is so acute is because it is such a young democracy?

No, I do not. Perhaps the root problem (which is linked to our dictatorial past, but which is similar to the Italian experience) is the Greek elite’s incapacity to act as a national elite. Instead, it milks the country dry on the promise that it will pass the task of reforming the nation’s institutions to something it vaguely refers to as ‘Europe’. Alas, ‘Europe’ is neither interested in nor capable of such a feat. Initially, ‘Europe’ was only interested in Greece as a market with low levels of private indebtedness. Now, it just wants to get rid of it but knows not how to do it without losing Spain, Italy and, ultimately, France.

What do you think is the answer to Greece’s problems?

To try out a policy we have never tried out before: To tell the truth both within the EU’s institutions and in public: The Greek state is insolvent, the bailouts have created a new cleptocracy amongst our bankers, and the quadruple crisis (banks, debt, investment and poverty) cannot be addressed through more loans under the imposition of greater austerity (which shrinks the incomes from which the burgeoning debts must be repaied).

Do you think that a third bail-out can solve any of Greek problems, or the Troika is just “buying time” (even if there’s no MoU, as Mr Stournaras has suggested)?

None of the bailouts had the purpose of solving Greece’s problems. The original bailout was a cynical ploy for transferring losses from the books of the German and French banks onto the shoulders of the Greek, German and French taxpayers. The second bailout was merely an acknowledgment that the first bailout had imposed upon Greece conditions that it could never meet. Similarly with the one being prepared now: Greece has committed, as part of the second bailout, to return to the troika €27 billion from the time the loans dry out April 2014) to the end of 2016. This would necessitate primary surpluses of nearly 5% every year for three years, all of which should be transferred out of the bleeding country and to the coffers of the troika. Everyone knows that this is economically impossible and politically explosive. So, this is what they propose to do: Adopt the bankers’ favourite trick of ‘extending and pretending’ bad loans. They will, in practice, allow the Greek government not to pay anything much back between 2014 and 2016 (they will, in effect, reduce interest to zero over that period) and extend the repayment period for principal plus interest by an additional decade or so. This way, they will be extending Greece’s insolvency ad infinitum.

Is there any possibility for Greece to ‘survive’ inside de euro? Is bankruptcy inevitable?

Greece defaulted twice already and will be defaulting a third time – since the reduction in interest rates coupled with the extension of the repayment period is an effective haircut of its debts to the troika. So, the bankruptcy has already happened, in doses. Can Greece survive inside the euro? The answer is that Europe is planning to allow it to languish inside of the Eurozone, tending toward a state that resembles Kosovo. Will the Greeks tolerate this? Probably. However, the most pressing, and interesting, question is: Can the euro survive? I have no doubt that, if the present policies continue, it cannot.

Note: The above Q&A took place a week ago between a German journalist and myself. More details will be published here soon.

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About Lambert Strether

Readers, I have had a correspondent characterize my views as realistic cynical. Let me briefly explain them. I believe in universal programs that provide concrete material benefits, especially to the working class. Medicare for All is the prime example, but tuition-free college and a Post Office Bank also fall under this heading. So do a Jobs Guarantee and a Debt Jubilee. Clearly, neither liberal Democrats nor conservative Republicans can deliver on such programs, because the two are different flavors of neoliberalism (“Because markets”). I don’t much care about the “ism” that delivers the benefits, although whichever one does have to put common humanity first, as opposed to markets. Could be a second FDR saving capitalism, democratic socialism leashing and collaring it, or communism razing it. I don’t much care, as long as the benefits are delivered. To me, the key issue — and this is why Medicare for All is always first with me — is the tens of thousands of excess “deaths from despair,” as described by the Case-Deaton study, and other recent studies. That enormous body count makes Medicare for All, at the very least, a moral and strategic imperative. And that level of suffering and organic damage makes the concerns of identity politics — even the worthy fight to help the refugees Bush, Obama, and Clinton’s wars created — bright shiny objects by comparison. Hence my frustration with the news flow — currently in my view the swirling intersection of two, separate Shock Doctrine campaigns, one by the Administration, and the other by out-of-power liberals and their allies in the State and in the press — a news flow that constantly forces me to focus on matters that I regard as of secondary importance to the excess deaths. What kind of political economy is it that halts or even reverses the increases in life expectancy that civilized societies have achieved? I am also very hopeful that the continuing destruction of both party establishments will open the space for voices supporting programs similar to those I have listed; let’s call such voices “the left.” Volatility creates opportunity, especially if the Democrat establishment, which puts markets first and opposes all such programs, isn’t allowed to get back into the saddle. Eyes on the prize! I love the tactical level, and secretly love even the horse race, since I’ve been blogging about it daily for fourteen years, but everything I write has this perspective at the back of it.


