Varoufakis’ Still-Born Plan

As we have pointed out on Friday, Mr. Tsipras’ negotiating position has not at all “improved” as a result of the referendum. Some have however argued that if a plan hatched by former finance minister Mr. Varoufakis had been implemented (which you can read about on Zerohedge), things might have gone differently. This is possible, but frankly, not very likely. The salient points of the maverick finance minister’s plan were the following:


varoufakis-319~_v-videoweblYannis Varoufakis during a meeting of the Syriza parliamentary group in Athens – at least he gets to write a book about his five months as finance minister now.

Photo credit: Foto: Alexandros Vlachos / DPA


As Schäuble supposedly said, elections cannot be allowed to change anything. But Varoufakis believes that they could have changed everything. On the night of the referendum he had a plan, Tsipras just never quite agreed to it.


He said he spent the past month warning the Greek cabinet that the ECB would close Greece’s banks to force a deal. When they did, he was prepared to do three things: issue euro-denominated IOUs; apply a “haircut” to the bonds Greek issued to the ECB in 2012, reducing Greece’s debt; and seize control of the Bank of Greece from the ECB.

None of the moves would constitute a Grexit but they would have threatened it. Varoufakis was confident that Greece could not be expelled by the Eurogroup; there is no legal provision for such a move. But only by making Grexit possible could Greece win a better deal. And Varoufakis thought the referendum offered Syriza the mandate they needed to strike with such bold moves – or at least to announce them.

He hinted at this plan on the eve of the referendum, and reports later suggested this was what cost him his job.


Varoufakis was outvoted, which perhaps shouldn’t be too big a surprise. Greece simply doesn’t have the administrative resources and expertise to handle an exit from the euro zone smoothly (the euro zone really is a roach motel), and Varoufakis’ plan hinged on a gamble: namely that these steps wouldn’t have led to the dreaded “Grexit”. He may actually have had a point regarding the legal situation: There are no provisions by which a country can be forced out of the euro zone.

Let us be realistic though. If the ECB were to cut off ELA funding completely, the Greek banking system’s insolvency would immediately become manifest. The government would be forced to adopt a new currency sooner or later, unless it was prepared to introduce even more severe austerity measures than those demanded by the EU.

This leaves only the question of whether the euro-group would have been sufficiently impressed by the “Grexit” threat to actually give in to Syriza. We would argue that the answer to this question is actually no. Yes, the EU’s movers and shakers have always had an enormous incentive to keep the “extend and pretend” game with Greece going, namely the contingent liabilities stemming from EFSF funding guarantees and TARGET-2 balances, as well as direct liabilities from bilateral loans to Greece.

There have reportedly also been significant differences within the euro-group as to how important it was to keep Greece in the euro zone. The governments of countries whose pensioners are getting half of what Greek pensioners are getting (such as Estonia or Slovenia) are understandably loath to support a country that seems uniquely unprepared to actually implement reforms. They sacrificed a great deal to get their own economies back into working order, and they cannot understand why an exception should be made for Greece.

Others like the governments of France and Italy, countries that themselves have been extremely reluctant to adopt economic reform, by contrast wanted to cut the Greek government some slack. Mr. Hollande e.g. let it be known that he thought that losing Greece as a member of the EZ would be a fatal mistake and lobbied heavily for creditor concessions.

All that said, it was clear that the political leadership of the most important euro area economy, Germany, was no longer prepared to keep Greece funded at any price. Simply put, this has become politically impossible, a fact Mr. Tsipras seems to be well aware of and Mr. Varoufakis seems to have underestimated.

In short, had Varoufakis’ plan been accepted by the Greek cabinet, the euro-group with “bad cop” Mr. Schaeuble in the lead would very likely have said: Be my guest. Goodbye, and thanks for all the fish. Instead of continuing negotiations, the EU would have been busy drafting a humanitarian aid plan for Greece over the weekend.


Greek-CrisisHow cartoonists see the agreement – however, we believe this interpretation is only correct if one likes Greece-style statism (see below).

Cartoon by:


Is Greece Being “Humiliated”? A Look at the Creditors’ Demands

Allegedly, the deal offered by the creditors to Greece over the weekend was “humiliating”. A much frequented Twitter hashtag by the name #ThisIsACoup has sprung up overnight, where countless people are falling over each other sotto voce denouncing the deal to which Alexis Tsipras has now in principle agreed.

