Yanis Varoufakis and Wolfgang Schäuble are fierce defenders of polar-opposite economic views. They go head-to-head Thursday afternoon in Luxembourg. How their struggle ends will shape the future of Europe.
June 17, 2015
by Edward Robinson originally published in in the July/August Rivalry Issue of Bloomberg Markets magazine.
Yanis Varoufakis pushes away from his desk and strides across his office overlooking Syntagma Square in the heart of Athens. Dressed entirely in black, Varoufakis looks more like a hit man in a Quentin Tarantino movie than the finance minister of Greece. On this April afternoon, the economist is spoiling for a fight.
In 72 hours, in Riga, Varoufakis is going to face Wolfgang Schäuble, Germany’s finance chief, and 17 other ministers who comprise the Eurogroup. They’ve been pressing Greece to slash public spending, privatize its biggest port, and collect more taxes from its citizens in exchange for disbursements from €240 billion in bailout loans. But the combative leftist government led since January by Prime Minister Alexis Tsipras promised Greeks it would end austerity, so it’s up to Varoufakis to negotiate a new agreement to receive the final, €7.2 billion tranche.
As Varoufakis holds forth from his sofa on the forces at work in this latest episode of Greece’s debt epic, it’s clear he’s not going to give in to Schäuble. He decries the austerity program as a charade that’s plunged Greece into its own version of the Great Depression, with a 25 percent unemployment rate and an economy that’s contracted by a quarter since 2010. And he refuses to sanction more painful cuts that hurt ordinary people and leave shipping tycoons and bankers unscathed.
Instead, Varoufakis wants a new deal for Greece, one predicated on stimulating the economy. To get that, he’s prepared a shortlist of changes Greece can live with, such as posting a budget surplus of 1 to 2 percent instead of the 4.5 percent target sought by its creditors. “This place is in serious need of reform; there’s no doubt about that,” says Varoufakis, 54, a sinewy, bullet-headed man with deep-set eyes. “To expect an economy that has shrunk so badly, where there is no credit and no investment, to expect it to produce such a surplus is madness; it’s complete madness. It’s like condemning us to die.”
Three days later, it’s Varoufakis who’s left beaten. In a closed-door meeting at the National Library of Latvia in Riga, Schäuble and the rest of the Eurogroup reject his proposal. Several ministers are so infuriated by Varoufakis’s stubbornness, according to people present, that they take turns insulting him: “amateur,” “time waster,” “gambler.”
Schäuble, 72, says nothing. He doesn’t have to: He’s the most influential minister at the table, thanks to Germany’s economic might. His ruddy face is an impassive mask that betrays no hint of schadenfreude at his rival’s comeuppance. He’s long taken a hard line on Athens’s inability to clean up its wasteful political institutions. In 2012, he mulled ousting Greece from the euro zone in a conversation with Timothy F. Geithner, then the U.S. secretary of the Treasury,who shared the anecdote in his 2014 memoir, Stress Test. The week before the Riga confab, Schäuble spoke sternly about the importance of nations fulfilling their obligations. “In Europe, we have good reason not to provide financial assistance without demanding something in return,” he said at a symposium at the Brookings Institution in Washington. “And we do not provide it if a country does not use it to help itself.” (Schäuble declined to be interviewed for this article.)
The rumble in Riga looks like a stinging defeat for Varoufakis, although he denies he was insulted. “My fellow ministers never, ever addressed me in anything other than collegial, polite, respectful terms,” he would write weeks later on his blog. In any event, on April 27, Tsipras appoints Deputy Foreign Minister Euclid Tsakalotos to take over day-to-day negotiations with the Eurogroup and Greece’s creditors. But Tsipras doesn’t sack his old friend and economics tutor. He shifts him into a supervisory role in the talks with Brussels. Varoufakis has survived to fight another day.
‘You’ve got different cultures and languages and politics shoved into a blender.’
