In 2010 the Greek state lost the capacity to service its debt. Put simply, it became insolvent and, thus, lost access to capital markets.
To prevent a default on fragile French and German banks, that had irresponsibly lent billions to irresponsible Greek governments, Europe decided to grant Greece the largest loan in world history on condition of the largest ever magnitude of fiscal consolidation (also known as austerity) which, naturally, resulted in a world record loss of national income – the greatest since the Great Depression. And so began a vicious cycle of austerity-driven debt-deflation, spearheading a humanitarian crisis and a complete inability to repay the nation’s debts.
For five years the troika of Greece’s official lenders (the International Monetary Fund, the European Central Bank and the European Commission representing creditor member-states) were committed to this dead-end strategy that financiers label ‘extend-and-pretend’; that is, lending to an insolvent debtor more and more money in order to avoid having to write off a bad debt. The more creditors insisted on this strategy the greater the damage on Greece’s social economy, the less reformable Greece became, and the larger the creditors’ losses.
Year after year, the IMF and the Commission would issue hyperbolic prognoses of imminent recovery, even to the extent of pre-announcing ‘Greek-covery’ in 2013. They were, of course, clutching at straws. For instance, in 2014, creditors and a compliant Greek government rejoiced at the fact that real GDP rose a little for the first time in seven years. Closer inspection, however, confirmed that the reported ‘turnaround’ was a statistical mirage; that what had really happened was that GDP, as measured in market prices (i.e. nominal GDP), continued to fall by 1.1% but, at the same time, average prices were falling even faster by 1.8%. So, what was essentially a clear sign of a deepening depression, with both incomes and prices falling, appeared confusingly as a boost in real GDP (which is the ratio of nominal GDP growth and the rate of inflation; a ratio that becomes positive in terrible circumstances when both the numerator and the denominator are… negative)!
This is why our party of the radical left, SYRIZA, won last January’s election. Had the electorate believed that Greece was on the mend, we would not have won. Our mandate was straightforward: To stop the ‘extend-and-pretend’ loans, and the associated austerity, which were driving Greece’s private sector into the ground. And to lift the fog of doom in which it was impossible to carry the people with us along the road toward the crucial, deep reforms that Greek society needed.
In my first Eurogroup meeting I delivered a simple message to the gathered Eurozone finance ministers: “In our government you will find a trustworthy partner. We shall strive for common ground with the Eurogroup on the basis of a three-plank policy to tackle Greece’s economic malaise: (i) Deep reforms to enhance efficiency and defeat corruption, tax evasion, oligarchy and rent-seeking. (ii) Sound state finances based on a small but viable primary budget surplus that does not impose too heavy a burden on the private sector. And (iii) a sensible rationalisation, or re-profiling, of our debt structure so as to allow for the viable primary budget surpluses consistent with the rates of growth necessary to maximise the true value of our repayments to our creditors.”
A few days earlier, on 5th February, I paid my first visit to Dr Wolfgang Schäuble, the German finance minister. I re-assured him that he could expect from us proposals aimed not at the interest of the average Greek but at the interest of the average European – the average German, French, Slovak, Finn, Spaniard, Italian etc.
Alas, none of our noble intentions were of any interest to Europe’s powers-that-be.
We were to find this out the hard way during the five months of ensuing negotiations…
On 30th January, a few days after I had assumed the Ministry of Finance, the President of the Eurogroup, Mr Jeroen Dijsselbloem, paid me a visit. Within minutes he asked me what I was planning to do vis-à-vis the Memorandum of Understanding (MoU) that the previous government had signed up to. I explained to him that our government was elected to re-negotiate that MoU; that is, we would be asking for an opportunity to re-visit the blueprint of fiscal and reform policies which had failed so spectacularly over the past five years, having diminished national income by one third and having turned the whole of Greek society against the very notion of reform.