We would submit that Greece’s private depositors and savers, who still have an estimated €115-120 billion in deposits in the Greek banking system (below you can see the data until the end of May), plus an unknown amount of cash in suddenly inaccessible safe deposit boxes with Greek banks, are by contrast breathing a sigh of relief and probably couldn’t care less about the humiliation.

Funny enough, all those denouncing Tsipras’ acceptance of the deal never seem to be giving much thought to these people. Admittedly, they were stupid to leave any of their money with the banks – but that doesn’t change the fact that a “Grexit” would impose large pecuniary losses on them. We have a hunch that the many armchair strategists out there wouldn’t be prepared to make them whole. Just saying.


Private sector depositsGreece, private sector deposits. Given that this chart depicts the situation at the end of May, one can probably deduct another €10 to 15 billion from the total. However, one then has to add back the unknown amount of cash sitting in safe deposit boxes at banks, which has become inaccessible as well. Chart by Acting Man, click to enlarge.


In one sense the critics who call the deal humiliating are certainly correct. It is humiliating for Mr. Tsipras, given that his government has long insisted it would push through something completely different. Moreover, by accepting the deal, Greece is essentially relinquishing a large part of its fiscal and economic policy sovereignty. The Greek government is also blatantly ignoring the “No” vote at the referendum – this was essentially a vote for “Grexit”, although we are not really sure if voters were fully aware of this fact. After all, the Greek government had repeatedly told them differently.


outcomeA week in politics …

Cartoon by Gary Barker


As many observers have pointed out, the euro-group actually threw the door wide open to a “Grexit”. One of the plans on the table was a “temporary exit” for five years coupled with a debt restructuring, with the possibility of rejoining the euro again after all the problems had been sorted out. Greece would in this case have haircut its depositors, nationalized the banking system and would have been largely on its own in an attempt to right the ship. This latter point is however precisely the kind of challenge Mr. Tsipras may have felt he wasn’t up to.

Leaving aside whether the offer is “humiliating” and also leaving aside for the moment the fact that the original decision to bail out Greece a few years ago was already deeply flawed, the question is actually whether the demands tabled by the creditors make any sense or not. The details can be seen here (pdf), and we will briefly comment on them below. Note, things in square brackets have not been agreed to by all parties to the negotiations, but are strongly suggested by one or several of them. The so-called “prior actions” demanded from Greece are:


“the streamlining of the VAT system and the broadening of the tax base to increase revenue”


As we have repeatedly pointed out, the biggest flaw of EU-imposed austerity programs is that they are often heavily skewed toward tax hikes. It may make sense from an administrative standpoint to “streamline” what is now a complex system, but the existing VAT exemptions for the tourism sector are an important part of its competitiveness. The best way to “increase revenue” remains allowing economic growth to take hold instead of strangling it at every opportunity with higher taxes.


“upfront measures to improve long-term sustainability of the pension system as part of a comprehensive pension reform program”


Greece cannot avoid pension reform, whether or not it remains a euro area member. A huge (and steadily growing) proportion of government revenue is consumed by pension payments, far exceeding the comparable numbers elsewhere in the world. The system is indeed unsustainable.


“the adoption of the Code of Civil Procedure, which is a major overhaul of procedures and arrangements for the civil justice system and can significantly accelerate the judicial process and reduce costs”


The only possible comment to this is: long overdue.


“the safeguarding of the full legal independence of ELSTAT”


Given that Greek governments have used falsified statistics to deceive the EU in the past, this is a very understandable demand. Of course, if we had an unhampered market economy, there would be no need to collect macro-economic statistics at all, but unfortunately that is not the case.


“full implementation of the relevant provisions of the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union, in particular by making the Fiscal Council operational before finalizing the MoU and introducing quasi-automatic spending cuts in case of deviations from ambitious primary surplus targets after seeking advice from the Fiscal Council and subject to prior approval of the institutions”


This is a demand reminiscent of the “sequester” deal in the US, and we see nothing wrong with it in principle: miss fiscal targets, and spending gets cut on autopilot. The important thing here is that it involves spending cuts instead of tax hikes.