  1. Hugh

    Was Merkel right about Greece? No. Greece merely exemplifies the problems that were inherent in the euro. Nice to see Varoufakis using the term “kleptocracy”. However, it is a term which applies to Greece’s (and Europe’s) rich and elites, not just its bankers. The euro was not set up as a viable currency but as a mechanism for looting masquerading as a currency.

  2. psychohistorian

    Thanks for the posting.

    I hope the more details include the US bankers complicity in setting Greece (and the whole EU for that matter) up to fail.

    Any fix on the coming Derivative Death of global finance? Its a run-away feature, not a bug, right? Derivatives are first at the trough everywhere now aren’t they?….rule of law where it matters to the plutocrats.

    When they tell me that some derivative has taken away my SS and/or small pension I just might get upset.

  3. participant-observer

    “Perhaps the root problem (which is linked to our dictatorial past, but which is similar to the Italian experience) is the Greek elite’s incapacity to act as a national elite. Instead, it milks the country dry on the promise that it will pass the task of reforming the nation’s institutions to something it vaguely refers to as ‘Europe’.”

    Similar also to the USA experience and “root problem,” that is, if you don’t consider the mechanism for producing and preserving unenlightened elites to be itself the “root” problem!

    1. digi_owl

      Reminds me of a trend i find worrying. That certain people, mostly “elites”, will consider themselves Europeans rather than citizens of whatever nation they have passport from or reside in.

      Likely these are people that can do most of their “work” from anywhere that has a high speed mobile data connection. And as such are free to move around as whim and local situations favors.

  4. The Dork of Cork.

    Again Yanis wants to make a banking union official.

    Need I say in each moment of human history a banking system scaling up creates more human misery.

    Countries with large banking unions such as the UK & US are also shitholes…..whats the point of this ?

    Me thinks another Latin Empire where the banks can be free to inflate and deflate at will without even pretend national controls…..at best it would be a more honest system of extraction.

  5. okie farmer

    In fairness to Yanis, his calls for banking union have been in the context of enabling a surplus recycling mechanism; the other EZ ptb who have, mostly left-handedly, supported a banking union have no intention to enable even a whiff of surplus recycling. Yanis’ Modest Proposal essentially calls for the European Investment Bank to take on the role of recycling surplus. I see nothing in this interview that is not true.

    1. The Dork of Cork.


      Further centralization is not needed…..why push for it ?

      In the UK union peripheral areas were pushed into deficit and “core” areas gained the surplus.
      On both a local and national level there was a general loss of freedom as the money vortex pushed resources upwards into the Industrial engine and the financial system which controlled it.

      The general high flux needed to push resources upward further is causing mass destruction of the banks assets (people)


      The system clearly needs to scale down and not up.

      1. The Dork of Cork

        During the 1980s there was a major money deflation in Ireland.
        This was a mechanism to push resources into the private banks so that they could scale up to the new Euro nightmare world.

        You can clearly see this in our population figures see 1987 -1990 where there was a slight decline in population despite a high birth rate.
        But the stress in the society & culture was less as the flux level was of a lower order (see the number of immigrants & emigrants from that time and compare it to today)
        After 1990 especially the capitalized banks went out to create a junk island with their new found (external) resources.
        The purpose of the present money deflation is perhaps to repeat the experiment – to create a greater bigger more unstable junk world.

