Economist and one-time Greek Finance Minister Yanis Varoufakis has written an account of his experience in 2015 trying desperately but ultimately unsuccessfully to get a debt deal for Greece that wouldn't condemn the country to indefinite economic depression, Adults in the Room: My Battle with the European and American Deep Establishment. It was published in the US Tuesday.
The Ellsberg quote comes in Varoufakis' description of the later stages of negotiations with the EU leaders, of whom Germany's Angela Merkel was easily the most significant.
[Prime Minister] Alexis [Tsipras] looked at me serenely and asked, 'What are the chances that they [the EU institutions and the IMF] will come back to us with something decent, Yani?'Adults in the Room is not only a good read, giving a chronological account of his short but highly eventful tenure as Greek Finance Minister under the Syriza government elected in 2015. Their mandate was to get Greece out from under the ruinous austerity program imposed on them by the "troika" of the IMF, the ECB and the European Commission. In the end, they failed, with Alexis Tsipras' government eventually backing down from risking leaving the euro currency.
At that critical juncture in our country's history I was obliged to answer with the greatest possible precision. I told him that the probability they would do so was mo per cent if they acted rationally. But, I warned, as Dan Ellsberg, the great American economist and Pentagon strategist turned pacifist whistle-blower, had emailed me a few weeks before, 'Keep in mind that the ruling class can be self-destructively mad; not just pretending!'
'Powerful European leaders have a track record of being bad at serving their interests, of falling prey to irrational urges,' I said. And given that irrationality breeds unpredictability, I estimated that a more sensible probability - that Chancellor Merkel would opt for the mutually assured damage of Grexit rather than a mutually advantageous deal - was around fifty-fifty.' [my emphasis in bold]
Greece is still struggling with the same problems 2 1/2 years later, the austerity program keeping the country in what is in effect a permanent depression. The human cost has been staggering. The pro-EU, anti-austerity group of which Varoufakis is now a part, DiEM25, has recently proposed a New Deal for Greece, which advocates the kind of solutions that he wanted to put into place in 2015. It's opening sentences (bolding in original):
The seven-year economic crisis has kept Greece locked in a state of quadruple insolvency: with a bankrupt state, bankrupt banks, bankrupt businesses, and bankrupt households. Everyone owes to everyone and no one can pay.Those themes run throughout Adults in the Room. Varoufakis does a great job of explaining the interactions between economic policy and the power dynamics within the EU. He cautions against shoeboxing the power rivalries within the EU in opposition between nations. He prefers to see the central conflict in basic left-populist terms as between the oligarchies of the EU nations and the people of the whole EU. At the same time, his account leaves little doubt that the chief enforcer for those EU elites is named Angela Merkel.
Under these circumstances, there can be only one overarching goal: to restructure all public and private debt; a move which requires the restoration of democratic sovereignty.
Greece did wind up with too much public debt to service, which became a legitimate debt crisis after the 2008 Great Recession began. A major portion of those bonds were held by French and German banks, already hit hard in other ways by the financial crisis, so German officials were particularly opposed to having the debt written down, which would be the normal procedure in such a case. Because the German government would then be faced with recapitalizing the banks, and Merkel didn't want to be seen doing that. The "solution" was a remarkable approach to excessive debt. The troika arranged additional loans to Greece so that they could service the old debt and avoid any French or German bank insolvencies. And forcing Greece to accept radical austerity measures as part of the deal.
Economists and financial journalists - among them Paul Krugman, Joe Stiglitz, Barry Eichengreen, Wolfgang Münchau, Martin Wolf, Varoufakis himself and his successor as Finance Minister Euclid Tsakalotos - predicted in real time that this was a disastrous program that would not solve the debt problem and would hammer the already distressed Greek economy. And events validated their predictions in a gruesomely spectacular way. As the austerity measures made the Greek GDP shrink, the expanded debt forced on them by the troika made the debt a bigger and bigger ratio to the GDP, which meant their debt position deteriorated further, requiring more "bailouts."
I put bailout in quotation marks, because the additional loans forced on Greece were not bailouts. They were additional debt. But politically, Merkel and her Grand Coalition government (CDU/CSU and SPD) decided to present the program as a generous bailout by Germany to Greece. And encouraged nationalist resentment against it. So it became distressingly common for Germans and Austrians to gripe about "lazy" and "corrupt" and "irresponsible" Greeks. This nationalist attitude toward Greece soared during the 2015 negotiations over yet another debt solution that had become urgent.
