Dear Yanni,
On the one hand I am writing to congratulate you. And on the other to express my disdain towards those who handed my friend the good ship’s wheel after the vessel has struck the iceberg.
Utterly familiar with your effervescent optimism, I know you mean it when you declare confidence in Greece’s capacity to overcome its current woes. It is the same enthusiasm that made you, back in 1994, to believe, contrary to almost every other analyst within or without Greece, that Greece could be admitted to the Eurozone. That faith of yours you turned, almost single-handedly, into a reality (from your position of chief negotiator with the EU and head of the Council of Economic Advisors).
However, Yanni, this time things are different. Back then, in the mid-nineties, Europe was creating something new and audaciously exciting. The issue then was whether small and fragile Greece could be admitted into this new European construct via a loose interpretation of the rulebook and with the assistance of some creative macro-accounting. Today, we have a wholly different kettle of fish. Today, Europe is disintegrating. That same construct is falling apart unstoppably, and the repercussions of its demise will prove a toxic solvent for the whole European project. Under these circumstances, “a loose interpretation of the rulebook with the assistance of some creative macro-accounting” will simply not do. And it won’t do not just for Greece but for Europe’s hard core either.
In accepting the position of Finance Minister, you accepted two gigantic challenges. The first one concerns, naturally, your forthcoming talks in Brussels on Bailout Mk3. The second challenge is the task of internal reforms, a set of policies on which you have been particularly vocal over the past few years (from your position of head of IOBE think tank).
Regarding the second task, everyone is watching you from the sidelines, eager to see how you will implement the reforms that you have been arguing in favour of for such a long time. All eyes will be on the manner of the implementation as well as on their impact (with your predictions of large positive effects on Greek GDP at stake). You know that you and I disagreed on the likely effect and relative significance of the particular reforms that you have proposed. However, this disagreement is neither here nor there. What concerns me the most is that you may never get a chance to implement your reforms in view of the accelerating derailment of the euro-locomotive and its immediate ill effects on Greece’s capacity to become governable again before your ministerial career is over. To put it bluntly, success in your first gargantuan challenge is a prerequisite for even getting an opportunity to come face to face with your second challenge.
So, let’s concentrate on the first challenge: negotiations with Europe. Yanni, time has run out for prolonging the bankruptcy and extending it into the future by means of longer repayment periods and even greater loans. Bailouts Mk1&2, in the final analysis, were nothing more than exercises in ‘gaining time’ until some solution was found at the European level. You and I disagreed on the wisdom of this strategy. Alas, our disagreement is now ‘academic’. This is so because a third bailout, a Bailout Mk3, will not gain us significantly more time as the sand in the Eurozone’s hourglass is running out. You will not be given more than one or two opportunities to address Econfin. It will be a major waste to use them up in order to seek looser terms, more loans, repayment extensions. If these are the ‘gifts’ that you return to Athens with during the summer, history will bestow upon you the cruelest and most unfair punishment ever exacted: the person who did so much, and with such great passion, to get Greece accepted into the Eurozone will be condemned to sit at his Syntagma Square office and watch helplessly as Greece is leaving a disintegrating euro.
Can you stop the rot all by yourself? I know not. But I shall make a point of conjuring up optimism like that which typifies you to table some thoughts on that which needs to be done: You must bind the Europeans to one or two moves that will deter any thoughts of Greece being chucked out of the Eurozone within the next few months. Moves that will, at the same time, help shift the Econfin agenda in ways that may help avert the impending euro-deconstruction. Which moves?
Move 1: Seek no new loans, even though you know perfectly well that the coffers are empty and the timeline of Greece’s repayments is well and truly off track. Instead of loans, propose that the money that went into Greek banks (the so-called recapitalisation program) does not count as part of Greek national debt and, in exchange, the EFSF retains common shares of these banks (in proportion to the money it placed into them) while the ECB takes it to itself to supervise the said banks (even wind them down, in an orderly fashion if need be). Once the crisis is over, the EFSF can sell these shares at multiples of the purchasing price, thus ensuring that the European taxpayers get their money back.
The advantage of this move is three-fold: It ‘liberates’ 30 billion euros from Bailout Mk2 for other (productive) uses; it creates a de facto alliance between Athens, Rome and Madrid; it turns european institutions into partners of the Greek banking system, thus giving our partners good cause to cease and desist from all talk of expelling Greece from the Eurozone.
Move 2: Based on a multitude of similar examples (e.g. Britain’s loan repayments to the USA after the WW2), demand a moratorium on repayments to the ECB, the IMF and the EU for one year and until the recession ends. From then on, repayments ought to be linked to Greek GDP growth. The advantage of this is that it gives the troika a genuine motive to see the end of Greece’s vicious recession and, to boot, offer Hollande’s team an opening for arguing in favour of a more dynamic involvement of the European Investment Bank (and the European Investment Fund) in pursuing growth strategies for the whole of Europe.
In short, your main challenge is to bind our European partners to Greece’s recovery, to ending all speculation about a Grexit, and to moves that resonate with genuine attempts to save the euro. “It won’t be easy” is the understatement of the century. I very much doubt that it is feasible. What I do know is that, otherwise, if Greece simply secures an extension or more money or looser bailout conditions, the country will almost certainly be expelled from the euro and the euro will cease to exist shortly afterwards. Already, many old acquaintances of your (of which Hans-Werner Sinn is the most visible) are working towards those dystopian ends.
Yanni, 15 years ago you managed to bind the European politicians to admitting Greece into the Eurozone. When you meet them again, in your new capacity, half of them will not recall who you are and the other half will despise you for your achievement (convinced as they are, courtesy of their fallacious analysis, that Greece is responsible for the Eurozone’s problems). During the following weeks you must bind them again. Only this time, you will not be able to do so through smooth-talking, cajoling, creative macro-accounting or your youthful intelligence. This time you must bind them to things that are constitutionally against their gestalt. What they are prepared to give you is more rope to hang yourself (extensions, looser repayment schedules etc.). You must turn it down and demand, instead, a ladder on which they must also climb.
Ending this letter on a more personal note, you know my feelings towards you. Setting our large disagreements over the past two years aside, I am incensed that the corrupt political class only turned to you now that the ship is almost beyond refloating. You are the Minister of Finance of a government made up of the same ancien regime that brought us to the edge of the abyss. You will find precious little genuine support from them. I know that you know that they are too ready to watch you fail so as to unload on your shoulders the impending catastrophe (you see, they are so aggressively stupid that they still believe there will be a ‘later’ for them to dominate). I truly hope you teach them a good lesson and that you succeed. The only help I can offer you at this moment is to re-confirm my feelings for you but also to issue a loud warning that the Eurozone is collapsing all around you and your efforts to save Greece.