Schäuble and Varoufakis may have shared the stage for only five months, but they’ve become archrivals in the battle of ideas that’s shaping the euro zone’s response to the worst crisis in its 16-year history. One man is a self-styled “erratic Marxist” who’s spent his career in the academy teaching economics and game theory. The other is a lawyer and stalwart of the conservative Christian Democratic Union who’s logged 40 years of lawmaking in the Bundestag, Germany’s parliament. Varoufakis has won praise from economists such as Joseph Stiglitz for his penetrating critiques of the euro area’s flaws. Schäuble helped form the 19-member monetary union.Their contest is rooted in a question that was left unanswered when the single currency went live on Jan. 1, 1999: What’s the plan if and when one of its members is about to go bust? Greece seems to be nearing that fate at breakneck speed. Over the weekend, eleventh-hour talks between Athens and its creditors collapsed, with no indication the two sides could resolve their differences. At a Eurogroup meeting scheduled for Thursday afternoon in Luxembourg, Varoufakis, Schäuble, and other finance ministers would be scrambling to avert a calamity. Varoufakis argues that the troika—the European Commission, the European Central Bank, and the International Monetary Fund—has been making it up as they go along. He says selling the port of Piraeus to the Chinese or slashing state workers’ pensions won’t save his country or, for that matter, the euro area. What’s needed, he says, is a redesign making it easier for rich nations such as Germany to channel “idle savings” into investments in poorer countries like Greece. “This is not a technical problem; it’s an architectural problem,” Varoufakis says. “And the current architecture can’t last.”Schäuble counters that the situation isn’t really that complicated. The minister, who finally achieved his long-sought dream of erasing Germany’s budget deficit with a “black zero” last year, says living within one’s means is the true source of prosperity. Spain’s economy, though still beset by high unemployment, is now outperforming France’s and Germany’s after cutting state spending and loosening hiring rules to make its companies more competitive; Portugal and Ireland have also notched positive results. “The countries that have implemented real reforms are starting to see their efforts bear real fruit,” Schäuble said at Brookings. “Structural reforms aren’t just about making labor markets more flexible. Our reforms are to improve education and training, streamline administration, and make a more efficient judicial system. The weakness of institutional frameworks is the main reason for insufficient growth.”Each man’s position says a lot about where he comes from. Schäuble exemplifies the German ideal that rules-based governance is the foundation for the euro zone’s legitimacy, says Daniela Schwarzer, director of the Europe Program at the German Marshall Fund of the United States, a Berlin-based think tank. Rulemaking is so fundamental to Schäuble that he staffed his ministry with more attorneys than economists.In Greece, a country where merchants routinely make sales off the books to avoid paying value-added taxes, rules are largely meant to be broken, laments Harry Theocharis, a member of the Hellenic Parliament and a former head of the nation’s tax collection agency. Dwelling in a land where laws change with regular randomness, Greeks tend to improvise their way through their financial lives. For Varoufakis, tearing up Greece’s austerity program isn’t an act of insubordination; it’s a form of creative destruction that can yield a fairer plan for reviving his country. “That’s the fundamental conflict between Greece and Germany,” says Schwarzer, a German political economist. “We say this is a rules-based arrangement, and if someone breaks them, that is not a base we can work on.”The clash has become emotionally raw for two countries whose relations have been tense ever since Germany occupied Greece during World War II. German tabloids have run headlines such as “Sell your islands, you bankrupt Greeks … And the Acropolis, too!” Greek papers have fired back—in one instance caricaturing Schäuble in a Nazi uniform. Ordinary Greeks praise Varoufakis for standing up to Schäuble. “He’s a patriot,” says Emmanouil Karagiorgos, 42, the owner of a Greek restaurant in Berlin. The German, in turn, has won plaudits from his own countrymen for playing it cool with Varoufakis. “Schäuble