Yanis Varoufakis, Professor of Economic Theory in the Faculty of Economic Sciences of the University of Athens speaks to the Italoeuropeo about the rescue plan for Greek.
The Europe’s economic conditions is under the attention of the economists and intellectuals because many bankers and institutions are frightened of a new contamination after Lehman Brothers’ bankruptcy during 2008.
He has taught at several British universities, including the University of Glasgow and Cambridge University and he is the author of “A modest proposal for overcoming the euro crisis” written together with Stuart Holland.
Q:How many billions the European Central Bank have already loan to Greece?
A:It depends on how we choose to count it. Of the €110 billion of Bailout Mk1, agreed upon in May 2010, the IMF lent €30 billion leaving the rest to be divided between the ECB, the European Commission and the rest of the eurozone countries (in proportion to their GDP).
Q: At with interest rate?
A:The interest rate is variable. At first it was set at 6%, then it was reduced slightly last March but now it is tending back to 6% as the ECB’s base rate is rising. Very soon the March 2011 rate reduction will have withered as a result of the rising ECB rates.
Q:This mean that the amount of the only interests will add up to?
A:It depends on the repayment schedule. Initially, the money borrowed was meant to be repaid in four years; an impossible task. In March of 2011 the repayment period was elongated, at a slightly lower (albeit currently increasing) interest rate. The more time Greece is given to repay its debts to the ECB, and to the rest, the greater the mountain of interest that it will have to repay.
Q:The Greek Government has approved the austerity plan that includes privatization. Why is it dangerous?
A:For a large number of varied reasons. Here is a brief list: (a) When you try to sell a lot of assets in a depressed market, the danger is that you will not raise noteworthy revenues. (b) When the revenue raised is used to service or to buy back your own state’s bonds that will most likely be haircut in the future, this amounts to a waste of public assets/revenues. (c) The banks that are for sale, e.g. Postbank, are healthy banks with good quality capital. Who will buy them? Effectively insolvent banks which want to get their hands on the state owned small banking entities in order to improve their asset values. It is like selling a healthy company to a bankrupt one. (d) In some sectors, e.g. energy, the aim of revenue maximisation is at odds with the aim of efficiency gains through greater competition (since you make more money by selling companies with large monopoly power).
Q: Can you tell us the limits of the government measures?
A:The savage recession poses the greater limitation. When caught in a downward spiral of debt and recession, any attempt to arrest the downfall by means of spending cuts and tax hikes only makes the debt to GDP ratio rise and the tax base shrink. Failure is then guaranteed.
Q:In what consist your proposal? [in photo Greek economic professor]
A:First, Europe needs to grasp the simple truth that the triple crisis it faces (a debt crisis, a banking sector crisis and a crisis of under-investment) cannot be solved by forcing German taxpayers to guarantee relatively high interest loans that are to be given to insolvent member-states. These loans are simply wasted economic energy. To get these loans Greece et al are forced to introduce savage austerity measures that fuel domestic recession, the result being lower national income, lower aggregate taxes and, inevitably, a higher debt-to-GDP ratio. And what do the recipient governments do with these loans? They use them to repay past debts to (mostly) European banks which, immediately, hoard most of that money (instead of lending it to business) as a result of their own catastrophic financial health (courtesy of the junk derivatives and bonds on their books). In short, the German taxpayers’ money and guarantees end up in a black hole, fuelling recession in the periphery and discontent in Germany.
Is there an alternative? Absolutely! Consider the following three-step policy that attacks all manifestations of the crisis head on:
1. Use the funds raised by the European Financial Stability Mechanism (EFSF) to recapitalise the eurozone’s (almost insolvent) banks in exchange for shares in these banks. Once the banks are cleansed, they will no longer need to rely on massive liquidity injections from the ECB (and can even be asked to take a selective haircut on bonds from the periphery). The EFSF then sells the shares and recoups its funds, thus costing the German taxpayer nothing (much like the TARP scheme in the USA).
2. A conversion loan is organised by the ECB for the part of the debts of member-states which does not exceed the EU’s Maastricht limits (60% of GDP). In brief, the ECB takes on its books forthwith a tranche of the sovereign debt (of all member states that request it) equal in face value up to (the Maastricht-compliant) 60% of GDP and finances this by issuing eurobonds that are its own liability. Naturally, the member-states continue to service their debts (to the ECB now) but at the lower rates (and with the longer maturity) secured by the eurobond issue.
3. Empower the European Investment Bank (EIB) to fund a large scale investment program by which permanently to counter the forces of recession in peripheries that keep dragging the rest of the currency union (including parts of German society) toward stagnation. How can this happen? By allowing for the 50% of project funding (which now the bankrupt member-states must raise!) to come from the ECB’s net eurobond issues.
Note the great benefits of such a policy mix:
· German taxpayers do not guarantee/provide any loans to Greece, Ireland etc.
· The aggregate mountain of EU debt and banking losses shrinks (a development that will calm the markets)
· No across-the-board haircut on existing debt is involved (thus averting a crisis of confidence and losses in pension funds etc.)
· The banking sector is revitalised
· The EU’s two great institutions (the ECB and the EIB) combine forces to bypass ineffective states (like the Greek one) in spearheading Pan-European investment
· No new institutions (and, therefore, no major Treaty changes) are necessary
· With the debt-banking crisis over, and investment projects run at the EU level, it will be much easier to introduce balanced budget rules for member-states, in accordance to Germany’s wishes.
Naturally, to get our leaders to agree on such a radical policy mix requires a radical Gestalt Shift throughout our continent. It is our duty to effect it.
Q:Following your advices how long does it take for a recovering?
A:I think that the euro crisis could be turned around in a matter of months. Remember: Europe is not facing a large aggregate debt. Our problem is the manner in which it is distributed on the weakest shoulders.
Q: Are the positive effects immediate?
A:Of the tranche transfer to the ECB, yes. The bond markets will immediately rejoice, funds will flood into the eurobond market from China and elsewhere and the interest rate spreads will collapse. The banking crisis will take about a year to resolve, since the stress tests and the recapitalisation will be more time consuming. Lastly, the investment-led recovery should only take about a year to be felt. For even if its multiplier effect takes time, the very announcement of the intention to go down that road will stimulate optimism and much needed private investment throughout the eurozone.
Q:One of your hints regards investments in Greece by the other European State. Which interest do they have?
A:It is by the European Investment Bank, which borrows internationally at much less than 3%.
Q: What can be a consequence of the Euro Area if another solution is adopted?
AIt depends on what it is. As long as it is rationally designed and not yet another attempt to remain in denial about the true, systemic nature of the euro crisis, I am more than happy to study it.
Yanis Varoufakis forthcoming books
- The Global Minotaur: The true causes and nature of the current economic crisis,
- Modern Political Economics: Making sense of the post-2008 world,London and New York: Routledge, with J. Halevi and N. Theocarakis, April 2011
Yanis Varoufakis previously published books
- Game Theory: A Critical Text, London and New York: Routledge, 2004 with S. Hargreaves-Heap), 2004
- Foundations of Economics: A beginner’s companion, London and New York: Routledge, 1998
- Rational Conflict, Oxford: Blackwell Publishers, 1991