The Varoufakis conundrum

I support what Yanis Varoufakis is trying to do in Greece. I see him as someone who is trying to change the debate in Europe from a narrow one about fiscal rectitude that brings out all sorts of nationalistic prejudices to a wider debate about how precisely to re-shape the European Monetary Union into a sustainable currency union despite differing political and social agendas in individual eurozone nations. Frankly, this is the only way the eurozone stays together. Thus far, Yanis has not been successful in this endeavour and I have some comments below as to why.

The reason I am bringing this situation up is because at the weekend, Varoufakis appeared on a well known German talk show hosted by the German presenter Günther Jauch. And while it was an ideal forum for him to take his message directly to the German people, the appearance was disastrous and set back his efforts to bring Europe together.

Before the appearance, the image Germans had of Varoufakis was that he was a dashing and charismatic rebel, a bit of a heartthrob, but not necessarily someone to be trusted. To put this in American terms, many Germans hated Ronald Reagan as ‘flatterhaft’, i.e. not substantive and would never have elected a former film star as Chancellor. The closest Germany has come is in electing Gerhard Schröder Chancellor, a man who was considered somewhat ‘flatterhaft’ i.e. unreliable. But he was a career politician more similar to Bill Clinton than to Reagan. Tsipras and Varoufakis, on the other hand, are seen as political novices who are not necessarily to be trusted. And this is why CDU bailout extension dissenter Klaus-Peter Wilsch said in parliament, “Look at Tsipras, look at Varoufakis; would you buy a used car from them?” in making his point about not giving an extension to Greece last month.

Moreover, the Greek Prime Minister had recently decided to go ahead and seek reparations against Germany for the losses Greece suffered during Nazi occupation in World War 2, something that had been taken on in Germany with disbelief. When Syriza took power, polls said only 26% of Germans wanted Grexit. Now the figure is up to 52%. That’s a huge change. And it is due specifically to the demonization of and mistrust for the new government.  In short, the Greek government had no credibility with the German public whatsoever before the Varoufakis appearance on Jauch’s program.

This is the context in which Yanis appeared on the show. So when the presenter Jauch did a bit of gotcha with him regarding a video in which he talked of showing Germany the proverbial middle finger and made the motion literally for emphasis, it would have been a good opportunity for Varoufakis to build more trust by owning up to the situation and explaining that it had been ripped out of context. What I saw, however, was Yanis saying that the video had been “doctored” and that he would never make such a gesture and that he was ashamed that the German people would think he would show them the middle finger.

The problem with this is that Yanis did say Greece should “stick the finger to Germany”, raising his middle finger in the process.

Here’s the video:

Go to the 40:20 mark for the relevant comments.

Why is this a problem? Trust.

What Varoufakis argues, namely that Greece should have defaulted within the eurozone, makes sense. And the German taxpayer would understand this. After all, I argued at the time that the Germans would not bail out Greece, that they would allow Greece to default. Why heap a burden on the German taxpayer with bailouts instead of making the true creditors of the now bankrupt Greek state pay the bills or negotiate an equitable restructuring? That’s a message the average German would understand.

But I was wrong. I did not understand how crippled German banks would have been if the Germans did do this. And I did not understand the fear that Germany had of the consequences of allowing Greece to default. Germany saw a massive 20% increase in its government debt to GDP due to the recent financial crisis from the implosion in trade, a shortfall in private demand, huge deficit spending, and large bank bailouts. That took them from barely within reach of the Maastricht 60% hurdle to well out of reach. This was a national embarrassment for those who value so-called fiscal rectitude. And so the Germans have sought to limit increases in their debt burden ever since.

Still, the message and the context would resonate with German viewers, that Germany bailed out its banks and made European taxpayers suffer in order to protect banks and bankers. But that’s not the message the viewers heard. Instead they heard Yanis categorically deny that he had ever made the “stick the finger to Germany” comment and they heard him call the video “doctored”. This is simply not credible, frankly. And in the context of a situation in which trust is in short supply, the appearance, then, was a disaster. And I might add, it was a disaster because of Yanis Varoufakis, because of the lack of credibility of his reply to the video stunt, not because of the comments on the video itself. He is never going to gain the trust of the German public now.

Thus, as I have been saying, it looks like we are at a crossroads here. It is simply not politically feasible for the German government to make any more concessions to the Greeks because it would only bolster domestic anti-euro parties like the Alternative für Deutschland. At the same time, the German position on adherence to the bailout extension is probably not politically sustainable for the new Syriza-led government. As a result, the only outcome which allows both governments to win politically is default within the eurozone, exactly as Varoufakis was suggesting the Greeks do in 2010. However, doing so now will impose more costs o the Greek domestic economy than it would have in 2010 and it will have much less impact on the rest of Europe, which is now de-coupled from Greece. Capital controls, local currency scrip and parallel currency are all going to be features of a Plan B Greece should be and probably is making right now.