Review of "Adults in the Room" by Yanis Varoufakis

In this blog post I’ll review Adults in the Room by former Greek finance minister Yanis Varoufakis, a much awaited book which recounts his negotiations with Greece’s creditors in 2015, the period when the common currency was on the precipice of collapse. The story resonates on a personal level because my doctoral thesis (and subsequent book) was on the politics of the euro, and one of the chapters is devoted to Greece. This involved, among other things, travelling to Athens twice, in 2012 and in 2015, to interview subjects and observe first-hand the effects of the crisis on people’s lives. When Greece held the historic referendum on July 5th 2015, and the majority voted No to creditor demands for more austerity, that evening I participated in the celebrations on Syntagma square, along with hundreds of thousands of Greeks. It was a triumphal and euphoric moment that ultimately ended in capitulation and humiliation, which had repercussions far beyond Greece’s borders. As Varoufakis mentions in Adults in the Room, the humiliation of Greece contributed to the backlash against Brussels, even among progressives who previously looked at the EU as a model of peaceful and just international cooperation. In the UK in particular, many on the left were outraged by the affair, which influenced their decision to vote for Brexit.

Adults in the Room provides a behind the scenes, vivid, and riveting account of the struggle between Greece and its mighty creditors, especially Germany, but what makes this text really compelling is that it reflects the perspective of an academic without the pressures faced by politicians. Typically, politicians must be sensitive to their constituents or the interests of their party, or they must constantly be on cue and express their ideals or ideological vision; consequently, their public communication often is characterized with fluff, platitudes, and shibboleths. One of the marks of a talented scholar, in contrast, is to speak with clear and honest language, and be willing to defend uncomfortable arguments regardless of whether they fit contemporary orthodoxies. Varoufakis accomplishes this in Adults in the Room by revealing the role of power and hierarchy in the operations of the European Union, an organization which, according to its promoters, is characterized with equitable cooperation and partnership. Adults in the Room shows that, at least in the Eurozone, Germany has near hegemonic power on the most crucial decisions; even more, the operations of the Eurozone’s hierarchy resembles, in some ways, colonial practises of yore rather than the progressive political structure that many imagine it to be.

The Road to Greece’s Tragedy

The Great Recession that began in 2007 and spread around the world had a particularly devastating impact on Eurozone countries, partly because each no longer had an independent central bank which could provide liquidity to ailing financial systems or that could devalue the currency to restore competitiveness. Consequently, the crisis was deeper in the Eurozone than it was in the US or in European countries without the euro. Southern Europe was particularly affected, and the impact on Greece was worse than elsewhere, leading to bankruptcy and the need for a bailout to avert collapse. In return for funds, Greece’s political establishment agreed to implement reforms, such as liberalizing labour markets and privatizations, as well as austerity, namely cutting spending and raising taxes. The IMF, which was and is party to the bailouts, estimated that these reforms would induce a brief contraction before spurring growth; what actually occurred was an economic depression which impoverished and devastated millions, as indicated by the following numbers: six years of continuous recession, a 28% drop in nominal GDP, unemployment rates that reached 28% for the general population and an astonishing 65% for youth.

Not only were the bailouts a failure of historic proportions; their main purpose was not to save Greece but rather to save French and German banks which made irresponsible loans to Greece during its credit-fueled economic boom. Another important but less discussed element in this story is how humiliating the bailouts were; implementing them meant foreign technocrats (or the “Troika”) coming to Athens and dictating legislation which reflected the will of creditors rather than Greece’s elected representatives. Consequently, ministers and deputies reported and were accountable to the Troika rather than the Parliament or the people.

