Finance ministers rarely become celebrities. Sure, there was a moment in the 1990s when Bill Clinton’s treasury secretary Robert Rubin came close. But that was because so many people thought they were getting rich off the dot-com bubble—and Rubin’s fifteen minutes of fame passed once the tech crash took hold.
A notable exception to this rule is former Greek finance minister Yanis Varoufakis, who served the Syriza-led government, and is best known for his efforts to resist International Monetary Fund–mandated austerity measures during Greece’s own economic collapse.
Varoufakis is out with Adults in the Room, a very substantial, well-written memoir of his brief but highly consequential ministerial career. When Varoufakis took office in January 2015, Europe was six years into its debt crisis; Greece, one of the most debt-ravaged partners in the European Union, had already endured several rounds of austerity; it was the most acute in the fraternity of nations on the European periphery known as PIIGS (Portugal, Ireland, Italy, Greece, Spain). These ill-timed reductions in public spending—successive rounds of deep cuts in government budgets in countries already in depression—was supposed to lead to recovery, according to fanciful theories developed by rich people and their hired hands. But in Greece, as in the other PIIGS states, austerity only produced deeper misery. Varoufakis challenged that routine, and was out of office by midyear.
The harsh rallying cry of austerity wasn’t a new refrain on the Greek political scene. Indeed, the long-running, and self-compounding, ordeal of austerity and crisis was what led to the political collapse of the established parties and a victory in the January 2015 elections by Varoufakis’s Syriza party, which is a Greek acronym for a name that translates as “Coalition of the Radical Left.” Founded in the early 2000s as a confederation of left-of-center groups, it turned itself into a unitary party in late 2013—the next year, Greek unemployment hovered around 27 percent, nearly three times its pre-crisis low of 8 percent. Though Syriza’s leader, Alexis Tsipras, had served several terms in parliament, none of its principals could be described as seasoned political pros.
In this era of neoliberalism, Varoufakis’s “modest proposal” seemed almost otherworldly.
Given Greece’s miserable economic condition, the finance minister would inevitably be in the spotlight, and Syriza chose someone well suited to life in the public eye. Varoufakis is an attractive, charming economist, who gets around on a motorcycle, and has a glamorous, aristocratic artist as his wife. His English is not merely fluent but often stylish. That all made for good press, at least at first, but it left him wide open to charges, which came from right, center, and left, of being a showboater and a narcissist. He’d also developed a name for himself as a public critic of orthodox economics and the European authorities’ horrifically inhumane and disastrous management of the crisis. (I should say that I interviewed Varoufakis many times on my radio show, starting in 2008, and like and respect him a lot.) In 2010, Varoufakis published a short paper on his website, co-written with Stuart Holland, offering a “modest proposal” for solving the European debt crisis. It involved the European Central Bank (ECB) financing debt relief for the troubled peripheral states, delivering loan guarantees to support the continent’s ailing banks, and marshalling heavy investment in the infrastructure of the crisis countries. A few decades ago, that would have been seen as a respectable Keynesian prescription for a broad-based economic recovery, but in this era of neoliberalism it seemed almost otherworldly.
In this account, Varoufakis chronicles the high-stakes negotiations around debt relief, and largely bypasses the third point, the need for massive investment in the Euro-periphery—a regrettable omission, since the lack of investment is at the heart of how the crisis came to be. In retrospect, the crisis was the inevitable outcome of bringing twelve countries—later expanded to nineteen—at widely varying levels of economic development into a single currency area. Germany is an economic powerhouse, producing some of the world’s most advanced goods; Greece has many charms, but no Daimler-Benz. (Italy and Spain are somewhere between.) According to IMF stats, Greek per capita GDP was 67 percent of the German level when the initial conversion rates from national currencies to the euro were set in 1998. But enthusiasm that joining the eurozone would magically allow Greece and other peripheral countries to converge to German levels of economic development sent capital pouring into the laggard PIIGS economies. That set off an unsustainable boom; Greek per capita income rose impressively to 80 percent of German levels in 2006. But those gains proved fleeting; the crisis has brought the Greek-to-German GDP ratio back down to 56:100.
As everyone knows, lenders can never be irresponsible.
Despite the quasi-boom of the mid-aughts, Greek economic fundamentals weren’t improving: because of a crummier infrastructure and factories that were no match for Germany’s, the productivity of Greek labor lagged badly even as wages and incomes were rising. Because of these enormous, and often widening, gaps in efficiency, Greece ran chronic trade deficits with Germany and other advanced countries—its goods could compete in neither quality nor price. The government also ran large budget deficits. Those deficits were financed by the inflows of capital I mentioned above, with German, French, and other northern European banks supplying the cash. When the crisis came, bankers and their scribes blamed the problem on corrupt, lazy, and profligate Greeks—because as everyone knows, lenders can never be irresponsible.
In the days before the euro, Greek financial leaders could devalue the country’s currency, the drachma. That move would have made imports more expensive and exports cheaper, which helped put the international books back into balance, and kept cyclical troubles from turning into crises. But once Greece entered the eurozone, that remedy was foreclosed. The inflow of capital stopped, and lenders wanted their money back. GDP fell by 4 percent in 2009—a deep recession in itself—and then contracted by another 24 percent through 2013.
Into this unfolding disaster stepped a crew of technocrats nicknamed the Troika—an unholy trinity consisting of the European Commission (EC), European Central Bank (ECB), and the IMF. The Troika’s lead policy hands prescribed deep cuts to public spending in return for loans. And the proceeds of these loans were not used to alleviate the suffering of Greeks, but to pad the accounts of its creditors: the “bailout” money briefly passed through Greek hands on its way to Frankfurt and Paris. It didn’t “work,” if what you mean by working is turning the depression around. But it worked in the sense of keeping the financial markets from completely imploding, which is what really matters to investors in these crises.
