The dashing Greek Finance Minister isn't anti-American – he wants a repeat of Roosevelt's New Deal

Mutualisation of European debt is the solution sought by many, including Yanis Varoufakis

You have to admire Yanis Varoufakis, Greece’s new Finance Minister. The former Essex University lecturer showed up in a Barbour-type jacket and boots for his meeting with George Osborne, but better still was his arriving at the office on his first day in the job on his 1300cc Yamaha muscle bike. It is the one with gold rear springs and shocks, several steps up in beef, if not in refinement, from the 650cc BMW favoured by his Prime Minister, Alexis Tsipras.

Varoufakis’s tactics are obvious. If your job is to represent a country that is in effect bankrupt, you don’t cringe. You swagger, secure in the knowledge that it is very much in the interests of your creditors not to let you go down. But then, having beaten up your creditors by telling them you won’t negotiate, you hold out the promise of a deal. The deal is that they should share in the country’s future success. If growth recovers they will get some, maybe most, conceivably all of their money back. And if it doesn’t, they would not get money back anyway.

This is a bit like a loan-for-equity swap that companies sometimes negotiate with their banks. Instead of debts that cannot be serviced, let alone repaid, the banks end up owning the business, which they hope they can then pass on to other investors once the company has been restored to health.

The difference, aside from the obvious point that you cannot own equity in a country, is that the existing management remains in control. Indeed, the public pitch of the new government is that the old approach, with economic policy in practice determined by Germany, has failed. It would follow that any new deal would give the creditors less authority.

Whatever happens in the forthcoming negotiations, I think we will see a lot more interest in the ideas of Professor Varoufakis. His big view of the world was outlined in his book The Global Minotaur, published in 2011 and available on Amazon – for $122.49. It is about the great recession, but its thesis is not that this was caused by a mixture of over-expansionary fiscal and monetary policies and weak banking regulation – the conventional view – but rather that its roots went back to the Wall Street crash of 1929. The modern version of the Minotaur – the mythical beast, half-man, half-bull, that lived in the Labyrinth built by command of King Minos of Crete – is the United States. The book’s blurb explains the thesis:

“Just as the Athenians maintained a steady flow of tributes to the Cretan beast, so Europe and the rest of the world began sending incredible amounts of capital to America and Wall Street… Today’s deepening crisis in Europe is just one of the inevitable symptoms of the weakening Minotaur; of a global ‘system’ which is now as unsustainable as it is imbalanced.”

It is clearly radical stuff, though I must confess to not having stumped up the $122.49 to buy the book. It is also clearly a view of the world – that much of what is wrong with the world economy is a function of the role of the US – that some people in Europe will be drawn to.

It would be unfair to dismiss Varoufakis’s views as an anti-American rant. His solution to the problems of the eurozone was sketched in a paper co-written with the former Labour MP Stuart Holland in 2010. The idea here is to have a large increase in lending through the European Investment Bank and its affiliate the European Investment Fund. There is a dearth of investment and a surplus of savings. So what you need to do – as Franklin Delano Roosevelt’s New Deal did in the US in 1933 – is to use the borrowing power of government to pump-prime the economy. A revised version of this paper, with an additional co-author, the US economist James K Galbraith (son of John Kenneth Galbraith), came out in 2013.

Given that interest rates in the eurozone are at rock bottom, with 10-year German bunds now yielding only 0.3 per cent, there must be a strong intellectual case for using cheap money to invest in government-guaranteed projects, for example in infrastructure. The problem is that if you are lending to Germany you can be reasonably sure you will get your money back but if you are lending to Greece you can be pretty sure you won’t. Private holders of Greek government debt recently had their holdings halved – the so-called “haircut”. That is why 10-year Greek debt yields 10 per cent.

Indeed it is precisely because Greece cannot repay its debts that it needs a deal. Mutualisation of European debt, with the sound countries carrying the risk for the less-sound ones, is the solution sought by many, including Prof Varoufakis. But the ultimate burden is transferred to the taxpayers of sounder countries.

Now the negotiations between Greece and the eurozone (plus the IMF as a junior partner) begin in earnest. My own guess is that there is an 80 per cent chance of a deal that will hold together for a year or two, and a 20 per cent chance of deadlock. If the latter, there is a decent chance Greece will be out of the euro by Easter. But whatever the outcome of the talks, we should not lose sight of the intellectual case for using low long-term interest rates to finance much-needed investment. To that extent the man on the bike has a point.

The problem in the negotiations, however, may turn out to be that Varoufakis’s perception that it would be a catastrophe not only for the eurozone but for the EU were Greece to leave may not square with the view growing in Germany that actually it might be easier to manage the eurozone were Greece not a member.