CNBC Exclusive Interview: Former Greek PM, George Papandreou

Following is a transcript of an exclusive CNBC interview with George Papandreou, Former Greek Prime Minister, by CNBC's Julia Chatterley.

Julia Chatterley (JC): Just how close to the brink of disaster is Greece again do you think?

George Papandreou (GP): It seems again very close to as you said at the brink of a disaster and it will be a real sin because we have had an adjustment programme five years, people have sacrificed, we have sacrificed 25% of our GDP, there's been high unemployment, all this to be able to remain in the euro and at some point be able to access the markets and then get on a path of growth and Greece has great potential. So I think we really need out of both sides to climb down from their high horses and really work on a compromise, on an honourable compromise to find a solution and move forward in a sustainable way.

JC: You said both sides need to get off their high horses here. Do you blame the negotiation tactics, the negotiating tactics of finance minister Varoufakis and the Prime Minister here?

GP: Well I can be very critical about negotiating tactics one or the other side, but let's look at the essential issues and I think there is a package to be gotten if on the one hand we have made amazing fiscal adjustment from the you know 15.7% deficit down to having primary surplus. We should, we should be able to have from the one side, from the European side and the creditors' side say ok you've done your fiscal consolidation, we're not gonna ask for more cuts, we're not gonna ask for more cuts in wages and pensions, we're even gonna deal with the debt problem so that it's less of an overhang and your primary surplus you can use for growth programmes, but on the other hand we in Greece have to say, the government has to say we are ready to continue deep reforms to make Greece sustainable and I would even say wider issues rather than looking at the narrow issues of the labour market of the pension system, but let's look at issues of you know really revamping our tax system, really bringing in transparency, adjust the system, the bureaucracy.

JC: But the Greeks are talking about that though.

GP: Absolutely. Greeks do want these changes and you know actually they did start but then, when you have austerity, as harsh austerity, there was a lot of, a lot of these interests that don't want this reform we say well they mobilized and they didn't want these reforms, so actually I remember Gerhard Schroeder telling me, the former Chancellor of Germany, he said when he reformed in Germany he said he couldn't have done austerity at the same time. We were asked to do both austerity and major reforms at the same time and politically that was very difficult.

JC: And you're being asked to do that again. I mean could the Greek government have been asked to enact austerity to meet certain targets even if they've softened them yet again and again there's no promises on debt. So you know there is an argument to be made here that what's being asked of Greece again is unfair. A straitjacket

GP: Well it's not just the Greek point of view. I think there's a wider, not consensus, but generally there's a strong point of view around the world that the austerity policies in Europe have not helped the recession after the crisis, not helped growth and certainly we need to reverse these policies. Now Greece has made huge huge adjustments, actually we're number 1 in OECD historically of making such a deep and such a quick adjustment in our fiscal situation, so we should be commended for that and what we now need to do is put our focus on the reforms, which is basically what we're saying, what I would say is ok, we've dealt with the symptoms of the problem, that was, that was the fiscal situation, now let's look at some of the reasons we actually need an adjustment programme, so dig down to the deeper questions of reform, which we started, but was slowed down due to the political situation in Greece.

JC: Do you think if that were the message that Tsipras went into with these negotiations, we'd have had a deal by now?

GP: Yes, I think that both he and the creditors Eurozone and the IMF got caught up in a sort of more narrow discussion about the specifics in the so-called memorandum agreement we have and the red lines and had we expanded the agenda to much wider issues in Greece, it would have been better for Greece and I think the creditors also would have said ok it's worth investing in Greece because look the Greeks are now saying we really want a major change. We could have actually even taken that to a referendum and had a very positive vote I believe on that. People do want change in Greece, people do want to say, do want to see things more just, more transparent, moving forward in having a functioning, a functioning state and democracy in a much more modern way and we have been able being in the EU and the Eurozone over these many years I think to have avoided some of the deeper structural reforms we need to make and restructure our economy, but now we have to do that.