It was in this context of failed bailouts and the humiliating way they were implemented that Greece’s politics took a radical and understandable turn away from the establishment parties and towards the extremes. The Party of the Radical Left (Syriza) went from being a marginal group with less than 5% support to winning a plurality of votes in the 2014 election. This did not reflect a radical change of ideology among millions of Greeks; many social democrats, independents and conservatives also voted for Syriza because a key part of its platform was to confront and challenge creditors rather than obsequiously defer to their authority, as previous governments had done. These events also cleared the pathway for Varoufakis’ rise to power which, he says, he never sought. He had a comfortable academic post at the University of Austin in Texas, and produced, among other things, academically rigorous accounts of the Eurozone crisis along with proposals to escape it. This intellectual pedigree, plus his polished English and independence from Greece’s establishment, meant he possessed the qualities to negotiate with creditors on Greece’s behalf and as a representative of the Syriza government. Varoufakis had a moderating effect on the party; the most radical members of Syriza wanted outright default and exit from the Eurozone. A condition of Varoufakis’s participation was to expunge unilateral default and Grexit from the government’s agenda. His proposals included debt-swaps that avoided default but extended payments to the indefinite future while making them conditional on GDP growth; tax-cuts and spending increases to stimulate macro-economic demand; reforms to reduce tax evasion and increase the general efficiency of the Greek state; and, importantly, an end to the humiliating practice of foreign technocrats dictating creditors’ will on a supposedly sovereign state’s legislators and ministry officials.

A brief moment of triumph on Syntagma Square, July 5th, 2015

Most impartial observers, especially American and British economists, recognized these proposals as quite reasonable and as providing the debt-stricken country a decent shot at reversing the depression while remaining a member of the common currency. But creditors were not interested in negotiating. Varoufakis was prepared for this eventuality, which is why his program included the creation of a euro-denominated parallel banking system. In the event of creditors’ intransigence, the ECB would have the power to starve the Greek banking system, while creditors could terminate payments that kept the Greek state afloat. Without these funds, all transactions would cease, leading to collapse and barter. Hence the need for a Plan B of a parallel system of payments that would allow economic activity to continue. According to Varoufakis, it would be denominated in euros, but at the click of a button, the system of payments could be transformed to the drachma. This would mean Grexit, but Varoufakis clearly states that this nuclear option would most likely not be used. He expresses the belief that creditors would want to avoid Grexit because it would mean their loans would never be repaid. The purpose of the parallel banking system, then, was to force creditors to compromise, not to leave the Eurozone.

Adults in the Room becomes particularly gripping and thrilling when negotiations begin. The forum where talks occurred was called the Eurogroup; all members of the euro participated, and decisions were made on the basis of unanimity. On the surface, there appears to be equality and partnership. But behind appearances was the reality of German dominance in the form of its consent being a sine qua non for any major decision. When Varoufakis submitted his ideas, he expected debates about their merits, and counter-proposals that at least took account of his arguments. Instead, his ideas were mostly ignored; creditors, led by Germany, inflexibly demanded that Varoufakis fully implement the bailout conditions agreed by his predecessors even though they privately admitted to him that the bailouts were a failure. A striking feature of the book is the details of the conversations Varoufakis had with important European statesmen, particularly French finance minister Michel Sapin, Italian finance minister Carlo Padoan, and European commissioner Pierre Moscovici; they mostly agreed with his analysis of the crisis and its impact on Greece, and recognized that more of the same would not be effective. But when they were in Eurogroup meetings, under the watchful eye of German finance minister Wolfgang Schäuble, they mostly sang the creditors’ tune.

The same happened when leaders spoke to the press, and a telling example is the conversation between Varoufakis and Michel Sapin. When they spoke privately, Sapin agreed with Varoufakis and even suggested he would challenge creditors during the negotiations. Just moments later, during a press conference, Sapin expressed the creditors’ narrative that Greece is mostly to blame, and that it must continue implementing the terms of the bailouts. As they were walking away, Varoufakis asked his French counterpart why he publicly expressed beliefs that he personally did not believe, and Sapin replied, tellingly, “France is not what it used to be”. This comment reveals much about Europe’s shifting power relations. France historically had a leading role in the politics of European integration, until German unification.  After this event, France and Germany together took the lead on major decisions, and the reigning assumption was one of equality between them. Sapin’s fear of openly challenging Germany clearly reflected France’s subservience.

