Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

For many of the most fast-paced global transactions, it was London, not Wall Street, that was the location of choice. By 2007, 35 percent of the global turnover in foreign exchange, running at a staggering $1 trillion per day, was conducted between computer systems in the City of London.

Before 2008 the driver of crisis was expected to be the balance of financial terror between the United States and China. A huge unwinding of the global disequilibrium centered on China and America and driven by profound domestic imbalances in each of them would, it was feared, rock American power to its foundations.

In 2008 the expansion of the EU and NATO in the face of Russian opposition had added another dimension of risk. Georgia and Russia had clashed and Moscow had approached Beijing to mount a joint attack on America’s fragile finances. Beijing had held back. There was no great dollar selloff. The geoeconomic course of the crisis took an unexpected and innovative direction.

The Fed’s liquidity swap lines stabilized the dollar-based financial system. In November 2008 the upgrading of the G20 had added a global leadership forum and this had been important in legitimizing the dramatic expansion of IMF resources in 2009. This backstopped the IMF’s urgent engagement in Eastern Europe. A year later, remarkably, the ...

At the same time, the United States was aggressively pushing a new system of regulation for global banking through the no...

The Democrats lost control of Congress. The recovery was so lame and the fiscal impasse so threatening that the Fed launched its cautious second wave of QE, to be met with violent opposition at the G20 meeting in Seoul.

Should Washington maintain its massive global footprint? Could it safely withdraw? Would either internal constraints or external pressures allow this to be decided as a matter of deliberate choice? Would it be an orderly retreat, leaving a legacy of stability, or would it be a disorderly rout?

Impelled as she was by the energy and sense of mission that descended from the 1990s as well as her own ambitions for the presidency, Hillary Clinton, as secretary of state, was in the proactive camp. In the autumn of 2011, as it finalized the pullout from Iraq, Clinton’s State Department tried to get back on the front foot. The “pivot to Asia” was its new initiative.

It was, as one of Hillary Clinton’s indiscreet correspondents dubbed it, a “de facto China containment alliance.”3

Back to 1947 containment was the glue that held together the powerful alliance network that the United States had constructed in Western Europe and East Asia. That alliance system massively extended America’s reach. It was the grounds on which committed liberal internationalists defended the idea that America remained a hegemonic force.

From Beijing’s point of view, America’s Asian pivot took on a distinctly darker coloration with the election in December 2012 of the nationalist politician Shinzo Abe as the Japanese prime minister. Abe was deeply concerned about China’s power. He was unabashed in his support for a stronger and more independent Japanese military. And he was also willing to override domestic economic interests for the sake of strategic cooperation with the United States. He was even willing to sacrifice Japan’s rice farmers to make his country into a key pillar of TPP.5 If he was willing to do that, what else might he do? By 2014 there was talk of a war scare between Japan and China.

Corralling South Korea, Australia, Japan and Vietnam into the American geoeconomic alliance system was, if anything, too easy. Their interest in containing China was obvious. The risk was that America’s new engagement with Asia would harden positions and trigger regional clashes, which were not in America’s interests.

In October 2013, on his way to the APEC meeting in Bali, President Xi Jinping announced China’s new investment bank proposal. It was a bold multilateral initiative to upgrade Asia’s infrastructure. Everyone was invited to join. It was a leaf straight out of America’s own playbook, and Washington did not like it. The Obama administration let it be known that it did not approve the Chinese initiative, and South Korea, Japan and Australia promptly fell into line.

But the UK, which was doing everything possible to court Chinese business, took up the offer from Beijing to become a founding member of the Asian Infrastructure Investment Bank.9 Washington was furious.10 London had made its decision, a State Department official let it be known, without prior consultation. America did not approve the “trend toward constant accommodation of China, which is not the best way to engage a rising power.”11 But London wasn’t listening, nor were the other Europeans who promptly signed up too.

Given the stresses that the United States was evidently under, it might have made sense to invert Kissinger’s famous move in the 1970s and to seek a closer relationship with Russia as part of the effort to contain China. It is unclear whether Washington was ever willing to take Russia seriously as a strategic partner, at the level even of Japan or Saudi Arabia.

In 2011 Medvedev was compliant over NATO’s intervention in Libya, so much so that it provoked a counterreaction in Moscow. Putin, biding his time in the number two position as prime minister watching footage of Gaddafi’s horrible fate, became morbidly preoccupied.