“the transposition of the BRRD at the latest within a week with support from the European Commission”


togaThe Greek financial system is in Blutarsky mode.

Cartoon byGlenn Foden


The aim of the EU’s “Bank Recovery and Resolution Directive” is to make bank bailouts impossible, or at least exceedingly difficult. Given that supporters of the free market have been highly critical of the bailouts that have occurred all over the world, this should be welcomed. Of course, there are numerous flaws in the regulations that are supposedly making the banks “safer”, especially those relating to risk weighting of assets. Anyway, this is not a major issue for Greece, as its government couldn’t even bail out a sausage stand in Athens, never mind a bank.

So much for the so-called “prior actions” – decisions that need to be taken beforehand to make a new bailout agreement possible. The following is what the creditors demand thereafter. The Greek government is requested to:


“carry out ambitious pension reforms and specify policies to fully compensate for the fiscal impact of the Constitutional Court ruling on the 2012 pension reform and to implement the zero deficit clause or mutually agreeable alternative measures by October 2015”


This refers to a Constitutional Court ruling that rolled back some of the pension cuts already implemented. We don’t think it is too outlandish to insist on further reform efforts to balance this out – as already noted above, Greece cannot avoid pension reform, no matter what.


“adopt more ambitious product market reforms with a clear timetable for implementation of all OECD toolkit I recommendations, including Sunday trade, sales periods, pharmacy ownership, milk, bakeries, [over-the-counter pharmaceutical products in a next step], as well as for the opening of macro-critical closed professions (e.g. ferry transportation). On the follow-up of the OECD toolkit-II, manufacturing needs to be included in the prior action”


Frankly, we haven’t read the OECD’s “toolkit” recommendations, but the gist here is obviously that Greece is asked to liberalize its domestic markets. These reforms are not only absolutely essential, it is a complete mystery to us why they haven’t been implemented five years ago already. This isn’t a “humiliating” demand at all, rather it is plain common sense, and the Greek government should regard it as an opportunity, because it can now tell assorted interest groups to take a hike.


“on energy markets, proceed with the privatization of the electricity transmission network operator (ADMIE)[, unless replacement measures can be found that have equivalent effect on competition, as agreed by the institutions]”


Our opinion on privatization is aligned with that of Hans-Hermann Hoppe, and can be summarized in just two words: “Privatize everything”. And not only in Greece.


HoppeHans-Hermann Hoppe has sound advice regarding privatization


“on labor markets, undertake rigorous reviews of collective bargaining, industrial action and collective dismissals in line with the timetable and the approach agreed with the institutions. [In addition, the Greek authorities shall modernize the legislative framework for collective dismissals, in line with best practice]. On the basis of these reviews, labour market policies should be aligned with international and European best practices, and should not involve a return to past policy settings which are not compatible with the goals of promoting sustainable and inclusive growth”


There can be no doubt that Greece needs labor market reform urgently. In fact, instead of the complicated semi-socialist hodge-podge above, why not simply make the labor market completely free and be done with it? The same goes for product markets discussed further above. However, we realize of course that one has to bow to realpolitik to some degree. The above is a good sight better than no reform at all. Again, this is an opportunity for Greece, and not a “humiliating” demand.


“adopt the necessary steps to strengthen the financial sector, including decisive action on non-performing loans and measures to strengthen governance of the HFSF and the banks, in particular by eliminating any possibility for political interference especially in appointment processes.”


Who can doubt that Greece’s financial sector needs to be strengthened? The most important point is however this: “eliminating any possibility for political interference especially in appointment processes”. This is something Greece needs more of, and not just in the financial sector.

To this a list of additional demands has been added. The Greek authorities are requested to:


“to develop a significantly scaled up privatisation programme with improved governance. [The Greek authorities will invite an independent body to assess the price of assets sold and will investigate the best way to further increase the independence of TAIPED with the involvement of the Commission.]”