        Its a pointless Gerbil wheel economy just so that private banks can control these societies to whatever direction they desire.

        I want no part of Yanis nightmare liberal world.
        In the 1980s I was a naive believer.
        Now after living the nightmare I realize it was a giant Scam.
        I guess one has to live through perhaps the most extreme deflation , inflation , deflation event in Europe to see the truth behind the curtain and its not pretty.

        Yanis would be a critic of social conservatives yet it his international system which creates the flux and the violence with follows.
        Its somewhat ironic don’t you think ?

        1. okie farmer

          Dork, I’ve never agreed with Yanis on ‘a more perfect banking union’, or his idea that the EZ can be fixed somehow. The EZ was designed from the beginning to do exactly as it’s done, empower banking and transfer money from the periphery to France and Germany, impoverish working people, destroy unions, etc, etc, essentially advancing soft fascism. France got ‘had’ by Germany in letting the Bundesbank be the model for the ECB, and have not fully awaken from that nightmare. But I think Yanis is right about France in this interview, they still “have a dream” and don’t realize it’s going to turn into a nightmare eventually.

          If you’ve read his Global Minotaur, it explains pretty well the importance of global recycling mechanism, and his contribution in the Modest Proposal, how the EIB could provide most of that function, is still a good idea. Basic Keynesian stuff, modest, nothing to object to UNLESS you want to proceed to a world restructured around banker control, eh?

          I would add that I agree with you almost all the time, and agree with you here, except you changed the subject from Greece’s chance of survival to the ‘banking union’ issue.

          1. The Dork of Cork.

            The EIB is a bank…………
            It has bankers and stuff inside it.
            It does not produce fiat in the fashion of a king outside the bankers sphere of influence.

            To be honest I don’t believe in the concept of France or Germany anymore
            Although these countries are and were controlled by banks their limited scale reduced the power of the banks to overpower domestic (village based co- op systems)
            Once these entities became more global (petro) in the 20th century the banking elites could overpower domestic systems of non monetary cooperation via the inflation & deflation of credit and energy.

            The Euro boys talk about freedom of movement now when in reality it is a bigger cage.
            To allow this scale of transnational control that Yanis wants it must burn down all local structures.

            This is what Hillaire Belloc warned us about.
            The nightmare has become a reality.
            A world without any concern for local human affairs.
            A global fucking airport.

          2. The Dork of Cork.

            my comment was eaten alive……….

            Such is life in a neoliberal nightmare world of a contrived Ying and yang.

  6. financial matters

    It will be interesting to see where people finally decide to draw the line on this. If derivatives were once thought to be useful insurance surely the disorderly and expensive experience of Lehman and AIG should disabuse them of this notion.. Should banks and other corporations really be at the head of the line?

    “”However, the most pressing, and interesting, question is: Can the euro survive? I have no doubt that, if the present policies continue, it cannot.””

    This conclusion seems to fit well with the conclusion of the previous post on Detroit..

    “Thanks to changes to bankruptcy law in 2005, holders of financial derivatives are not subject to the ‘automatic stay’ provision intended to prevent a disorderly grab for collateral by competing creditors. As such, they are able to press their claim immediately, prior to bankruptcy proceedings and therefore before claims by competing creditors are considered. “”

    “We are seeing the beginnings of the next phase of the on-going credit crunch, in the US at the municipal and state level, but also in Europe and beyond. This is a good time to question the prevailing blind optimism and look instead for an understanding of how the system really works, and where its architecture and internal dynamics are taking us.””

    “”The Detroit bankruptcy is looking suspiciously like the bail-in template originated by the G20’s Financial Stability Board in 2011, which exploded on the scene in Cyprus in 2013 and is now becoming the model globally. In Cyprus, the depositors were “bailed in” (stripped of a major portion of their deposits) to re-capitalize the banks. In Detroit, it is the municipal workers who are being bailed in, stripped of a major portion of their pensions to save the banks.””

