What Yanis Varoufakis actually said: and it’s very interesting

January 31, 2015

The media have managed to completely misunderstood what Yanis Varoufakis actually said about the Troika, and in the process completley miss some far more important other things he also said. And it’s only the first week of the new government.

What has dominated the reporting of his remarks after a meeting with Eurogroup chairman Jeroen Dijsselbloem on January 30th was when it appeared he said that Greece would no longer cooperate with the Troika. He was speaking in Greek and in the multilingual translation frenzy what he actually said was misheard and misunderstood. What he said was “”We are not going to co-operate with a rottenly constructed committee.” What he meant by this was not that Greece would not work with the ECB and IMF but that it would not work with the Troika’s permanent infrastructure that was embedded deep into the Greek state to oversee the implementation of the ‘reform’ program (the program that is destroying the Greek economy). The new Greek government will work with the Troika but only through direct talks with the bodies concerned, the ECB and IMF etc, and not via it’s apparatus in Athens.

All the fuss about the Varoufakis statement about working or not working with the Troika meant that somethings very important that he really did say, and very clearly, was simply either not heard or it’s significance has been completely overlooked.

What Varoufakis said in the Newsnight interview was this:

Suppose a friend of yours were to come to you and say that he or she had difficulty paying the mortgage because of a reduction in their income – they lost their job or something like that. They have a great idea on how to solve this problem: they would get a credit card and draw money from it in order to meet the mortgage payments for the next few months. Would you advise them that they should continue to take these tranches of loans from the credit card in order to deal with what is essentially an insolvency problem?

The Greek Finance Minister is saying that Greece is bankrupt.

Everyone knows Greece is insolvent, of course, but no-one has ever stated it officially. The Troika’s position is that Greece’s problem is a temporary liquidity shortfall: lending it more money so it can meet current debt service obligations is justified because structural reforms will lead to renewed growth and increased income, enabling it to meet its obligations (including those for the new loans) in the future. But Varoufakis disagrees with this interpretation. His view is that while things remain as they are, Greece will never recover. The bailout program locks it into a debt deflationary spiral which simultaneously reduces its income and increases its debt burden. Continuing to accept more loans in order to meet debt service obligations only makes matters worse. What is needed is debt restructuring coupled with measures to restore growth.

Varoufakis made it clear in the Newsnight interview that he is by no means opposed to structural reforms:

We do not want to reverse structural reforms. We want to deepen and extend them.

But he is deeply critical of the reforms imposed under the bailout terms, which he says do not address the “malignancies” of the Greek economy. He complains that the privatisation program is a fire sale: the proceeds do not go into new investments or tax cuts, but simply go to meet debt service. Selling the family silver simply staves off default for a little longer. It does not restore Greece’s income. And nor would decades of cost-cutting and tax raising to put Greece’s debt/GDP ratio on a sustainable path. The large primary surpluses forecast by the Troika would squeeze all demand out of the economy. They are almost certainly impossible to achieve, and even if they were achievable, it is questionable whether they would restore the public finances anyway. The prospect of severe austerity for years to come is a serious disincentive to hard work and enterprise, which is what is really needed in Greece. If all your output disappears down the black hole of debt service, why bother?

Varoufakis wants an end to the policies that entrench debt deflation.

“The crisis of the last five years has been detrimental to the whole continent. We want to end this”.

He is calling for a New Deal, not only for Greece but for the rest of Europe.

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