“[Moreover, valuable Greek assets of [EUR 50 bn] shall be transferred to an existing external and independent fund like the Institution for Growth in Luxembourg, to be privatized over time and decrease debt. Such fund would be managed by the Greek authorities under the supervision of the relevant European institutions;]”


Let us just note here that given how successive Greek governments have to date managed to botch the privatization effort (we suspect it has to do with Greece’s clientelism, as state-owned companies have always been used to provide sinecures for political cronies), it is high time a different approach was tried. It seems by the way that the idea to transfer Greek assets to an independent fund has been agreed on in the end, and this strikes us as a good move. Of course, this is in fact a bit humiliating, as it is a sign that no-one trusts the Greek government to manage privatization on its own. However, why should there be such trust? This approach at least offers a chance to actually succeed.


“in line with the Greek government ambitions, to modernize and significantly strengthen the Greek administration, and to put in place a 12 July 2015 ­ 16.00 program, under the auspices of the European Commission, for capacity-building and de-politicizing the Greek administration. A first proposal should be provided by 20 July after discussions with the institutions. The Greek government commits to reduce further the costs of the Greek administration, in line with a schedule agreed with the institutions”


(emphasis added)


We had to highlight a few passages here – what can one say, except: It’s high time! This should have been done years ago already, and successive Greek governments have failed the population of Greece by refusing to tackle this problem.


“to fully normalize working methods with the institutions, including the necessary work on the ground in Athens, to improve program implementation and monitoring. The government needs to consult and agree with the institutions on all draft legislation in relevant areas with adequate time before submitting it for public consultation or to Parliament. The euro-group stresses again that implementation is key, and in the context welcomes the intention of the Greek authorities to request by 20 July support from the institutions and Member States for technical assistance, and asks the European Commission to coordinate this support from Europe”


Well, yes, this is humiliating indeed. However, one must ask whether there is actually a way around this. This paragraph demands that the Greek government surrender a great deal of sovereignty to the EU and IMF, something we dislike on principle.

On the other hand, creditors who are already on the hook for about €340 billion or so (including TARGET2 claims) are after all expected to throw another €80 billion onto the Greek pyre. Given the inability of previous Greek governments to stick to their commitments and their refusal to implement serious reforms, we cannot blame the euro-group for insisting on this. After all, the Greek government is perfectly free to retain its sovereignty and independence: All it has to do is walk away from the deal.


greek debtOne of the major flaws of the bailout policy … however, a debt reprofiling will actually be de facto equivalent to a haircut anyway.

Cartoon by Chappatte


“[finally, to amend or compensate for “roll-back” legislation adopted during 2015, which have not been agreed with the institutions and run counter to the commitments agreed in the framework of the 20 February 2015 euro-group statement.]”


This sounds reasonable enough to us, and we are surprised there was apparently no unanimity on this point.



In summary, we can conclude: Yes, some of the terms of the agreement can certainly be seen as humiliating to the Greek government. Moreover, by accepting the agreement, the Greek government seems to have decided to ignore the referendum outcome, although this is actually open to debate. After all, the EU has offered some €35 billion in direct investment to Greece, as well as a further debt reprofiling after the agreement has been successfully implemented (precisely what Ms. Merkel had already offered Mr. Tsipras privately). Until then, sufficient bridge financing will be made available to avert a default and to recapitalize Greek banks for the second time. In short, Mr. Tsipras certainly didn’t return from Brussels empty-handed.



Well, what can you do?

Screenshot via


Other than tax increases, which seem to be focused specifically on VAT, the demands appear to make a great deal of economic sense. Before complaining too much about the “humiliation” of the Greek government, people should ask themselves what Greece’s options would have been after a “Grexit”. Could it have succeeded economically without these reforms?

We would suggest the answer is no. The difference is that by surrendering part of its sovereignty, the Greek government has a lot more leeway in fending off special interests. There are way too many welfare state clients and political cronies in Greece and far too few wealth creators. Now there is finally a chance for a Greek government to do what is necessary, which so far hasn’t been done precisely because special interests have always stood in the way.


A Word on Devaluation

Lastly, a word to those who believe that currency devaluation would magically save Greece. This is a widely held view, but it is a complete fallacy. One cannot create prosperity by devaluing one’s money. At best a devaluation can create an advantage for a small sector of the economy to the detriment of everybody else in the economy.