Events involving another Frenchman, European Commissioner Pierre Moscovici, also illustrate much about Europe’s hierarchy. The European Commission represents the ideals and aspirations of Europeanists and supranationalists because, unlike other institutions, it is supposed to make decisions on the basis of European rather than national interests. When its decisions prevail, it suggests that the EU is fulfilling its aspiration of becoming a truly post-national entity that operates on the basis of common rather than egoistic concerns; when it is sidelined, it means that national interests—and hence relative power—determine the outcome. Commission president Moscovici privately agreed with Varoufakis, and even produced a document that compromised on some of the creditors’ demands. When this document was shown to Eurogroup president Jeroen Dijsselbloem, he would not even consider it. The Eurogroup, it is worth recalling, was the forum which was largely controlled by German finance minister Wolfgang Schäuble; its unwillingness to even consider the Commission’s views is further evidence that German hegemony, rather than European ideals, was the main driver of Eurozone policy.

Challenging Germany

For social contract theorists, hierarchies of all kinds have a shared feature: one entity commands, and another obeys, and this occurs even though both parties agree to the arrangement. When hierarchies are consensual in this way, the stronger party possesses authority. Coercion is used to discipline only when authority is challenged, and may entail, depending on context, military force or the imposition of economic distress. This framework helps make sense of some of the negotiations in the Eurogroup.  Germany does not explicitly command, and its authority is not explicitly recognized. But in any major decision, it has the power of veto which others do not; and this veto power is, in effect, a command. Others in the euro accept its decision partly because they accept German economic dominance. But when it is challenged, the threat of coercion, in the form of economic distress, comes into play. This is why the stakes were so high in Varoufakis’s gamble; he challenged Germany’s authority, and in response, Germany said: obey, or face Grexit, with all the economic pain that such an outcome entailed. This asymmetrical capacity to inflict economic pain almost surely explains France’s and Italy’s unwillingness to challenge Berlin. All it would take to cause a financial crisis in both countries is for Schäuble or Merkel to express disapproval or a lack of confidence in their leadership. Markets would then interpret this as increased economic risk, increasing interest rates on these highly indebted states, and potentially leading to a politically destabilizing financial crisis. The reverse would not happen; markets would largely ignore French and Italian leaders who did not express confidence in Germany’s economy.

Varoufakis was well aware of how Germany’s will prevailed over others, which is why he had a plan to create a parallel currency system in the event that talks broke down; this would have given creditors one last chance to negotiate, and if they still refused, he would threaten creditors with massive default and, by implication, a return to a national currency. In Adults in the Room, Varoufakis expresses the belief that this nuclear option would not actually occur; he was convinced that creditors would compromise as soon as they realized that default and Grexit were a serious threat.

When he entered the Syriza-led government, he made it clear that he would not capitulate to creditors, partly because he believed that unilateral default was less bad than continuing the humiliating and economically devastating bailouts, but also because he was convinced that creditors would compromise once they saw that Grexit was imminent. Other members of the cabinet, including Prime Minister Alexi Tsipras, agreed, and so initially at least Varoufakis had the backing of the entire government. Those who followed the events know what eventually transpired: Varoufakis was sidelined, and Tsipras capitulated to a third bailout with conditions that were more onerous and humiliating than the previous two.

The reasons for Tsipras’s surrender are complex and will likely be debated for a long time. Adults in the Room highlights some of the critical factors and, in the process, contributes to our understanding of how hierarchy operates in the Eurozone. Creditors had much sway partly because they could impose economic distress, but also because they successfully coopted Greece’s domestic oligarchy, comprised of financial interests, the media establishments funded by wealthy Greek bankers, and the establishment figures who still held positions of power. Two particular banks, run by powerful Greek families, profited handsomely from the European Central Bank’s injection of liquidity into the ailing Greek financial system, and with the profits they financed media outlets which helped to create panic and instability during the negotiations between the Syriza team and Greece’s creditors. Another disgraceful example of successful domestic cooptation is demonstrated by the actions of Greece’s Central Bank. During the period of Eurogroup meetings it was led by Governor Stournaras, an establishment-hack who made no secret of his sympathies for the creditors; Stournaras actively aimed to undermine the Syriza government by contributing to bank runs, an act which violated its mandate to be politically neutral. Consequently, negotiations took place while a state of panic afflicted much of the country, weakening the Syriza government’s hand.