JC: So those discussions clearly didn't happen perhaps because there wasn't time or they didn't believe there was time to have those kind of discussions and negotiations in the short term to extend the bailout deal or at least finish the old programme before we move on to the next one. Do you think that the market is being complacent about the likelihood of a compromise being reached here?

GP: After 2012 and Mario Draghi saying we will do whatever it takes to save the euro and of course now we have QE, we have , we're moving in the banking union, there's the ESM mechanism, there's more fiscal coordination , there's been a sense that the euro has stabilised. And even if Greece is sort of the outlier, if it leaves the euro that there's no real problem. Actually I think that that is, that's a wrong assessment. First of all because Europe is not only a financial or market economic project. It's also a political project. It's getting together, trying to solve problems together, not all this acrimony, not all this this sometimes even nationalistic with a racist undertone blamegame. We in Europe are there because we are saying let's get away from these you know nationalistic histories and conflict and so on, let's work together to deal with not only the financial crisis, other climate change issues, the refugee issue, our neighbourhood is having problems. Greece is in the center of a region which is the stable country. If you look at the Balcans, if you look at the Black Sea with Ukraine, Russia, Turkey, Syria, Palestine, Israel, Libya, Egypt, we are at the center of all that and we being inside the core of the Euro-zone also gives a sense of stability and I would say helps keep many of these countries on European path, so I would say it would be, we would underestimate, underestimating the cost of a Grexit I think is very wrong and that's one reason why I think it's in all of our interest. The Greek people they wanna stay in the Eurozone, they wanna stay in the euro. The Europeans would also have, would lose if Greece left the Eurozone, there's a deal to be made. Let's get together and really work hard, both sides need to break away from some of the dogmatism, certainly the Greek government yes does have a rhetoric that, a dogmatic rhetoric, they've got to change that, but there have been also some very very harsh red lines from our creditors' side which they need to show some sense of flexibility.

JC: You've said it twice now. I'll have to pick up on the point about a referendum. It goes back to what you called for back in 2011, it's a tough decision, it's difficult to remain within the euro and not enact austerity, you can't ultimately have it both ways, which arguably the Greek people are asking for at this stage. Is a referendum at this stage essential?

GP: If we had a wider programme, I would think that a referendum would not only be essential but it would be a very positive. It would be positive for the Greek people, because when I called for it in 2011, my desire was that this was owned by the greek people, that they really felt and that we would then have a mandate to quickly move in and make these reforms and we would have broken down a lot of the resistance in some of the vested interests that didn't want the reforms because we would have a popular vote in favour of the changes. What happened is that we didn't have a referendum so that the resistance to the changes and the political cost of the parties pushing for reforms or was too big so that a lot of the, very often we didn't do as much of it as we needed. So we lost the momentum, the reform momentum I think at that point. If we want to gain it again, we need to have a wider consensus. Now there is a wider consensus in Greece amongst parties. All the spectrum now, if there's an agreement, there'll be a positive vote in the Greek parliament, but I again would want to see much wider reforms and have the people own them, really believe that this is their programme, it's a Greek programme. As a matter of fact I said let's not make it a programme of the institutions or the Troika or the European creditors, let's make it a greek programme because it's in our interest to really see a reformed and modern democracy.

JC: So far tsipras has avoided the hardest decision arguably which is to separate from the left platform within his party or ultimately take Greece down the path of default and ultimately Grexit if that's the case. He can't avoid that decision forever, can he? Can this, the Syriza party withstand a compromise deal here do you think?

GP: A compromise is needed and as I said.

JC: But they won't stand for it…

GP: Well, you can be elected by your party or the party is elected, but once you are elected in government you are not simply head of your party, you're head of a government. You're head of the party, your responsibility is first and foremost to the public interest to the much wider audience and the wider audience in Greece, the citizens of Greece, over 70% are in favour of staying in the euro, they did not give a mandate to for this government to leave the euro or to default. They are sometimes, people would be applauding a sort of more hard stronger negotiating position, but in the end they do want a deal. So I believe it is in the interest both of our country but also of even the Prime Minister to go beyond the narrow confines of his own party and move forward to find an honourable compromise. And I hope that it happens.