Varoufakis calls Merkel's strategy "extend-and-pretend," his version of the American "kicking the can down the road." One of the most notable aspects of Varoufakis' account is that the conservative German Finance Minister Wolfgang Schäuble repeatedly admitted to his Greek counterpart that he knew the program on which the EU was insisting would not actually solve the problem it claimed to be solving.
And this is where the Ellsberg quote comes in. Varoufakis also specializes in game theory. And his understanding of the basic negotiating options for Greece meant that if the EU had offered debt relief and a decent recovery program for Greece, then Syriza could accept it and the deal would be done. But if Germany and their allies in the EU insisted on continuing the unrealistic extend-and-pretend austerity program - which is what actually happened - then Greece would have to be prepared to be pushed out of the eurozone in order to be able to force Germany to agree to a solution that kept them within the eurozone without ruinous austerity.
This remains the basic dilemma for the EU and the eurozone. The German political scientist Claus Offe describes it in Europe Entrapped (2016) in terms that are broadly consistent with Varoufakis' description and which obviously draws heavily on the lessons of Greece's doomed 2015 attempt to break out of the debt-and-austerity trap. The German version is titled Europa in der Falle, which the English title also renders well. For the eurozone, no one knows exactly the consequence of a member nation leaving. But it would be a big risk. Because of the very likely possibilities is that the currency zone would quickly disintegrate with one nation after another leaving. The currency breakups after the fall of the Soviet Union and of Yugoslavia don't give anyone looking at this problem warm and fuzzy feelings.
Leaving the eurozone is also presumed to mean that the leaving nation would also have to leave the EU itself, which would create further economic problems. Brexit is providing a real world test of that process, but without the even more consequential implications of having to leave the euro currency zone, since Britain was never a member of it.
Varoufakis and Tsipras assumed on taking office that Germany was likely to insist on their hard line until the very end, which is what occurred. If Greece refused to agree to an unfavorable deal, Germany would then be forced to push Greece out of the eurozone. Schäuble, on Varoufakis' evidence, wanted that to be the outcome. He was willing to take the risk. That's the context in which the Ellsberg quote comes into play. The Greek negotiating strategy was predicated on the idea that Merkel's government would only agree to a realistic program that provided debt restructuring if they thought that Greece was serious about leaving the eurozone rather than accept a continuing of the troika program.
In the end, it was Tsipras who backed down from the risk of Greece leaving the euro. And in a humiliating way. Greece got a terrible deal and the same dilemma persists, unsolved, with 2 1/2 more years of serious economoic damage to the country. And it gives us a good idea of what to look for in future such confrontations. And in the ongoing Brexit negotiations.
One key point that Varoufakis stressed during the process was that Merkel's determination to coerce Greece into capitulation was primarily aimed at deterring other EU countries from going the same route, France in particular. She seems to seriously believe in her austerity policies, because she is especially determined to force them on the eurozone countries.
And Adults in the Room gives a vivid picture of what the much-discussed "democratic deficit" in the EU and especially the eurozone looks like. It's not a pretty picture. In an article (Why we must save the EU Guardian 04/05/2016), Varoufakis relates an emblematic moment in the "democratic deficit":
After I had recited our government’s plea for a substantial renegotiation of the so-called “Greek economic programme”, which had the troika’s fingerprints all over it, Dr Schäuble astounded me with a reply that should send shivers up the spine of every democrat: “Elections cannot be allowed to change an economic programme of a member state!” he said categorically.
During a break from that 10-hour Eurogroup meeting, in which I had struggled to reclaim some economic sovereignty on behalf of my battered parliament and our suffering people, another finance minister attempted to soothe me by saying: “Yanis, you must understand that no country can be sovereign today. Especially not a small and bankrupt one like yours.”
This line of argument is probably the most pernicious fallacy to have afflicted public debate in our modern liberal democracies. Indeed, I would go as far as to suggest that it may be the greatest threat to liberal democracy itself. Its true meaning is that sovereignty is passé unless you are the United States, China or, maybe, Putin’s Russia. In which case you might as well append your country to a transnational alliance of states where your parliament is reduced to a rubber stamp, and all authority is vested in the larger states. [my emphasis]
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