The Varoufakis effect – revisited

A few weeks ago, a fund manager called to tell me a weird story. At a conference he had attended a little earlier, the famous Yanis Varoufakis had loudly complained about me, accusing me of having “doctored data” to smear him. ‎Hmmh, I had not paid any attention to the musings of Varoufakis since he had moved from the Greek finance ministry to the global lecture circuit. However, that sounded serious enough for me to look into it eventually. The result is rather embarrassing for Varoufakis: he neither seems to know what happened in Greece on his watch nor does he seem to have actually read my analysis.  

Let’s start with a few facts. Serious mistakes by various Greek administrations and the troika of international lenders had pushed Greece into an unnecessarily deep and protracted adjustment recession from 2010 onwards. The bitter medicine of reforms and fiscal repair finally started to work shortly after new Greek prime minister Antonis Samaras committed himself to the path of reforms and ECB president Mario ‎Draghi contained the systemic euro crisis with his “whatever it takes” pledge in July 2012. Having bottomed at -37 in October 2012, Greek corporate confidence rebounded rapidly thereafter. By the autumn of 2014, it even exceeded that of Spain, hovering around a positive level of +5. Like Spain, Greece was on course for a solid rebound. After an average annualised gain in real GDP of 2% in the first three quarters of 2014 and having managed to place new bonds again in 2014, Greece could look forward to leaving its troika-supervised adjustment programme in early 2015, requiring no more than a precautionary credit line as a back-up thereafter.

Then came Alexis Tsipras and Yanis Varoufakis. In December 2014, the leaders of Greece’s radical left refused to help elect a figurehead president for the country and forced early general elections for January 2015. With the rise of political uncertainty, business confidence started to collapse from December 2014 onwards. After Syriza won the elections on 25 January 2015, the populists confirmed the worst fears of Greek businesses fast. Threats to reverse many reforms and a confrontational approach towards Greece’s only willing lenders drove capital abroad and the economy into the ground until the banks had to be closed for a while in July 2015. The rot stopped only after Tsipras turned more pragmatic, firing Varoufakis in early July and striking a new deal with creditors in August 2015. After hitting a record low of -39 in August 2015, corporate confidence recovered from September 2015 onwards.

When Varoufakis‎ left office, the Greek banks, which had been successfully recapitalised at the expense of taxpayers in 2014, were bankrupt and had to be rescued again with taxpayer money. Tottering on the brink of collapse, the Greek economy needed a new painful and expensive bailout. Greek real GDP today is some 5% below the level it could have reached if Greece had stayed on a Spanish-style recovery track as heralded by strong corporate confidence in the autumn of 2014. Rarely has a finance minister done some much damage to his own country in such a short time as Varoufakis‎ has done to Greece.‎

Before the rise of Syriza to power in Greece in January 2015, I had warned that the campaign promises of the left-wing radicals were based on illusions. When Greek business confidence plunged in early 2015, I called it the “Varoufakis effect” as the then-finance minister Varoufakis embodied the turn away from reforms and the futile confrontation with the country’s only willing lenders even more so than prime minister Tsipras. ‎The chart below shows Greek and Spanish corporate confidence. The Varoufakis effect is clearly visible.   

Corporate confidence in Spain and Greece

Corporate confidence is the weighted average of confidence in industry (40% weight), the service sector (40%), construction (10%) and retail trade (10%). The data for confidence in these sectors are readily available from the European Commission’s website  The European Commission’s economic sentiment index, which also includes consumer confidence, looks very similar. Source: European Commission


I have used earlier versions of that chart in various Berenberg presentations and publications. In one publication, for which we employ an external graphic designer to make the design compatible with that of our Brussels partner, The Lisbon Council, a mistake crept in. The chart had to be transformed from Berenberg’s usual excel-based format into a different format. Upon proofreading the report (‘Euro Plus Monitor, Brussels, 14 December 2015), I did not notice that the chart (page 41 of that report) now had a stretched time axis: the tickmark for ’2015′ was accidentally placed beneath the data for November rather than January 2015. As a result, the chart in this particular publication could be misread as suggesting that the collapse in Greek confidence had happened ‎in 2014 rather than mostly in early 2015.

Does that mean that Varoufakis has a point when he says that I have “doctored data” to smear him? Not at all. First, the text that went with the chart described the data correctly, pointing out that Greek corporate confidence exceeded that of Spain in late 2014. The same holds for all other uses of the chart, including a presentation I gave in Brussels on the day the above quoted report was published there. Reading the text that went with the misleading chart would probably have sufficed to clarify the issue. If that had left any doubt, a brief look at the European Commission’s readily available data on Greek economic sentiment would have clarified it all. Second, the mistake in the chart’s timeline was actually in Varoufakis’s favour, not against him. The stretched time axis would have (wrongly) suggested that the collapse in Greek confidence happened fully before and not mostly during his tenure. Weirdly, in a blog he posted on 28 January 2016, Varoufakis compared two versions of the chart, calling the version with the stretched timeline the “original” and claiming that I had “doctored” the other chart (with the correct timeline) to smear him. This leaves only one conclusion: he simply does not know the data, and hasn’t read the text that explains the chart either.

‎Interestingly, in an earlier blog of 26 January 2015, Varoufakis had tried to re-interpret what I call the Varoufakis effect, claiming that it had all been the fault of the troika. Well, that sounds rather disingenious. Yes, the troika got quite a few things wrong in its adjustment programmes for troubled Eurozone members, in the first and particular difficult case ‎of Greece more so than in other cases. I have often criticised the troika for that. However, the troika had been around in Greece since 2010‎; it had been there while confidence surged under Samaras from late 2012 to late 2014. The change at the end of 2014 and in early 2015 that shattered business confidence had nothing to do with the troika. Instead, the change for the worse was the rise of the risk that the likes of Varoufakis might actually ‎come to power in early elections.

The subsequent confrontation between the Syriza-led government and the troika was certainly not the result of a major shift at the troika. The troika simply asked Greece to honour the commitments the country had made in exchange for taxpayers elsewhere putting more than €200 bn at risk in support programmes for Greece. Remember how Varoufakis publicly humiliated the head of the Eurogroup representing the finance ministers of all euro members, Jeroen Dijsselbloem, on 30 January 2015 when Dijsselbloem had come to Athens to establish some rapport with the new government there? It was Varoufakis who told Dijsselbloem that the Greek government will not negotiate with the troika any more, not vice versa. Blaming the troika for the conflict between Varoufakis and the country’s only willing creditors is such a gross distortion of facts that even master-campaigner Donald Trump could have been proud of it. ‎In addition, it was not a change at the troika that allowed for the rapid if incomplete rebound of Greek corporate confidence from September 2015 onwards. The change was that Tsipras did finally get real, having ditched Varoufakis and signed a deal with the troika.

All other former programme countries (Spain, Ireland, Portugal and Cyprus) have fared much ‎better than Greece in the last two years. Because Tsipras has ultimately changed tack, Greece has at least avoided the sorry fate of Venezuela into which further Varoufakis-style policies would have pushed the country. In a very painful process that is still ruefully incomplete and marred by some continuing resistance to the supply-side reforms needed to bolster confidence and attract more investment, Greece is now gradually turning the corner again. After almost two lost years, Greece now seems to be back on the path to growth. For the sake of Greece, let’s hope that radicals of the Varoufakis sort don’t get in the way again.


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