Moreover, even the sector that is benefiting from the devaluation will see these benefits evaporate after a short while, namely as soon as domestic prices have adjusted. Meanwhile, a devaluation always means that the economy will become structurally impaired, as relative prices will shift and malinvestment will be fostered. As Ludwig von Mises explained (we have replaced the word “British” in the text below with the term “Greek”):


“The much talked about advantages which devaluation secures in foreign trade and tourism, are entirely due to the fact that the adjustment of domestic prices and wage rates to the state of affairs created by devaluation requires some time. As long as this adjustment process is not yet completed, exporting is encouraged and importing is discouraged. However, this merely means that in this interval the citizens of the devaluating country are getting less for what they are selling abroad and paying more for what they are buying abroad; concomitantly they must restrict their consumption. This effect may appear as a boon in the opinion of those for whom the balance of trade is the yardstick of a nation’s welfare.

In plain language it is to be described in this way: The Greek citizen must export more Greek goods in order to buy that quantity of tea which he received before the devaluation for a smaller quantity of exported Greek goods.”


(emphasis added)

There is really not much more to say on this particular topic. Mercantilism always was and remains an economic error.

agreementIt’s not that bad …

Cartoon by Joep Bertrams



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11 Responses to “AGreekment”

  • mantrid:

    wonderful post, Pater! It’s always pleasure to read your articles!

    I hope MISH (Mike Shedlock) will read it, especially the last section. I was always dissapointed on how he insisted that Grexit and devaluation would ‘help’ Greece. I would only add that severe inflation would probably make Greeks consume their real savings and real capital, which are needed for investments in the first place! then there would be no real resources to bootstart recovery and the government would be keen on keepeing the country within hyperinflationary spiral.

    • VB:

      A Grexit would have helped Greece, in the sense of getting rid of the debtberg (via default) and forcing it to live within its means. A devaluation wouldn’t have helped, because the debt is in euros that Greece cannot devaluate – but the devaluation would have happened naturally when switching to a currency they can print. The value of the currency would have naturally reached an equilibrium level that reflects Greece’s relative productivity and labor costs. These factors are just not the same as Germany’s and it is pointless to trying to force them being the same. You need some kind of natural equalizer and the market forces when exercised on the currency would provide such a mechanism.

      • mantrid:

        apparently you haven’t read or understood neither what I wrote, or what Pater wrote in the last section.

        this monetarist-keynesian “value of the currency would have naturally reached an equilibrium level that reflects Greece’s relative productivity and labor costs” is wrong. because while devalueing that relative productivity and labor costs are shifting too! productivity is impaired by malinvestment and drain of real savings/capital. labor costs are rising simply because of inflation, which as you should know is just another form of tax.

        Ukraine has been doing this ever since the fall of Soviet Union and look where it took them.

        • Crysangle:

          When a currency is valued, an investor will look at the worth of holding or being repaid in that currency. The international value of the euro is supported by the sum total of Eurozone weight. Greece is being told it detracts from that weight, that it needs to reform to come closer to the mean. Many believe that this is not the case, they believe Greece achieved false values due to the euro framework ( unsuitable rates, credit and asset value boom etc.) . So it would seem wrong to experiment on Greece to try to enforce those false values. They should have been written down . In fact those who are currently debasing their currency, as per PT’s example , are the eurozone, not Greece. The attempt is to save the finacial and banking sector, not enforce Greek efficiencies – those just fit in.
          So the initial devaluation of a Drachma, so often talked about, would be to a level that investors felt confident in – it would be the reflection of the balance of trade between currencies. The Drachma would find a level that is closer to Greece’s needs, whether they turn to monetary inflation or fix a gold standard is besides the point.
          So we should not confuse the two events, in fact it is hypocritical to talk of Greece and currency debasement given European antics.

          • mantrid:

            > “The Drachma would find a level that is closer to Greece’s needs”

            yeah, sure, like in Belarus, Ukraine etc.

            > “to a level that investors felt confident in – it would be the reflection of the balance of trade between currencies”

            I see, it is not real capital or real savings that drive the economic growth but “the investors” by pouring their domestic foodstamps into the Greek economy.

            can you give at least one historical example of this keynesian-monetarist voodoo working actually? because I have a wide spectrum of counter examples from modest Belarus to extreme Zimbabwe.

  • Crysangle:

    The depositors that are breathing a sigh of relief are a certain portion of society .

    They will normally be those that benefited from the pre crisis boom , they might easily include government workers.

