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

Kathimerini English - - Focus - BY YAN­NIS PALAIOLOGOS

“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.”

Sachs-Varoufakis plan

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?”

Cap­i­tal con­trols

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.

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