Mr Dijsselbloem’s response was immediate and crystal clear: “That won’t work. It is either the MoU or the program crashes.” In other words, either we would have to accept the failed policies that were imposed on previous Greek governments, and which we were elected to challenge, or our banks would be shut down – for this is what a ‘crashed program’ entails in the case of a member-state that has no market access: the European Central Bank removes financing of the banks whose doors and ATMs then shut down.
This blatant attempt at blackmailing an incoming, democratically elected government was no one off. In the Eurogroup meeting that followed eleven days later, Mr Dijsselbloem’s disregard for democracy’s most basic principle was confirmed, and enhanced, by Dr Schäuble who spoke immediately after M. Michel Sapin. The French Minister of Finance had just argued in favour of discovering common ground between (A) the validity of the existing MoU and (B) the right of the Greek people to mandate us to re-negotiate crucial parts of the MoU. Dr Schäuble lost no time to give short shrift to M. Sapin’s reasonable point: “Elections cannot be allowed to change anything”, he said with a large majority of finance ministers nodding along.
At the end of that same Eurogroup meeting, while negotiating the joint statement to be released, I asked that the word “amended” be added in front of “MoU” in a sentence that was meant to commit our government to the latter. Dr Schäuble vetoed my proposed phrase of an “amended MoU” saying that the existing MoU is not to be negotiated just because a new government was elected by the Greeks. After a few hours of the resutling stand-off, Mr Dijsselbloem threatened me with an imminent “program collapse” (which translated into bank closures by the 28th of February) if I insisted on adding “amended” in front of “MoU”. On that night, on instructions from my Prime Minister, I left the meeting without a communiqué being agreed to, ignoring Mr Dijsselbloem’s threat. On that occasion the threat proved empty. But it was not long before it returned with a vengeance.
Time and again we would be threatened with bank closures when refusing to endorse a program, the MoU, that had so demonstrably failed in every possible way – macroeconomically, in terms of enhancing microeconomic efficiency, socially, politically. Creditors and Eurogroup finance ministers refused even to engage with our economic arguments. They demanded that we capitulate. They even accused me of daring to “lecture” them on economics in the Eurogroup; i.e. in the body comprising the Eurozone’s finance ministers!
And so it was that Greece’s negotiation with its creditors were conducted: in a dark cloud of threats that our banks would be shut down if we insisted on straying from the MoU. That the threat was credible we knew from the outset, even though we were not prepared to stand down or to lose hope that Europe would change tack.
Even before we were elected, the previous Greek government, in cahoots with the Governor of the Bank of Greece (who had previously served as that same government’s finance minister), had sparked off a mild bank run a month before the election that brought us to power.
After our election, the ECB began to signal that it would steadily switch off the flow of liquidity to Greece’s banking system, thus reinforcing the deposit flight that, at a time of the Eurogroup’s choosing, ‘justified’ the closing down of the banks – as Mr Dijsselbloem had threatened.
Stonewalling, Propaganda and Fragmentation
The negotiations, once they commenced at the level of ‘technocrats’, confirmed our worst fears. The creditors publically proclaimed their concern for getting their money back and for reforming Greece. In truth, however, they only cared about humiliating our government and forcing us to choose between resignation and capitulation, even at the cost of ensuring that creditor nations would never get their money back and jeopardising a reform agenda that only our party could convince Greeks to adopt as their own.
From the beginning, time and again, we proposed that legislation should be passed on three or four areas that we agreed with the institutions – e.g. measures to tackle tax evasion, to shield the tax authority from both political and corporate influence, to address corruption in procurement, to reform the judiciary etc. Their reply was: “No way!” Nothing should be legislated before a ‘comprehensive review’ was complete.
During the Brussels Group negotiations, we would be asked to present our plans for VAT reform. Before we could pin down an agreement on VAT, the troika representatives would shift to pension reforms. They would immediately rubbish our proposals before moving on to, say, labour relations. Once they rejected our proposals on that, they would shift to privatisations. And so on, ensuring that the discussions moved from one topic to another, before anything was agreed, without any serious negotiation on any of topic, creating a process that resembled a cat chasing its tail. For months the troika representatives stonewalled, insisting that we should talk about everything, which is equivalent to negotiating on nothing at all.