JC: So kick the left platform out, if that's necessary

GP: Well, not necessarily, I think he either has to convince it you know his party and he may be able to do so or he may as we said earlier have to go to some form, asking the greek people to to renew the mandate if he has difficulty either through referendum or either through elections. But it's very possible if he is going to ask simply for an extension of the existing programme, for 9 months, which is one of the discussions that is being made that he might be able to just get that through parliament, but after 9 months there will be another question do we continue the reforms and then there will be other issues down the road. But

JC: Not even after 9 months. Is this government really capable of implementing the reforms it agrees to?

GP: Well, it will be tested, it will be tested, so once an agreement is and we hope there is an agreement, then it will be tested on the ground. Will they be able to implement what they have signed. I hope so, I hope so for greece's sake.

JC: and what if they can't?

GP: Well, let's not, let's not theorize for negative scenarios, but democracies have their solutions and other people

JC: You think there will be a political cost?

GP: I think there will be a political cost. If they do sign something and they won't be able to implement it, there will be a lot of criticism not only from the outside but also from the inside in Greece and you know the political cost will be paid. But for the better of, for the better interests of our country I believe that we all need to rally around in agreement. If it's, if it's made, a deal is made and help it be implemented beyond just waiting for the government to do it. This is something that is, is for the whole of Greece.

JC: It's been 4 months trying to negotiate a completion of the old programme, nevermind ultimately a new bailout deal which many people believe Greece is going to, is ultimately going to need. Just how much more difficult are those discussions then going to be?

GP: If there's a new programme, well it very much depends on one thing of course the practical issue of how's our economy growing, it actually was growing, started to grow just a few months before the elections, we had a primary surplus, now because of this uncertainty of the negotiations, it has impacted on the economy and of course that is part, partly it's a strong responsibility of this government that they have dragged on this negotiation for a long time, but also possibly some of the inflexibility, some of the issues from our creditors. We needed to come to an agreement more quickly so that we could keep this dynamic of growth. The feeling around it and I've been talking to many people in the markets, like investors around the world, there was a feeling that Oh Greece now is an opportunity. Now we would, just before the elections, now we can, we will go there to invest, now there's new growth opportunities. Greece has great possibilities and green energy and Mediterranean diet and agriculture in high quality tourism, well on this tourism cultural tourism is on, fisheries.

JC: And what do they say now?

GP: Well, obviously these dragged down negotiations have made people very wary and and waiting to see what the results will be. So, in order to restore confidence and open up the path towards growth and investment we need to have a deal, so that's, we need to have a deal as soon as possible and that's why I think there's a, both sides have to work together to make this a success story.

JC: And to go back to the point that you were making about what's being demanded on both sides, what's the risk here that the deal that the Greek government are forced into signing only prolongs the agony for the Greek economy and for the Greek people?

GP: Well, that's why I would like to see a deal which deals with the underlying causes of some of our problems. As I said the fiscal issue, yes it is an issue we have to deal with, we have to be responsible fiscally, but we have now reached a primary surplus after, we've done it in record times according to the OECD, so we've done that side. Let's look at some of the other issues, which make, which not only will lighten the burdens so that the people don't have this agony if you like and a sense also of security that we will stay in the Eurozone and that euros will still be, they will still hold on to their euros and there will be a positive side, actually that the negative thing of a Grexit now is that we have taken the pain of the adjustment and we were just about to get all the benefits of being in a common currency with the stability and the sense of credibility that it gives to an investor. If we lose that, that'll be a tragedy for Greece, it'll be a very negative thing I think for the Eurozone also. But we do need to look at, if we do get a deal some of the underlying causes, I mentioned earlier. There are issues that we have to deal with and has to be agreed on.

JC: What about the debt?

GP: Yes, that is another issue that. Debt is something that, if you talk to people in the markets they say Greek debt is something we have to deal with to make it sustainable and the IMF is talking about that. There are ways to do it. One problems in the European Union or the Eurozone is that the money that we have borrowed from our friends and partners in the Eurozone are taxpayers' money , so getting a haircut on the principle would be hitting the taxpayer, very difficult politically. However, extending the maturities, deferring having a wider deferment period for deferring back, lowering the interest rates, those are issues that could be on the table, should be on the table and.

