An expert's point of view on a current event.

Greece’s Dynamic Duo Takes on the Troika

They’re exciting, energetic, and have charisma like Europe hasn’t seen in years. That may not be enough.


Listening to Yanis Varoufakis, Greece’s new finance minister, as he canvassed his way across the capitals of northern Europe last week, it seems obvious that this is somebody ready to take the continent by storm. He is personable, very smart, overwhelmingly charming, and significantly different in style from the introverted suits that one typically associates with ministries of finance, central bankers, euro-technocrats, and corporate types. Forget ties — he doesn’t even tuck in his shirts. An eclectic professor of economics by background — and a self-proclaimed “erratic Marxist” — he is an odd fit for the hotbed of financial capitalism that is the City of London, and yet he seems perfectly at ease among financiers and conservative politicians. Varoufakis was a man on a mission: to drum up as much support as he can for the cause of Greek debt restructuring. His approach? To quote a veteran City journalist, it’s a mix of “charm, charisma, and expertly articulated academic venom.”

Greece’s public debt, at 175 percent of GDP, is one of the largest in the world relative to the size of its economy. In absolute terms, at just over 320 billion euros, it looks slightly less daunting — tiny Belgium’s, for instance, is larger — but nevertheless it is problematic for a country whose economy has shrunk by 25 percent since 2010 and has been in recession for six consecutive years. Following three bail-outs, in 2010, 2011, and 2012, the “Troika” of the European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF) now collectively hold between 85 and 90 percent of Greece’s public debt.

More than half this amount comes due this month, and the question had been whether Greece’s fiscal discipline and economic reforms would satisfy its creditors enough to roll over the debt. But Prime Minister Alexis Tsipras, who was sworn in on Jan. 27, and his charismatic new finance minister do not want to extend the bailout. In a fiery speech before Parliament on Sunday — his first as prime minister — Tsipras again insisted that there would be no extension. By refusing a new package, the Greek government is trying to get free from the conditionality imposed by the Troika — in other words, the commitment to the program of austerity measures and structural reforms that the creditors have imposed on Greece. Athens has been holding direct talks with its creditors — that is, with other European governments, but not under the supervision of the Troika — to work out possible solutions for the country’s public debt that do not involve squeezing Greek taxpayers and constraining economic growth.

There is no questioning the commitment of the new Greek government, since their political credibility is at stake. They promised their voters a debt write-off and the end of austerity; obtaining these requires the cooperation of those who lent Greece the money. More broadly, the countries that have been hard-hit by austerity are hoping the negotiations can touch on larger questions of fairness and what they call “solidarity”: that is, how the eurozone can share the fiscal burden of easing countries out of unsustainable debts in order to help maintain economic growth. But for Germany and other creditors — notably the Netherlands and Finland — it’s important to make clear that countries must play by the rules in order for Europe’s monetary union to function. This was inevitably the central tension in each of Varoufakis’s discussions.

Having ditched the campaign rhetoric that called for a full-blown debt write-off, Varoufakis has instead suggested debt swaps that would exchange the existing bonds for new ones. These would carry easier conditions for Greece but would not result in cuts to the bonds’ face value. One suggestion is to index the new bonds to Greece’s economic growth rate, without adjusting for inflation; another is to issue perpetual bonds that pay out interest without a requirement for the debtor to eventually repay the face value, as the British government did in World War I. As a quid pro quo, Varoufakis will commit Greece to maintaining a 1 to 1.5 percent primary surplus (the government’s budget balance before the cost of paying interest rates on the debt kicks in) and continue with structural reforms. These, however, will not necessarily be the same ones agreed earlier with the bailout program.

Given Greece’s wobbly financial position, there is a narrow window of opportunity over the next few weeks to keep the show on the road and maintain momentum. The narrative is straightforward: there is a ‘humanitarian emergency’ in Greece where living standards have collapsed, the unemployment rate has skyrocketed, and the economy is in tatters. Another dose of the same austerity medicine risks fueling even more discontent that this time might be channeled into support for the neo-Nazi party Golden Dawn. Indeed, Varoufakis has almost suggested that Germany shares a responsibility to avert this outcome.

Will the finance minister’s charm offensive succeed? In some ways, it seems to be working: Many leaders across the board, including President Barack Obama, now share the view that Greece has had a rough deal and should not be held to draconian austerity measures. But the devil is in the structural reforms. Athens has performed relatively well in getting its fiscal house in order — public spending dropped by about 30 percent from 2009 to 2014. But it has still failed to deliver on many of the structural reforms that were part of the bailout package. And the new government has already put a halt to the privatization of the state-controlled electricity company Power Public Corporation by rehiring some public sector workers who lost their jobs because of the cuts to public employment. That’s enough for alarms bells to go off in Berlin.

As time ticks away, Athens may find itself backed into a corner, faced with either reneging on international commitments or disappointing voters. Tsipras and Varoufakis have brought a new sense of swagger to downtrodden Greece — but there are still no guarantees that swagger will translate into a reformist, anti-austerity agenda that can win the support of progressive forces in other countries, including Germany.

They have the support of their countrymen at their backs: Tsipras’s speech on Sunday was met with enthusiastic applause, as the 40-year-old prime minister pledged that Greece would have “its own voice,” and that “Greece is no longer the miserable partner who listens to lectures to do its homework.”

With Varoufakis at his side, they make a vibrant pair, with charisma in spades. But the prosperity and the political stability of Europe are at stake. And charisma may not be enough.

AP Photo/Petros Giannakouris

Paola Subacchi is director of international economics research at Chatham House.