If we follow the ruling mantra of the Eurozone group, then Greece is a recalcitrant negotiating partner, which is not willing to make concessions to the other Eurozone countries. The Greek government led by finance minister, Yanis Varoufakis, is not interested in credibly committing itself to an austerity plan, which will ensure that the Greeks will finally repay their debt. Just make a few more cuts in pensions, wages and social services. Raise the level of competitiveness further, increase exports, reduce imports. Greece will see the light at the end of the tunnel. Jeroen Dijsselbloem, the chair of the Eurogroup finance ministers, thinks that Greece’s debt to GDP will soon be lowered to 120%, and by bringing another reassuring deal, Greece’s borrowing costs will come down after they spiked significantly when the left-wing Syriza party came to power. We are going to have light at the end of the tunnel, if only those damn Greeks make enough concessions with their creditors (90% of which are not private investors, but the “institutions”, i.e. EU and IMF). The Greeks have made a heavy mistake in the voting booth, and would have been much better off if they kept the previous conservative government in office. They could have completed the task of continued “structural reform”. Now that Varoufakis had been sidelined by his own prime minister, real reform will become possible.
This is a very comforting narrative, just as the stereotype of the lazy Greeks, who have gotten themselves into the fiscal crisis, and then reject any help from their Eurozone partners, who only have the best of all intentions for their Greek brethren. Except this narrative is all wrong.
It should first be noted that Yanis Varoufakis (2015) is probably the only finance minister, who understands what the real problem of Greece is: cutting wages and pensions in an already depressed economy will depress the economy further and reduce the ability of the country to repay the debt. How can someone repay a debt with a decreasing income? Second, further austerity undermines social support for any future government program, and without legitimacy it is impossible to rule in a democratic country. Greece has transformed its pre-2008 ponzi-growth strategy (based on huge government loans financing current consumption rather than investments) to a post-2008 ponzi-austerity strategy (based on debt repaying debt resulting in more debt, while social programs and wages are savagely cut) (Varoufakis 2012). It is not surprising, therefore, that Varoufakis has tried everything that he could to block the Eurozone partners from forcing the Greek government to adopt even more austerity measures.
Because Varoufakis knew that he was the “finance minister of a bankrupt country” (Zeit 2015) he did not have many tools at his disposal to oppose the crazy austerity agenda. The creditors did not want to create a precedent of unilateral debt forgiveness for Greece, while the other countries (Spain, Portugal etc.) were savagely cutting their own public budgets. Ironically, Varoufakis has also indicated that they wanted to make the loan repayments in full. On the other hand, nobody (not even Varoufakis) wanted to contemplate a Grexit, whereby the Greeks would exit from the euro, devalue the currency and write off the euro-denominated debt (which will plunge the country into a potentially deeper crisis and significantly lowered standard of living).
With the other two options forestalled, the Greek government could only hope to buy more time. Buying more time means to receive more financial aid from the EU, but the EU only wants to hand over the cash after more austerity is inflicted on the Greek people, but the Greeks have voted into power an anti-austerity party. When Syriza capitulates in front of the creditors, then they will be removed from power as quickly as they were installed to it. In that situation, Varoufakis did the only thing that was feasible to him: reject any further demands from the Eurozone partners, and hope that they will fork over the financial aid anyway. For that reason the financial and right-wing European media denounced Varoufakis for pursuing brinkmanship (see Smith 2015) without admitting that the Eurozone partners themselves were pursuing a brinkmanship strategy.
Varoufakis is doing the best that a finance minister, who really cares about the well-being of his country, can do. Since he does not control the cash flow, he needs to hope that he can win the war of arguments. And he clearly has won the war of arguments, because the European partners can only hope to undermine the Athenian position with reference to their “bad negotiating style”, their “lack of manners”, their “unwillingness to compromise”, and other kinds of formalistic defenses, which lack any substance. The European narrative is completely bankrupt, and can not stand up to strict scrutiny, which makes it all the more important for the Eurozone partners to shoot down the innocent messenger, Yanis Varoufakis.
Now prime minister, Alexis Tsipras, has appointed his deputy Euclid Tsakalotos to head the negotiation team confronting the Eurozone group. The bond markets have “rewarded” the Greek government with slightly lower bond yields, which demonstrates that the financial markets still wield significant power over European governments. But sidelining Varoufakis would be a very wrong move, because if Syriza can not deliver on a better deal for their people (they tried by raising the minimum wage and reinstating state workers), there will be further political disruption. We need cool and reasonable voices like Yanis Varoufakis in order to change the European discourse around how to tackle the Eurozone crisis.
In my view, Greek debt has to be cancelled, such that the debt-to-GDP ratio falls below 70%, and they can have some breathing room to recover. They should also be assisted with a Marshall plan (good luck pushing the reparations claims against Germany for the Nazi invasion) to strengthen their investments, which should create jobs and boost their depressed economy. Other countries of the periphery will not be happy about this, and I expect the Spanish Podemos party to become even more influential than they are currently. Germany is fearful that leniency on Greece will open up the box of Pandora for other commitments for the bigger Eurozone partners. But these are the costs, which Germany has to help bear, because they have so shamelessly benefited from the Eurozone, and their hyper competitive economic system (i.e. paying their workers less than the productivity increase).
Europe is very far away from developing a fair and social system, but listening to sane voices like Varoufakis keeps the light at the end of the tunnel alive.