A parallel currency would have led to Grexit
Jeffrey Sachs, economist and adviser to overindebted countries, gives his account of the turbulent period leading up to July referendum
“I’ve always argued for debt relief inside the eurozone. Greece must remain in the eurozone.” Speaking to Kathimerini via Skype, Jeffrey Sachs, the Columbia University economist and adviser to overindebted countries around the world, gives his account of the turbulent fivemonth period leading up to the July 5 referendum and the closure of local banks. It was the period during which he offered his services to then Finance Minister Yanis Varoufakis – without payment, as he makes known – in order to help find a sustainable solution for Greece. “I didn’t know anyone from the government before they were elected,” Sachs says. “I met the finance minister through [University of Texas economist] Jamie Galbraith. We had a meeting in London in early February, we had a nice talk and we kept in contact after that via phone and e-mail. I also traveled with him to Brussels on a couple of occasions.”
Perils of default
In an extended profile in The New Yorker, Varoufakis says that Sachs contacted him repeatedly at the end of June to urge him to demand debt relief and, if he did not get it, to default. The American professor confirms this (“My advice was to suspend payments to creditors rather than to pensioners”), though he insists he never supported the adoption of a parallel currency. “I told them not to do anything in that direction, because it would lead to a forced exit,” he says emphatically, adding he had no hand in the consultations of the Grexit working group under Professor Galbraith.
The question remains: How would the government deal with the lack of liquidity it would face in the case of rupture, if not with some form of a parallel payment system? The advice to default, in other words, could not but lead to a Grexit.
Varoufakis’s term in office was not the first time that the American economist was actively involved in the Greek affair. “I have been trying to help since the days of George Papandreou, unfortunately with few results. I really like Greece and I think it’s very sad that things have turned out this way.”
On the debt specifically, he says that “my proposal, for many years now, has been that it should be reset at a very long maturity and at a fixed interest rate, rather than at the variable interest rates that it is set at right now.” This, as he explains, would require the debts to the European Central Bank and the International Monetary Fund, as well as the bilateral loans, to be placed under some kind of general European framework (e.g. the European Stability Mechanism), “with an interest rate of 0.5 or 1 percent and with maturities of about 40 years.”
Germany, debt and ownership
“That has never had a serious hearing from the European side,” Sachs notes. “And it’s not like the Germans haven’t heard repeatedly in the last few years – from the IMF, from the US government – that this needs to happen. But they have consistently rejected this advice.”
Still, wasn’t the Varoufakis approach a mistake? Wasn’t he wrong to use rhetoric about Greece being insolvent and unable to ever repay its debts? Didn’t that create unnecessary tensions with the creditors?
“It is hard for me to judge the effectiveness of this or that approach,” he replies. “All I can tell you is that, since 2011, when I had offered my services to George Papandreou, every effort we made hit a wall. And until now, it hasn’t mattered whether the Greek government was nice or aggressive.”
According to Sachs, the Europeans – and in particular the Germans – have adopted an “unacceptable” stance of dictation toward Greece in recent years. “The behavior towards Mr Papandreou was quite brutal,” he says. He remembers Filippos Sachinidis, at the time the deputy minister of finance, pressing the issue of the impossibility of growth without credit to small and medium-sized companies: “You just could not get a discussion going on these matters!” he exclaims.
What about the criticism that Athens has never – under neither Papandreou nor Tsipras – presented its own, fullfledged economic program? “I think that’s true. I fervently believe that this is what Greece needs to do – to put its own program on the table. But it is warned time and again that it must not do that. It is viewed as bad behavior by your partners.”
In the New Yorker profile, Varoufakis mentions that he had prepared such a homegrown Greek plan, with Sachs’s contribution. The Columbia University professor confirms it: “I did indeed work with [Varoufakis] on a program proposal. It was within the normal outlines: a fiscal adjustment framework, reforms in different sectors and policies for growth.
“It was similar to many other programs I’ve worked on in over 30 years of dealing with these issues. It used the same language and the same tables that the IMF uses. This is a criterion of mine.”
The Sachs-Varoufakis plan, according to what the former finance minister told The New Yorker, was rejected by the prime minister as too risky. We asked Sachs what could have led Tsipras to that conclusion.
“I don’t know, I never spoke to the prime minister about this plan,” he says. “But it should have been submitted. When I asked Mr Varoufakis what happened with it, he did not give me a clear answer. I learnt what happened through The New Yorker too!” he says with a burst of laughter.
The fiscal targets of the plan, as he reveals, included medium-term primary surpluses of 2 percent of gross domestic product, and there was no proposal to erase the debt or impose a haircut. Greece’s third bailout foresees primary surpluses rising to 3.5 percent of GDP from 2018 onward. If the creditors’ commitment to further debt relief is realized, could this also lead to a further loosening of surplus targets, to a level where they are no longer obstacles to economic recovery?
“I always thought this was a realistic scenario. The IMF has been saying it for a while, the US government strongly supports it, about half of the governments in the eurozone are openly in favor of it. Germany – [Finance Minister Wolfgang] Schaeuble, to be more exact – has been opposed to this resolutely all this time, for tactical reasons. And this even though the moral hazard argument – that offering Greece debt relief will encourage other countries to demand the same – is not at all convincing. Who could possibly want to go through what Greece has gone through in order to be granted a debt restructuring at the end of it?”
Sachs speaks with fierce indignation about the hardline stance of Schaeuble and his fellow-travelers, whose “campaign of whispers and louder interventions about Grexit so poisoned the environment that it was a major factor in the bank run of the last few months.” Germany, he claims, “is heavily responsible” for the closure of Greece’s banks.
He speaks of “shocking, shameful mismanagement” on the part of the Europeans.
It wasn’t only Northern European politicians who spoke of the possibility of a Greek exit from the euro. Top members of Tsipras’s cabinet mentioned the possibility of rupture at every opportunity; some went as far as discoursing on the virtues of reclaiming the country’s monetary sovereignty. What’s more, it was the announcement of the referendum a mere four days before the expiry of the four-month extension of the program that turned the bank jog (managed with the help of emergency liquidity assistance) into an uncontrolled bank run. This – the timing of the referendum – was a choice that belongs wholly to Tsipras.
“You are right on both these points,” Sachs admits. “These kinds of statements by Greek officials were not at all helpful.” But he reverts once again to the role of the Germans, highlighting Schaeuble’s suggestion to Varoufakis for a Greek exit from the euro with European assistance.
But that was the exact same suggestion that Schaeuble had made to Evangelos Venizelos in September 2011. It was an approach with few supporters in Europe at the time, which vanished from public discussion in 2013-14 – and that returned renewed, as a mainstream view in the European north this year because of SYRIZA’s shenanigans. How does he comment on this? Didn’t the Tsipras government manage to bring the whole of the eurozone together in opposition to it?
“Possibly. I have been working for 30 years with the underdog and my sympathies are always with them. The countries that are in desperate shape may make a series of mistakes, but the chief responsibility in crises like these belongs to the powerful, the creditor countries.”
‘I did indeed work with [Yanis Varoufakis] on a program proposal,’ confirms Jeffrey Sachs.