The cooptation of Greek financial elites effectively divided and undermined Syriza, ultimately helping to ensure its capitulation and the continuation of the core’s authority and rule. Here, creditors adopted the practices used by dominant powers since time immemorial. Previous empires at least had the virtue of being honest about their activities. In the Eurozone, in contrast, the tool of cooptation was implemented but beneath the thin veneer of legality, technocracy, and “partnership”. Other ethically questionable practices were occurring behind the scenes. When Varoufakis secured billions of euros in Chinese investment that would have injected a substantial economic stimulus into Greece, Berlin called Beijing to signal its displeasure, and the latter decided to reduce its exposure and invest only 100 million euros. In this example, Germany acted to prevent the potential diminution of its power vis-à-vis Greece by using its influence to stop the injection of economically stimulating investment from a competing source.

In Adults in the Room Varoufakis calls these practices neocolonialism. But despite his recognition of the character of these actions, Varoufakis worked assiduously to ensure that Greece remained a member of the Eurozone. How can someone who calls himself progressive want his country to belong to an entity that operates on the basis of things that progressives detest? Varoufakis provides an answer in the book that I find to be unconvincing. He says that progressives must try to transform the euro to make it more socially just, so that it operates on the basis of equality and democracy rather than the hegemonic control of the strong over the weak. Varoufakis has even started a new political movement to build support for this idea across Europe. But this ignores the fundamental reality that Germany can command partly because it has an asymmetrical capacity to inflict economic pain; consequently, periphery states must either obey or try to persuade Germans that they are wrong. The latter is unlikely; most of the evidence I’ve seen suggests that a majority of Germans agree with the Merkel government’s position of imposing discipline on Southern Europeans, and especially Greece. This leaves defiance, which comes with serious potential costs. If the weaker state is unwilling to risk the costs of the defiance, it must obey. Varoufakis’s appeal to democratize the Eurozone will not change this stubborn fact.

In fairness to Varoufakis, there is some evidence that the costs, economic and political, of defiance would have been considerable for Greece. Defiance ultimately would have meant returning to the drachma, which would have halved the value of Greek savings; the new and cheaper currency would have doubled the costs of imports, such as fuel and medicine. However, although this likely would have created much economic pain, it would have been temporary; a new and cheaper currency would also have halved the cost of Greek exports, immediately increasing competitiveness, which would have induced sales, investment, and employment. In light of this, I am therefore not convinced by the establishment narrative that exiting the euro would turn Greece into a third-world country. The potential political costs, however, are more difficult to assess and a stronger case can be made that they would have been devastating. Adults in the Room mentions an interesting conversation that took place between Varoufakis and Tsipras shortly after the historic referendum and on the eve of the latter’s capitulation. Varoufakis sensed that it was coming, which meant that Tsipras would have betrayed, not only the original agreement of the Syriza cabinet, but also the 63% of Greeks who had recently voted No to further austerity. During this conversation, Varoufakis stressed the need to respect the majority’s will and defy creditors. In response, Tsipras alluded to the possibility of a coup, and said the president of the country and other elements were ready to take power. He was referring to the powerful establishment forces, allied with Eurozone creditors and backed by millions of Greeks who voted Yes in the referendum, who would be willing to use force to prevent Grexit. Those favouring Grexit would then have responded with force, raising the prospect of a civil war and a return to authoritarian rule—a not inconceivable scenario in light of Greece’s recent history (democracy was established only in 1974 after a long period of authoritarian rule which was imposed to quash civil conflict between communists and monarchists).

Adults in the Room is worth reading even if one does not agree with Varoufakis. The book is immensely entertaining in part because he is a talented writer of the events he describes; equally important is that it is written from the perspective of an academic without the pressures faced by politicians, which means he can speak honestly and plainly about what actually occurred. The tale is gripping partly because there is an element of the heroic in the text; like the Roman senator Cincinnatus who preferred his comfortable life on the farm but was forced to return to Rome to save the state from civil conflict, Varoufakis reluctantly left a comfortable academic post to save Greece from its mighty creditors. Many readers will, like me, probably be tempted cheer for the underdog and ignore his defects. But an honest appraisal of Varoufakis would recognize, not only how remarkable his story his, but also his questionable aim of wanting to remain in a currency system where the dominant state engaged in profoundly unethical practices to impose its authority.