Greece would have to be sacrificed in the name of preventing dissoluteness.
Syriza was elected to put an end to this bloodletting. Unlike many in Syriza, Varoufakis (who was never a member of the party) opposed leaving the eurozone—Greece should never have entered, he thought, but once in, an exit (or “Grexit”) would be catastrophic. It would take too long to create a new currency, and during any such changeover, any Greek with a few euros to spare would whisk them out of the country, making a horrible situation even more horrible. So Varoufakis preferred to negotiate within the eurozone, and even default on Greek debt service payments to bondholders and the IMF. The threat of a bond default was particularly powerful: Letting one particular class of Greek government bonds go into default would have caused the European Central Bank enormous trouble, forcing it to write down the value of other crisis countries’ bonds that it had bought to stabilize things. That would not only hammer its balance sheet, but would cause it immense legal troubles in Germany, where the government and its courts looked askance at the Bank’s efforts to stabilize the financial markets by buying up vast quantities of government bonds across the eurozone. The specter of a spreading default on its massive debt obligations was Greece’s most potent weapon—not that it had many others.
Enter the adults in the room, as Varoufakis calls his eurozone overseers. The finance minister’s efforts to negotiate with the Troika, which he skillfully recounts in substantial and revealing detail here, were essentially pointless. Most of his contact was with something called the Eurogroup, a collective of finance ministers along with the head of the ECB and a few other high-level bureaucrats. The president of the Eurogroup, the Dutch finance minister Jeroen Dijsselbloem, is nominally a social democrat, but in fact an accomplished sadomonetarist. As a member of the secretariat explained to Varoufakis, “[T]he Eurogroup does not exist in law. . . . [T]here are no written rules about the way it conducts its business, and therefore its president is not legally bound.”
In his severely straitened role as a bargaining partner, Varoufakis was allowed to present what were called “non-papers” to the group—position papers with no legal standing—but they were routinely ignored. His economic arguments about the fundamental unpayability of Greek debt, which had a lot in common with those advanced by the IMF, were met with silence. It was, as Varoufakis said, as if he were singing the Swedish national anthem.
The most influential player on the creditors’ side of the negotiations was the German finance minister Wolfgang Schäuble, whose worldview can be captured in a saying he attributed to his grandmother: “benevolence comes before dissoluteness.” Although Schäuble agreed with Varoufakis that the eurozone was unsustainable under present arrangements, he had no time for Varoufakis’s Keynesian proposals. Instead, he wanted “greater discipline. . . . And it will be a much stronger eurozone if it is disciplined by Grexit.” Greece was a bother that had to be expelled.
Why? On paper, one could make the case that Grexit would increase the profits of German business. But such an outcome was far from certain, given the general difficulties of recovering debt in a defaulting national economy; you could more easily argue that by stimulating growth, looser policies could raise profits. But Schäuble was taking a long view. He thought the “overgenerous” European social model had become too expensive and had to be ditched. Even though Greece didn’t have that well-developed a welfare state—its poverty rate was higher than Germany’s and its income distribution was more unequal—Greece would have to be sacrificed in the name of preventing dissoluteness. It would serve as an example, most importantly, to France, whose generous welfare regime he thought needed a severe rethink.
One set of actors clearly deserve more criticism than they’ve gotten: the social democratic parties of the European core.
After five months of pointless negotiations, Greece finally pulled out of the negotiations for substantive debt relief in June 2015. Fearing a run on the banks, the government shut them down. The government put the Eurogroup’s latest offer up for a referendum: accept or reject? The vote, held just a week after it was announced, was sixty-one to thirty-nine to reject. Varoufakis wanted the government to invoke the default option and, should the authorities eject Greece from the eurozone, improvise a new currency through the tax system. But his colleagues had lost their nerve. Ignoring the referendum, they rolled over, agreed to yet another austerity deal, and Varoufakis resigned. Today, Greece still suffers from a massive debt burden. The economy has stopped shrinking, but even all the conventional measures show that it’s a long way from recovery.
It’s a tragic tale, in the ancient Greek sense of tragedy—flaws in personalities and worldviews that lead to what seems like avoidable disaster. Varoufakis has been criticized for weakness and betrayal, which seems deeply unfair after reading this account. His Syriza colleagues—the ones who rolled over and signed up for more austerity—could fairly come under that charge, even though the country held few cards other than the default threat. But one set of actors clearly deserve more criticism than they’ve gotten: the social democratic parties of the European core. The social democrats were part of Angela Merkel’s coalition government in Germany, and were the government in France. Several of the Eurogroup principals, like Dijsselbloem, were nominally social democrats. Yet they did nothing to stop the immiseration of Greece and the other PIIGS. More broadly, they’ve presided over or assented to the ascendance of neoliberalism across Europe, resulting in the steepening economic polarization and poverty that has contributed to the rise of the far right.
Varoufakis, for his part, has moved on to a new project: the “democratization” of the European Union. A central element of his plan would be the election of governments willing to challenge financial orthodoxy through a process he calls “constructive disobedience.” He finds this deliberative approach preferable to busting up the EU and retreating to competitive nationalisms. It’s an admirable goal, but is seems like a long shot. Still, as with the threat of default, it’s hard to see any other option creating meaningful reform in the eurozone, particularly as the forces of the nationalist right continue to gain ground. Aside from supplying a masterful narrative of the Greek debt crisis, Adults in the Room delivers a badly needed case for the revival of a humane internationalism.