  7. Tom

    Had a long, long conversation with a guy who works as a journalist in Berlin. No, he is not German but Australian and works for an international news organisation. Chances are you seen him on TV. It was very interesting in that he basically concurs with Mr. Varoufakis (and Pritchards) analysis but says both forget a major, major point. The political will of all involved. They will muddle thru he predicts.
    It is definate that all the doom sayers were wrong until now. My reading of Germany´s Pravda aka the Frankfurter Allgemeine Zeitung tells me that
    a. the German elites know very well that Greece can´t continue like that and
    b. that there will be a big, big rescheduling if not outright forgiveness of debt after the elections. That is if there is no great external shock.
    Finally let me state that nobody paid for Greece until now but the Greek. Sorry, Germany is a rich country and my interlocutor rightly pointed out that it would be in Germany´s own very best interest to fork over a few billion. Not much more than was wasted on Berlin International Airport. My best bet is that is the way it will go.

  8. Banger

    I enjoy Yannis’ comments, they are fair, he has a sense of the how the whole system works and he thinks clearly. Having said that, I don’t believe economic problems are “economic” problems–they are political problems. Greece is not a country of “lazy” people who won’t work anybody that knows anything about that culture knows that the Greeks found themsleves at a nodal point in history as collateral damage in the Banker’s coup (well, it’s not that simple but we may as well call it that) of ’08.

    The really telling thing was the fact Yannis mentioned, in passing, that there is unlikely to be social undrest because depression does depress people and they are unlikely to create social chaos. When you’re scrounging for a meal you’re not going to hit the barricades not when you can watch TV. In fact, I don’t think the French or Russian revolutions would have occurred if TVs and the full panoply of electronic devices had been available.

    The ruling elites know they can do as they please and there will be no opposition other than from fringe elements in society. What will happen is what may well be happening in Greece, a sort of ad hoc neo-feudalism. I saw a show a few months ago about the Golden Dawn–one of the functions they were performing was to provide protection to merchants in urban communities since the state had withered somewhat. I think we will see the growth of these little “states” within states all over the world in time.

    I have thought, for some time, that we are seeing the withering away of nation-states as centers of real power (they will probably always have symbolic power) and the growth of small and large “gangs” or principalities operating within and across nation-states. Some Mexican and Central American gangs are like that. But this also includes the various mafias, multinational corporations and so on. Also this includes factions within the state–in the U.S. this is the contractor community which, particularly in the case of military and national security contractors have their own power base and their own agendas–part of the confusion we see in Washington is due to the powerful power-struggles that go on between various groups of contractors and lobbyists (often closely linked). Greece may well devolve into a series of “other” arrangements and be a pioneer for the New New World Order.

    1. Mario Panziero

      The ruling elites know they can do as they please and there will be no opposition other than from fringe elements in society. What will happen is what may well be happening in Greece, a sort of ad hoc neo-feudalism. I saw a show a few months ago about the Golden Dawn–one of the functions they were performing was to provide protection to merchants in urban communities since the state had withered somewhat.

      You are witnessing resurgence of fascism ( a third way to capitalism and urss pseudo implementation of marxism, or the chinese one) for the next big social movement will eventually focus on strikes and social unrest, which have always scared the shit out of any elite. Imho these events that are being delay by keeping economies in a financially induced coma-depression. Only delayed because a delay is all that the usual suspects need to bail themselves out, or to minimize damage adn weather the storm …or so they think.

      1. Banger

        My understanding was that the government made the health of the public sector look good by gambling on derivatives and that caused the debt to mushroom. Never said it had anything to do with Greek banks.

    2. Eric377

      Unlike Ireland, Spain or Iceland, Greece did not find itself with a banking system swamped in losses that the national government was under pressure to assume on the public balance sheet – which Iceland avoided doing in their case. Greek banks may not have been the best managed in the world, but to talk about Greece being a nodal point in a banker’s coup is pretty much nonsense. Greece got in trouble the old fashioned way of borrowing too much to service. Dumb lenders for sure, so not crying much for them. There would be no discussion of the tragic circumstances of many vulnerable Greeks today had the nation serviced its debt as scheduled. In fact, their debt would carry an interest pretty similar to Germany’s even today. But they could not do it and not because some bankers got together to scheme how to buy Naxos or Meteora at some incredibly low price.