hasn’t lost his temper,” says Carl Graf von Hohenthal, a former deputy editor-in-chief of Die Welt, one of the country’s largest dailies. “He’s an old fox.”As Bloomberg Markets went to press in early June, Tsipras and Varoufakis weren’t just fighting with Schäuble and Greece’s other creditors. They were also sparring with their own allies within their party, Syriza, as the deadline for paying back €1.5 billion ($1.7 billion) in IMF loans neared. Syriza’s hard-left faction was balking at any compromise the pair might make on raising taxes or cutting pensions for state workers. As the prospects the nation would default and perhaps exit the euro zone increased, investors pushed up yields on Greek 10-year bonds 50 basis points, to 11.4 percent, as the benchmark ASE Index plunged 5.6 percent.Even if Varoufakis does make a last-minute deal to fend off default, the respite will not last long. A wall of debt is rapidly approaching Athens. As of June 1, the nation’s total liabilities stood at €328 billion, or 174 percent of GDP—almost double the 90 percent average in the euro area. Within just a few months, Greece must scrape together €8.2 billion to pay down loans issued by the Frankfurt-based ECB and the IMF and another €514 million for bondholders. To stay afloat, the Tsipras-led government will have to seek a third loan package—this one for €30 billion—according to Eurasia Group, a New York–based research firm. Then the cycle of crisis will begin anew.“It’s questionable just how much an outsider should come into countries and explain how they should reform themselves,” says Charles Dumas, chairman of Lombard Street Research in London. “It’s at the heart of the whole business of the euro zone. You’ve got different cultures and languages and politics shoved into a blender—and basically they are being told they have to be like Germany.”
‘He’s an academic renegade.’
On a balmy April evening in Athens, commuters are hurrying to their buses around Syntagma Square as tourists admire the neoclassical facade of the Hellenic Parliament building on its eastern flank. Three years ago, this plaza exploded in plumes of tear gas when scores of rock-throwing Greeks clashed with police and demanded an end to the austerity program that was upending their lives. Graffiti blaring “IMF Get Out!” and “Smash the Troika” soon marred ancient city walls. The calm on this spring day belies the nightmarish fears of investors and lawmakers around the world bracing for a Lehman-caliber meltdown should Greece crash out of the single currency.
Varoufakis approaches the entrance to the Hotel Grande Bretagne on the square’s northeast corner arm in arm with his wife, artist Danae Stratou. The glamorous couple, profiled in the pages of Paris Match earlier this year, greet well-wishers with hugs and kisses amid the flashes of news cameras. The finance minister makes his way through the ornate lobby and into a ballroom filled to standing capacity with hundreds of Greek bankers. In a somber speech, Varoufakis notes the mounting nonperforming loans on their books. Many in the audience hold their smartphones over their heads and capture video of Varoufakis, just like kids at a pop concert.
Varoufakis is a rare combination of scholarship and rock ’n’ roll. He’s constantly invoking “deflationary spirals” and “animal spirits” and “macroparasitic behavior” in his running narrative on Greece’s economic travails. In his 2011 book, The Global Minotaur: America, Europe and the Future of the Global Economy, he traced the origins of the 2008 financial crash all the way back to the Bretton Woods Conference in 1944 and the formation of the IMF and the World Bank. “Most economic models ignore historical context, but Yanis’s work is rooted in political and economic history,” says James K. Galbraith, a professor of government at the University of Texas at Austin, where Varoufakis taught until December. “He’s an academic renegade.”
Varoufakis tools around his native Athens on a Yamaha motorcycle and shows up for meetings with the likes of U.K. Chancellor of the Exchequer George Osborne wearing a leather jacket and an untucked electric-blue shirt. He’s matched his unconventional wardrobe with a casual disregard for the niceties of diplomacy. After his first talk with Schäuble in February concluded on a sour note, the German said at a post-session news conference in Berlin, “We agreed to disagree.” Varoufakis frowned. “We didn’t even agree to disagree from where I’m standing,” he retorted. Awkward.