JC: The creditors should voice that, too, shouldn't they?

GP: That's right, absolutely.

JC: They should offer that olive branch.

GP: I believe that would be

JC: Why are they being so intransient?

GP: That will be very important in a coming deal, that the creditors say listen we understand that the pain has been huge, that, we've had recession for 7 years, austerity for 5 years, you actually have sacrificed, the Greek people have sacrificed a huge amount. I mean a 25% loss of GDP has, is close to a depression period you know and in peace time it has never been done since the second world war in the developed countries, so the Greek people have said we are ready to make the adjustment, we actually have sacrificed to stay in the euro. I think they need to be rewarded by saying ok we will help you, sort of this overhang this debt doesn't, is a drag on your economy, but will also help us access the markets. The markets will be confident that we can actually deal with our debt sustainability issue, then it will in fact help our creditors, because they don't wanna keep on funding Greece. They wanna say you're on your own two feet now, great, you're, you have your freedom to do things as you want, of course responsibly, but we don't have to sit there and continue to lend you to be able to be sustainable. I think that both sides want that.

JC: How does it make you feel when polls suggest than now majority of Germans believe Greece should leave the Eurozone?

GP: Well it's negative and I can understand, there was a narrative, there still is a narrative in the European Union that you know the Greeks are to blame for the, we obviously have a part of the responsibility for the fact that when I became Prime Minister I found out that the deficit was not 6% as the government had reported officially to the European authorities but it actually ended up being 15.7%. Well obviously that was, fudging the numbers was not the way to create credibility and that was part of the reason why we then could not access the markets, spreads went up, we had to use the so called European mechanism to borrow, borrow from our partners. So yes, we have our part, our share of responsibility and we had to put our house in order but on the same time, the Eurozone itself was an incomplete architecture, so you know if you're, if somebody feels that his or her euros in Greece are in danger, they take them out, there's a slow bank run or diverging interest rates on borrowing, which in a single market make it for Greek companies to compete, the fact that we needed to have a banking union or a bank assessment and it took many many years to do this. We are now talking about QE, we are actually implementing QE which the US did in the midst of the crisis in 2008-2009. Now this is 2015 and we're implementing it, why did it take so long. So these are problems that were not Greek problems, these were the problems of the Eurozone and there was some very wrong predictions about how quickly Greece would be able to access the markets. So I think we have, there's a shared, a shared responsibility as to the difficulties Greece is going through. I think we need to get away from this narrative which is saying the Germans are to blame or the Greeks are to blame. You know they were saying Greeks are lazy, but if you look at the OECD numbers Greeks work more hours than any other Europeans. So let's get away from the stereotypes, let's go back to the European idea of we work together to solve problems, we are stronger when we're united, we can pull our strengths and not be so fearful when pulling our risks.

JC: I spoke to finance Minister Varoufakis back in February about the handover between the former government and his and the lack of documentation involved in that and he said that Greek politicians need to grow up and it isn't a true reflection of democracy the way politicians in Greece have behaved. Do you agree that that's been an accurate statement?