    Then there are those that did not , that find assets such as property overvalued , that lack income to enter the market , who are underwater having acquired mortgages at peak prices and in a false economy , who now lack work , who never had work … and a place in the new society under the euro .

    So this causes rifts that economists do no pick up on . Politicians do , for reasons that are aired as questionable . There are generational rifts that are unknown in the past , there are regional rifts that are exasperated , there are rifts in status and feelings of resentment from those who have seen their country sold out to their detriment .

    How are we to condone this ?

    Your presentation of devaluation I find slightly askew . The quoted references are very well in their setting of a purposeful devaluation of a currency by mechanism . However for Greece the devaluation talked of would be the natural setting of the value of the currency to a level that simply respects the economics and politics of the country . In other words it would mean abandoning the false economic valuations, accounted in Euros , about which the current MOUs aim to tailor the country to fit , recognizing instead the support as unnecessary under a national currency .

    Obviously the latter is easier said than done , especially with friends like those in Europe .

    Whichever your view of direction , the forcing and imposing of a solution cannot be welcomed , it is the epitome of a statist lack of consideration, or worse still , false consideration.

    I have met many people who work internationally , and they all have agreed on one point – you cannot introduce modern methodology into a society/business that is not able to receive it . Greeks will not be Germans , Saudis will not be Americans , and so on and on and on .

    • HitTheFan:

      We don’t need to fear rifts or inequality, that’s life.
      Those who are brighter, sharper, quicker, more skilled, more adaptable, they will thrive.
      Others who lack any or all of the above will be worse off.
      That’s life. We’re not all created equal.
      You sound like a communist, wanting it all to be fair and pleasant.
      There are many like you.
      The future will horrify you. Tough luck. Reality is headed our way.

      • Crysangle:

        I should know better than to reply you , but then my reply is not for your benefit .

        You introduce the concept of fear , not I , in fact you reinforce the effort in your closing comments , and so I might only assume you originate it.

        Darwinian theory also includes space for the non specialists. Look at the creatures that have been here far longer in their current form than Homo Modernus . Just as a parasite limits its success by finishing its host , you will find that the particular host of your success is highly adaptable and fully capable of equating your position to its reality .

        A communist ! Lovely . I have a sense of justice , I like transparency , and I denounce a power grab , a rip off , when I find it , much to your distaste .

        To equate fairness and pleasantness as based on a communist illusion is pathetic – it is a dream that much , or most , of mankind has . You sully that ideal , not because communism might or might not share that perception , but because you are willing to detract from it by presenting false argument .

        There are many like me . I hope so .

        I live in the present , and what I see is an attempt at threat , what I see is someone trying to morph their own sensation of insecurity onto others , without the least regard to its eventual effect . That is a very very stupid thing to do , and takes a tremendous amount of arrogance to attempt .

        So I leave you with your claims , and I wish that every time they cause trouble it is your telephone that rings , that it is you conscience and peace that , out of fairness , is infringed upon . That being if you have a conscience , obviously .

        • HitTheFan:

          If you actually read and think about the article, rather than apply your own (very common socialist) biases, you would see that there is no power grab. The Greeks could easily refuse the terms and default. Up to them. At least be honest about facts.

          As for fairness and hope and dreams, good luck with those, as the sun cools, the debt bubble bursts, and millions starve and wars are raging, I hope your dreams give you comfort.

          Me, I’m ready, but that’s because I’m smarter than you and your ilk.

          Natural selection will see that you and your socialist genes wither.

    • zerobs:

      The devaluation wouldn’t stop once the “new” drachma is introduced. The devaluation would in all likelihood accelerate after that because the biggest debtberg in Greece is the insolvent entitlement system that nearly every politician supports.

      Mind, the entitlement systems in all the other countries are also insolvent and therefore constantly being bailed out. There wasn’t even any political will to declare the Detroit entitlement system null and void, for example.

  • HitTheFan:

    How refreshing to read some common sense views on this issue.
    I know you are often critical of the Euro zone, but they are our best chance for returning to economic sense, via an ordo liberal approach. It may not be anarcho capitalism, but I feel it is the best we can hope for.
    I’ll share a post I’m writing for STF on the euro currency breakthrough very shortly.

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