Tuesday, July 28, 2015

Varoufakis and Plan B; Schäuble and the European Nightmare

Former Greek finance minister Yanis Varoufakis outlined his preparations for a parallel payment system and a possible exit from the euro and made other observations, especially about German finance minister Wolfgang Schäuble, in a conference call on July 16. It was hosted by the London-based Official Monetary and Financial Institutions Forum (“OMFIF”), which appears to have institutional and individual memberships from both the public and private sector from various countries. This includes both public and private fund managers. Though this has not been mentioned in any press accounts, I think it is fair to assume that Varoufakis was paid, and probably paid well, to participate. (Varoufakis is not setting any precedents here. Ben Bernanke for example has appeared before investor groups for pay, now that he no longer works for the U.S. government.) In any case, Varoufakis delivered for his hosts. I am not sure that what he had to say would have led to any good trades, but it was uncommonly interesting.
The July 16 OMFIF conference call was held under the “Chatham House Rule,” which allows for the information to be used but prohibits identifying the source or the other participants present. At the end of the call, one of the hosts, OMFIF managing director David Marsh, aware of the “slightly sensitive” information Varoufakis conveyed, admonished the participants in the call with a somewhat stronger version of this rule:
“…I do have to say also that you did say one or two things which were slightly sensitive regarding various episodes when you were a minister, so I would just like to say to everybody that none of this information that you have been hearing here should be used to make any trades of any sort in any way. But also please do not pass those on to other people, this is a private conversation under the famous Chatham House rule. And the idea is that you hear first-hand from Yanis Varoufakis, and also Lord Lamont, about their experiences –but this is not a public broadcast, this is not the BBC.” (Transcript of the call here; audio here.)
Mr. Marsh also reported that there were “84 people on the line from all over the world.” I suspect there were more than that, since multiple people could be listening to the call on a single speakerphone. Given that, it is surprising that it took 10 days for the information about Varoufakis’ preparations to set up a parallel banking system in Greece in the event the banks to leak. It was first reported on July 26 in the conservative Greek newspaper Kathimerini, which has been critical of the current Greek government. It seems likely that the leak was meant to embarrass Mr. Varoufakis and the current government. Indeed, some claim that Mr. Varoufakis has committed treason or other crimes. (I know nothing about Greek law, but I suspect that these allegations will not go anywhere.)
Since this story broke, Varoufakis and his two questioners Norman Lamont and Marsh agreed that the recording of the call be made available online. Subsequently, a transcript has also been released at the OMFIF website.
Why Varoufakis decided to make the secret preparations for an alternate payment system, including the hacking of the website for tax payments which he says was controlled by the troika, is not entirely clear. He had to have known, Chatham House Rule notwithstanding, that the information was too explosive to stay secret, given the number of listeners.
After listening to the call, I suspect that Varoufakis has bristled at the charge that the Greek government failed badly in its negotiations with the other Eurozone countries because they had no plan, and no credible way to threaten, pulling out of the euro. He implies that Prime Minister Tsipras did not have the courage to escalate the fight with the Eurozone countries by implementing the plan when the European Central Bank (“ECB”) forced the closure of the Greek banks. Varoufakis is prompted to tell this story after Marsh asks:
“You obviously didn’t have a Plan B and did rather weaken your negotiating argument, because the others were absolutely scared of you leaving and yet you said ‘Don’t worry we’re not going to leave.’ I think though just in the last couple of weeks you yourself did start to think about a Plan B, and I think you even gave some inkling about it in your interview with the New Statesman where there was a vote in the inner-cabinet in Athens after the referendum and you were in favour of trying to prosecute a Plan B and you were out-voted. Do you think there was still a chance, if everything goes badly, that there may well be a Plan B and that the Grexit - which nobody wants in Greece, I understand that - may come about even though it is something for which you are unprepared?”
Whatever the reasons Varoufakis made this public, the story he tells shows how dangerous the brinksmanship played by both sides were to European unity. What Varoufakis had in mind, using the Greek tax website as an alternative payment site, would not have been as provocative as another scheme to take over the Bank of Greece and use the euro notes in its vaults. This has been reported to have been an idea of former energy minister Panagiotis Lafazanis and Varoufakis. If Greece had done that, the fury of the ECB would have come down on Greece, and the notes would have been declared counterfeit. Varoufakis does not mention this in the call, and it is not clear whether he really supported this. In any case, the press has dropped this story.

However, setting up an alternative payment system which could be switched to a new currency would have been provocative enough. Whether it would have worked at all is not clear, but it could only have bought Greece a bit of time and all hell would have been let loose in Europe. If there is a decision for Greece to leave the euro, the mechanisms to do this should be negotiated with substantial input from technical experts. It is a complicated undertaking to accomplish smoothly, and disputes over who owes what to whom are inevitable.
Also, in the conference call, Varoufakis indicates that Greece may have been set up. While the Greek parliament is passing legislation required by the preliminary agreement as preconditions to negotiating a final loan agreement, the IMF may very well decide that it cannot participate because the level of Greek debt is unsustainable. That could cause the whole agreement to fall apart, which may lead to a Greek exit from the euro, which is what Schäuble wants, though it is not the preferred outcome for Chancellor Angela Merkel.

According to Varoufakis, Schäuble wants to use Greece to terrorize France:
“[Schäuble] believes that the Eurozone is not sustainable as it is. He believes that there has to be some fiscal transfers, some degree of political union. He believes that, for that political union to work without federation, without the legitimacy that the properly elected federal parliament can render can bestow upon an executive, it will have to be done in a very disciplinarian way. And he said explicitly to me that the Grexit, a Greek exit, is going to equip him with sufficient bargaining power, with sufficient terrorising power, in order to impose upon the French that which Paris is resisting. And what is that? It is a degree of transfer of budget-making powers from Paris to Brussels.”
Schäuble is wrong both about economics and politics. Austerity has clearly not worked, and having Germany dictate to other EU countries how they should manage their affairs will also not work. In a perceptive column in The New York Times, Shahin Vallée writes that a euro leading to Germany being able to dictate will not be acceptable for other major European countries:
“…The choice will soon be whether Germany can build the euro it wants with France or whether the common currency falls apart.
“Germany could undoubtedly build a very successful monetary union with the Baltic countries, the Netherlands and a few other nations, but it must understand that it will never build an economically successful and politically stable monetary union with France and the rest of Europe on these terms.
“Over the long run, France, Italy and Spain, to name just a few, would not take part in such a union, not because they can’t, but because they wouldn’t want to. The collective G.D.P. and population of these countries is twice that of Germany; eventually, a confrontation is inevitable.”
While the France of François Hollande is not the France of Charles de Gaulle, France is still a proud country and will not stand for Germany dictating its fiscal affairs. France may be able to be “terrorized” (probably too strong a word) in the short-term, but that will not last long.

The basic problem is that a monetary union implies a fiscal union, and for that to work in Europe, it must have legitimacy and be subject to democratic control. There is no clear path for that to happen. Jean Monnet’s European dream is in danger of turning into a nightmare.

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