European finance ministers tend to stick to a script of platitudes in public while their staffs iron out the technical details of agreements behind closed doors. Not Varoufakis. During the past four months, he’s brainstormed a raft of major euro-zone policy changes at conferences, in press interviews, and in meetings with his counterparts. He’s proposed converting the ECB’s term loans to Greece into bonds that are indexed to economic output. That way, the better the nation’s economy performs, the more debt it can pay down. And he’s suggested that the ECB could kick-start the Greek economy by purchasing bonds issued by the European Investment Bank, a Luxembourg-based institution that loans about €77 billion annually to transportation projects, alternative energy ventures, and small and medium-sized businesses. The EIB could invest the proceeds in promising Greek enterprises, which would bolster income and help businesses pay down debts to the country’s strapped banks. “It would be foolish not to do this,” Stiglitz, a Nobel Prize winner, said at a symposium in Paris in April where Varoufakis described his idea. Greek business leaders agree. “There’s been too much focus on austerity,” says Alexis Macridis, CEO of Chryssafidis, an industrial parts importer in Athens. “Without growth, we’re stuck in a negative feedback loop of high unemployment and no investment.”
Schäuble and his peers aren’t interested in Varoufakis’s scenarios. They want Syriza to carry out the reforms the previous government committed to. Varoufakis may believe it’s indefensible to pursue reforms that have caused so much hardship for Greeks. For Schäuble, it’s anathema that a euro-area government could tear up such an obligation because it didn’t agree with it. As for ordinary Germans, they became fixated on Varoufakis after a video from 2013 surfaced on YouTube showing him giving their country the finger. (Varoufakis said the video had been “doctored.”) “Actually, it’s not Varoufakis’s middle finger that’s been the problem; it’s this one,” says Jens Bastian, a German economist who lives in Athens, wagging his index finger. “He’s lecturing, and while I may think he’s right, that’s not the job of a finance minister.”
Varoufakis shrugs off such criticism. “This accusation that I lecture at people—what that really means is that I try and talk economics in the Eurogroup, which nobody does,” he says. “To imagine that we can sort out our problems simply by taking the next loan tranche and dealing with our liquidity problem for another two months flies in the face of reality.”
‘We agreed to disagree,’ said Schäuble. Varoufakis frowned. ‘We didn’t even agree to disagree from where I’m standing,’ he said.
It’s market day in Offenburg, and the aroma of freshly baked bread wafts down the cobblestoned lanes of this town nestled between the Rhine River and the Black Forest in southwestern Germany. Local families, along with French shoppers who’ve come over from Strasbourg for the day, browse produce stands teeming with strawberries, rhubarb, and white asparagus grown in nearby fields. A butcher hawks bauernwurst, knoblauch salami, and other sausages stacked on his rolling meat wagon. On a Saturday morning in spring, this community of 57,000 exudes a responsible prosperity that seems perfectly in keeping with its most influential resident. Schäuble, born in the nearby college town of Freiburg, has represented Offenburg in the Bundestag since 1972. When he and his wife, Ingeborg, an economist, stay at their flat in town, he likes to have a dinner of schnitzel and french fries and catch up on local news at the Hotel Sonne, a community hub that dates back to the 14th century. At a wine tasting the hotel hosted recently to showcase local rieslings, Carola Vogt described Schäuble, a friend of her family’s, as bodenständig, a man rooted to his native soil. Offenburg, located at Europe’s epicenter, has endured three wars since the 19th century. “There is no better place to explain why we need a unified Europe,” says Vogt, a tour guide.
That vision of Europe has been Schäuble’s lodestar. As West German Chancellor Helmut Kohl’s top deputy, he led negotiations to unify West and East Germany in 1990. The same year, a mentally ill man shot Schäuble at a campaign rally, leaving him paralyzed from the chest down. He persevered, succeeded Kohl as chairman of the Christian Democratic Union in 1998, and then won approval of Germany’s adoption of the euro in the Bundestag. Schäuble’s bid to stand for chancellor himself ended after his party was embroiled in a scandal involving illegal campaign donations. Angela Merkel replaced him as head of the CDU in 2000, and five years later, she was elected chancellor. “His destiny was not fulfilled,” says von Hohenthal, who’s now a Berlin-based senior adviser to Brunswick Group, a public relations firm. “She is where he wanted to be.”