  9. allcoppedout

    We need to identify who the gangs are and find ways to stop them. Even in the ‘war against drugs’ we have done nothing other than facilitate them. We lack a thorough-going dialogue on the money-system and how it does what Dork suggests and how kleptocracy comes about. We are not that short of information, but everything I read leaves me stuck (in ex-detective mode)feeling my size-nines should be kicking down some doors to get at evidence rather than piss-and-wind. I personally see the motivational-circumstantial-historical element as made and that there is nothing I could stand up in court. The evidence, of course, is heavily protected.

    The ideology that prevents investigation is in deep, from hankerings for a return to the time when determination and can-do and hard work could make you successful depleting resources with lobster-pots, through to long-standing tolerance of white-collar crime (classic work Sutherland 1940 – but also a theme of many Westerns). They have us bound in fantasy and belief there is somewhere to action the truth. With my old team on your back as a murderer I’d take any odds on your conviction – but miserable participants in various mass murders in Africa with a recent IPO of your mining company can rest assured we’d all be sacked if I approached the Treasury for funds to do the investigation.

    A classic work is JB Priestly’s ‘An Inspector Calls’ – someone needs to put a version on replacing the upper-class family’s roles in the dire suicide of a poor young woman with, say, worthies from a prestigious US alumni fund, a Mayfair hedge fund and rapes, murders and land clearance in the Kivus. Even literature is letting us down.

  10. allcoppedout

    Greece more or less worked before the Euro. So what are these “debts”. I don’t understand any of this much beyond turning up in a boat and swapping my cargo for another. With today’s record keeping potential we might do better to go back to such barter.

    Don’t go thinking I’m a primitive here. New technology could handle this in complex, honest, transparent ways. Banking is essentially medieval and has as much place in a modern world as black bags for women.

    It would be good to see the Greek debt forgiven – but hold on to your hat Yanis – this would be a good idea everywhere else. We could give everyone the homes they live in, build more to give to those without – and transform economies into something modern. This all might follow forgiving Greeks. In other words, fat chance.

  11. NotSoSure

    People keep saying the Euro won’t survive, etc, etc and yet it sits there at 1.32 whistling away. There’s something the naysayers (including me) are not seeing, just not sure what it is. Heck, with all the supposed contraction, the protests have gone down, so perhaps something else (underground economy?) is making things up?

  12. TC

    Well, y’all better figure out ways to make the euro survive, because idiotic submission to unworkable treaty arrangements arbitrarily imposed for the sake of managing hot money flows is a fool’s game serving London and her towel boys in New York whose securities-based Ponzi scheme masquerading as a “banking system” is at the root of the euro’s woes.

    Y’all better get behind Syriza and demand the Greek central bank be nationalized (which policy I do not know whether Syriza presently advocates, but in fact must), then charge this nationalized central bank to issue euro credits targeting Greek industries whose production both would revitalize the Greek economy, as well as kick start Greece’s exports.

    Oh, this would be a violation of the Maastricht treaty? So be it! What’s Brussels going to do? Throw Greece out of the EMU? They wouldn’t dare, as the defiant policy advocated here would force the hand of so-called “surplus countries” to either follow Greece’s lead or watch their so-called surplus be marked to the new reality Greece could easily impose, especially if a protectionist regime simultaneously were implemented (one whose carrot would offer other EMU members better trade terms were these, too, to mimic Greece’s initiative).

    So to summarize, a political consensus in Greece first is needed (Syriza), while at the same time policy proven effective by the likes of Alexander Hamilton and his co-thinkers need be asserted, and this with no regard whatsoever for the so-called “rules” imposed by Greece’s imperialist jailers, the likes of whom are not German Shepherds, but rather the New Venetians of London and New York.

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