The Varoufakis effect
- The Varoufakis effect: Rarely has a new government caused so much damage as Greece’s first Tsipras admistration with finance minister Yanis Varoufakis from January to July 2015. Business cofidence plunged, capital fled the country and the banking system virtually collapsed. Confidence recovered only halfway after prime minister Alexis Tsipras finally ousted Varoufakis. As a result, Greek GDP at the end of 2016 will probably be 7% lower and Greece’s ratio of public debt to GDP will be some 25 percentage points higher than it would have been without the Varoufakis accident, including the long-term costs of the required bank bailouts.
- Contagion control is working: The chart also shows that the Eurozone economy as a whole was not affected at all by the Varoufakis accident. In mere economic terms, Greek reform reversals matter to the Eurozone only slightly more than the travails of debt-ridden Puerto Rico matter for the US.
- A lesson for Portugal, Spain, Poland and others: No other country in Europe is in a similarly fragile position as Greece was a year ago. But the overall lessons still apply: Reform reversals and open confrontation with Europe and other creditors can be very costly indeed. Under their recent governments, Portugal and Spain have regained market confidence the hard way. Low borrowing costs and the gains in employment, underpinned by labour market reforms, now give these countries some leeway to soften their adjustment pro