Meanwhile, without having put forward any proposals of their own, and while threatening us with a cessation of talks if we dared publish our proposals, they would leak to the press that our proposals were “weak”, “ill-thought” “not credible”. In hope that they would, at some point, meet us halfway, we went along with this impossible process.
Perhaps the greatest impediment to holding a sensible negotiation was the fragmentation of our interlocutors. The IMF was close to us on the importance of debt restructuring but insisted that we should remove any rights that organised labour retained while destroying the surviving protections of middle class professionals. The Commission were far more sympathetic to us on these social issues but forbade any talk of a debt restructure. The ECB had its own agenda. In short, each of the institutions different red lines, which meant that we were imprisoned in a grid of red lines.
Even worse, we had to deal with our creditors ‘vertical disintegration’, as the bosses of the IMF and the Commission had a different agenda to their minions or as the German and Austrian finance ministers had an agenda totally at odds to that of their Chancellors.
Defeated friends, Defeated Europe
Perhaps the most dispiriting experience was to be an eyewitness to the humiliation of the Commission and of the few friendly, well-meaning finance ministers. To be told by good people holding high office in the Commission and in the French government that “the Commission must defer to the Eurogroup’s President”, or that “France is not what it used to be”, made me almost weep. To hear the German finance minister say, on 8th June, in his office, that he had no advice for me on how to prevent an accident that would be tremendously costly for Europe as a whole, disappointed me.
By the end of June, we had given ground on most of the troika’s demands, the exception being that we insisted on a mild debt restructure involving no haircuts and smart debt swaps. On 25th June I attended my penultimate Eurogroup meeting where I was presented with the troika’s ‘take it or leave it’ offer. Having met the troika nine tenths of the way, we were expecting them to move towards us a little, to allow for something resembling an honourable agreement. Instead, they backtracked in relation to their own, previous position (e.g. on VAT). Clearly they were demanding that we capitulate in a manner that demonstrates our humiliation to the whole world, offering us a deal that, even if we had accepted, would destroy what is left of Greece’s social economy.
On the following day, Prime Minister Tsipras announced that the troika’s ultimatum would be put to the Greek people in a referendum. A day later, on Friday 27th June, I attended my last Eurogroup meeting. It was the meeting which put in train the foretold closure of Greece’s banks; a form of punishment for our audacity to consult our people.
In that meeting, President Dijsselbloem announced that he was about to convene a second meeting later that evening without me; without Greece being represented. I protested that he cannot, of his own accord, exclude the finance minister of a Eurozone member-state and I asked for legal advice on the matter.
After a short break, the advice came from the Secretariat: “The Eurogroup does not exist in European law. It is an informal group and, therefore, there are no written rules to constrain its President.” In my mind, that was the epitaph of the Europe that Adenauer, De Gaulle, Brandt, Giscard, Schmidt, Kohl, Mitterrand etc. had worked towards. Of the Europe that I had always thought of, ever since I was a teenager, as my point of reference, my compass.
A week or so later, the people of Greece, despite the closed banks and the scare mongering of the corrupt Greek media, delivered a resounding NO in the referendum. On the following day the Euro Summit responded by imposing on our Prime Minister an agreement that can only be described as our government’s terms of surrender. And the Euro Summit’s weapon of choice? The illegal threat of amputating Greece from the Eurozone.
Whatever one thinks of our government, this episode will go down in European history as the moment when official Europe, using institutions and methods that no Treaty legitimised (e.g. the Eurogroup, the Euro Summit, the threat of eviction from the Euro Area), dealt a major blow at the ideal of an ever-closer democratic union.
Greece capitulated but it is Europe that was defeated.
No European people should ever again be put in a position of negotiating in fear. For that to happen, Europeans must not fear to negotiate a European New Deal that restores the dream of shared prosperity within a democratic polity. If we fail, barbarism will rise up from within. For a continent that has generated the best and the worst humans are capable of, this ought to be a sobering thought.