Merkel and Schäuble are kindred spirits when it comes to the need for reform in the euro area, says the German Marshall Fund’s Schwarzer. In 2009, Merkel tapped her former rival as finance minister.
Following reunification, recessionary Germany was branded the “sick man of Europe.” Gerhard Schröder, the center-left chancellor from 1998 to 2005, cut unemployment and welfare benefits, reduced state pensions, and made it easier for companies to fire unproductive workers. As the nonwage costs of German labor fell, the nation’s high-value exports surged to 46 percent of GDP from 36 percent in the past decade, and the unemployment rate halved to 6.4 percent. “Merkel and Schäuble believe that’s the way forward, and that’s why they have been so insistent with other countries,” Schwarzer says.
With Greece, a nation still grappling with the volatile legacy of military rule and socialism, they may have been too unyielding. Syriza wouldn’t have been elected if the austerity program hadn’t been so harsh, says Dimitri Sotiropoulos, a political scientist at the University of Athens. Now, a wave of radical political movements is surging on the Continent, from Podemos, the new leftist party in Spain that made impressive gains in municipal elections in May ahead of a national vote later this year, to Marine Le Pen’s right-wing National Front, which has vowed to withdraw France from the euro.
Even in Germany, the politics have become fraught. Unyielding on austerity, Schäuble seems prepared to let Greece exit, while Merkel, reluctant to risk such a momentous move, is willing to compromise with Syriza. Meanwhile, German taxpayers are so done with Greece that even if the chancellor strikes a deal with Tsipras on a loan package this summer, it would be hard to win the Christian Democratic bloc’s full support in the Bundestag. “There would be many negative reactions to that from her own party,” says Hans-Peter Friedrich, a legislator from Bavaria and a member of the Christian Social Union, the CDU’s sister party. “We’ve given Greece a lot of opportunities, and they voted for Tsipras and Varoufakis and a government that is not willing to cooperate with other member states. So we should say: ‘OK. Go your own way. Leave the euro zone.’ We cannot support them for the next 100 years.”
If there’s one thing Varoufakis and Schäuble agree on, it’s that the world’s No. 1 monetary union must endure, and that its advantages for the 335 million people living within its borders far outweigh its shortcomings. “The two of us, the Greek finance minister and I, we are both in favor of European integration,” Schäuble said at his Feb. 5 news conference with Varoufakis. “We want a strong Europe, a Europe which has clout and stands its ground in the world.” Even if the euro area weathers Greece’s departure, a crucial question will linger: How should Europe deal with unsustainable debt? Varoufakis has proposed a raft of pro-stimulus ideas, while Schäuble has pushed the tonic of austerity-driven reform. What if they’re both wrong? “We have given space to political policy arguments and to the questioning of how the euro zone was built, but at this moment, it’s difficult to see a forward-looking narrative on where we want to take this union,” Schwarzer says.
Back in the finance ministry in Athens, Varoufakis is musing on yet another idea, what he calls “the commonality of debt.” If the euro zone is to be a true monetary union, then why doesn’t the ECB issue its own bonds to service the debt of troubled states? “Wasn’t it Alexander Hamilton who said, ‘A common debt, as long as it’s not excessive, is the bond that binds a nation’?” Varoufakis asks. Close. The first U.S. secretary of the Treasury actually called a common debt a “national blessing.” For Schäuble and his fellow Germans, Varoufakis’s proposal would surely be anything but that.
This story appears in the July/August Rivalry Issue of Bloomberg Markets magazine. With assistance from Nikos Chrysoloras, Brian Parkin, and Maria Petrakis.