GP: I would say that we have to yes, our democracy has to be deepened, it has to mature, institutions have to work more clearly. We just going a little bit historically back to to a few decades back and of course that's part of my personal experience, I lived through dictatorship in my lifetime. We didn't go through the so-called Copenhagen criteria that Central and eastern Europe went through to become members of the European Union. We were on the winning side of the Cold War, so we were just let in and many of the authoritarian structures of the former dictatorship or authoritarian regimes, clientelistic regimes were somewhat intact and even fed by some of the European money, so that allowed politics to avoid some of the deeper issues and responsibilities that we had to take up to create institutions that were more transparent. I'll just give you a statistic, we brought prescriptions in the pension funds, medical prescriptions which are paid by the pension funds in Greece, we knew there were kickbacks, the doctors were overprescribing medical treatments and they were getting money from multinationals or perks. We put everything online, medical prescriptions online, we cut the cost by 50%, that's 2,5 billion, that's more than we get from our property taxes, all property taxes per year. So, this is what we needed, we needed the leadership in Greece to deal with this system and and sort of political culture of clientelism and corruption, yes I've been very open about that. I don't think the Greek people are corrupt, because at some point people are saying Greek people are corrupt, no no no, the system was geared in a way that made people have to deal with the public sector or the doctors, or the hospitals and to be able to actually get their services sometimes by you know some kind of a bribe or some kind of gift so on. We have to eliminate that. The first thing I did, one of the first things I did in Greece was to put all expenditures online from local to central government. I was the first one to cut down corruption. We can do more. And Britain's institute has come out and said some years ago that if Greece had become fully transparent, it would have got, we would have gained 8% of GDP. Now that's huge! So yes,

JC: Cause these are the things, not just the reforms, these are the things also that investors need in order to -

GP: Absolutely

JC: - regrow confidence in the Greek economy.

GP: Absolutely, and that's why I said ok we needed fiscal consolidation, we had to take some very difficult measures, cutting wages up to 30, 40, 50% pensions and so on, but that was the tip of the iceberg, that was the symptom. The underlying problem of our institutions is creating a really transparent and working democracy is what we needed. That's the challenge we politicians have to do and we have to, this has to go beyond the spectrum of different ideologies you know, it has to go from right to left. This is something just to make sure our institutions work well and that's going to create an environment where investors can be confident and I hope that we can do that as soon as possible.

JC: Alexis Tsipras doesn't have the legacy issues that the established relationships in the sense that the older parties in Greece have. Is he best placed to break down some of those corruption links, the oligarchs, the connections to the media, the tax evasion, the old wealth that ties back to the politicians in the country? Is he best placed to break down on those links?

GP: Yes, I think he's, he could have first of all a wide consensus in Greece by working with all the parties and you know. There are, I don't want to debunk all politicians in Greece, because there are legacies which are positive, there are legacies which are negative. There are people that have fought against corruption, people that have fought for democracy, there are people that have been subsumed by a negative system. So this has been an ongoing fight, but this crisis is an opportunity for us to really make the necessary changes. Luckily a lot of people were saying well the problem is the memorandum, the problem is the programme. Well yes the programme did have its deficits, did have its faults and problems but there were underlying issues which we have to deal with. Now I hope that since pretty much everybody, the whole political spectrum has dealt with this crisis we can now sit down and say rather than just trying to find some scapegoat and who's to blame and so on, let's sit down and say ok now's a good time to really rethink where Greece is going, it's a great country, it's got great potential, we have smart people, well-educated younger generation, we can do, sky is the limit if you like.

JC: Is a grand coalition the answer?

GP: Well, that might be an answer, but I would say we need to we need to create more consensus across the isles if you like working together on some of these basic issues, very basic issues. There are ideological differences which we will always have, others will say more social cohesion, others will say more free market movement and so on, but there are other issues which are basic, like transparency, like a good tax system that is working with justice, the sense that justice is working also,cutting the red tape, I mean these are issues which we can bridge ideological divides and not necessarily behold to ideological divides. There are beholding to certain vested interests, well let's work as politicians to put them aside and move our country forward.

JC: You've been talking to investors while you're in London. What message have you given them about the short-term? Have you said be cautious, be careful or have you said look ultimately I think a deal will be agreed?

GP: My bets are that there will be a deal agreed, there are some possibilities of an accident of course or what they call a Graccident, but I do believe that there could be a deal and based on that deal move forward and changes we need, further changes we need to have quite a few changes but move forward changes in Greece and really make Greece a place where investors will really want to come and invest and people of course, a lot of people like Greece for many reasons, too, the environment, the beauty, the culture, the islands, the mountains, the diet, the lifestyle. Greece is a great place to invest in.

JC: And that needs buy-in both from the creditors and the Greek government

GP: Absolutely

JC: More effort on both sides.

GP: We need to partner and in partnering we need to move the country forward.