Lessons from Greece as controversial finance minister exits stage left

Greece’s economy is in ruins. It is hard to imagine how things could have gone worse. Banks closed, no liquidity, very high unemployment, businesses closing down or fleeing the country, and the brain drain is accelerating.

And now the Greek people have voted No in a referendum that some cast as being about whether they would remain in the eurozone – though many were unclear about what exactly the vote meant. What it certainly means is that the Greek people are deeply wounded by the prolonged recession of the last six years.

As Greek Prime Minister Alexis Tsipras heads back to the negotiating table in hopes of securing a new deal to save his country, he will go without his controversial finance minister, Yanis Varoufakis, who resigned a day after the vote. According to Varoufakis, Tsipras asked him to resign in order to help with the negotiations.

One reason we’re where we are today, so close to a “Grexit,” is that journalists – Greek and foreign – failed to carefully scrutinize Varoufakis’s strategy to win better terms from Germany – one that didn’t pan out. Let’s hope they look much more closely at his replacement.

Day after referendum, Greek pensioners wait to receive part of their pensions.Reuters

Path of destruction

Tsipras, Varoufakis and their left wing Syriza party were elected to office back in January because of how much the Greek economy had suffered. Between 2009 and 2014, a tremendous amount of value was destroyed, both because of the failure of Greek governments to implement reforms and because of the austerity measures imposed by creditors. The pace of value destruction only accelerated in the first six months of 2015.

Consider this: just in the first quarter of 2015, the Hellenic Financial Stability Fund (the fund established with loans from eurozone governments and the European Financial Stability Facility to finance Greek bank recapitalization) lost €5 billion.

This loss and the postponement of cash payments from the Greek government to its suppliers isn’t being accounted for in its budget. Doing so would turn the 4% primary budget surplus that was reported for the first quarter into a 13% deficit. The primary surplus is the sum of spending and income, excluding interest payments.

From expert to pariah

When Varoufakis emerged on the public scene, he was quickly baptized by the media as an expert and world-class economist.

That created a figure of authority, a person that many Greeks deeply believed. In the last couple months, however, he has been under attack, accused of destroying the country’s finances.

The same people who now criticize him never questioned the basic premise of Varoufakis’ negotiating strategy: that Europe would blink first because of the risk of contagion. His assumption was that the threat of a Grexit would have devastating consequences to the eurozone.

Back in February, I said the opposite: do not count on this because we are not in 2012 anymore. The eurozone built a concrete fence around the Greek economy so that if it blows up, the consequences for other countries would be minimized – though it still would send Greece back to pre-euro economic development levels.

Whether this will now prove to be true is irrelevant. What matters is that both European politicians and the markets believe it. All Greek threats during negotiations were dismissed.

Lack of scrutiny

Unfortunately, before Varoufakis was given the license to implement his strategy, he was never hard-pressed to present evidence of his hypothesis.

What data did he have that suggested that European financial institutions were exposed to the risk of a Grexit? Would big foreign multinational companies be forced to fire a large number of people as a result of the Greek market collapsing? Did the prices of government bonds of other countries move in the same direction as the prices of Greek government bonds in 2014 – in other words, is there evidence of a close connection between the fate of the Greek economy and that of other countries?

The role of a finance minister is incredibly important in a country’s economy.

Given the importance of attracting investments, the finance minister needs to inspire confidence and build trust. The only way to do this is through consistency, specificity and clarity in decision-making and public statements.

A finance minister needs to have a clear plan and to be able to support his or her rationale with evidence.

I do hope that Greek – and other – journalists will scrutinize the country’s future finance ministers to present evidence that justify the policies they choose. They have a very important role to play, if Greece is ever to recover.

George Serafeim is affiliated with Harvard Business School, KKS Advisors, the High Meadows Institute and the Global Initiative for Sustainability Ratings.