The same Western powers that had shamelessly courted the Libyan dictator had turned on him, bombing his military and delivering him to the vengeful mob. One would be a fool to trust them. Medvedev’s appeasement would only invite further aggression. Putin would have to take back control.

This decision was only confirmed when Moscow erupted in protests over the winter of 2011–2012 following rigged parliamentary elections. Clinton barely disguised her enthusiasm for regime change. Instead of reset and détente, Put...

In opposition to the liberalism of the Obama administration, the Kremlin donned the garb of conservative cultural nationalism. Gay rights, feminist pop provocateurs and the Greek yogurt rations for America’s Olympic athlet...

It was certainly not the balancing against China that one might have expected. But nor was it the Americans who brought about the open crisis in relations between Russia and the West. It was America’s most important ally, the Europeans. The EU...

France and Berlin loved the détente with Moscow. Poland and Sweden did not. With active support from NATO, the “new Europeans” championed the EU’s Eastern Partnership with the post-Soviet states. It was no secret in Warsaw or Riga that this, like TPP, was a “de facto containment” policy. As far as Poland was concerned, the priority was clear. In the words of President Bronislaw Komorowski: “Never again do we want to have a common border with Russia.”17

The instruments of the EU’s Eastern Partnership were EU Association Agreements. These were complex documents harmonizing regulations, liberalizing trade and the movement of workers. The agreement with Ukraine, initialed in 2012, was hailed as the most extensive agreement ever completed with a non-EU member.

By 2013 talks with Ukraine were the most advanced. But the EU’s Eastern Partnership negotiations proceeded on a broad front. At a summit conference in Vilnius on November 29–30, 2013, Brussels was hoping not only to sign the Association Agreement with Ukraine but to initial agreements with Moldova, Georgia and Armenia.

Brussels had also been negotiating with Belarus.21 After incorporating the Baltics and the East European Warsaw Pact in the early 2000s, Brussels was now seeking to deepen and transform its relations with the rest of what had once been the western Soviet Union.

It was undeniably a major shift in international relations and it was all the more significant for the fact that it clashed directly w...

Since 2011 Russia had been developing its Eurasian Customs Union into a more comprehensive Eurasian Economic Union. It was clearly intended as an alternative to the EU’s Eastern Partnership. The details of its agreements were far less onerous than those demanded by the EU. But they meant entering into a lopsided relationship with Russia, and the customs union inc...

With goodwill a compromise between the EU’s Association Agreements and the Eurasian Customs Union could no doubt have been worked out. But that was not the mood on either side. The technical and economic issues of harmonizing two different economic blocs were overlaid by geopolitical tension whether Brussels acknowledged it or not. There was a choice to be made: Did the East European governments want to face west or east? Bruss...

Across the post-Soviet world, the economic and political recovery from the shock of 2008 was uneven. On the northern flank, the Baltics continued on their course toward the West. Estonia joined the euro on January 1, 2011. Latvia, the pivotal crisis country of 2009, adopted the common currency on January 1, 2014, followed a year later by Lithuania. The rest of Eastern Europe was supposed, under the terms of their 2004 accession, to join the euro in due course too.

In Poland the nationalists were in opposition. In Hungary they were the government. In the April 2010 election, the ruling Socialist Party paid the price for its corrupt and duplicitous handling of economic policy and the financial disaster of 2008.

Among Fidesz’s heresies was its refusal to separate the questions of political sovereignty and financial dependence.

Orban’s aggressive nationalism and Fidesz’s campaign to curtail civil liberties and political pluralism reversed the liberalization of Hungarian political culture since the end of communism.

To further bolster his position, in early 2013 Orban embarked on a new détente with Moscow. An alliance with Russia was by no means an obvious choice for a Hungarian nationalist.

Securely embedded in both the EU and NATO, Hungary could afford to take the risk of balancing between East and West. A tiny candidate country for an EU Association Agreement, like Armenia, menaced by sanctions from Russia, was not in the same position. Faced with a clear threat from Moscow, in September 2013 Yerevan pulled back. It declared its intention of joining Putin’s Eurasian Customs Union, prompting Brussels to close the door on the Association Agreement.

This setback for the EU’s Eastern policy made Ukraine all the more important. Given its size and geopolitical significance, it was Kiev’s posture that would decide the balance of influence in the region.

That Ukraine needed a change was undeniable. Even after the losses of 2008–2009 were made good, according to official figures average incomes in 2013 were barely higher than in 1989. Unlike in its neighbors to the west, the post-Communist transition in Ukraine had produced a generation of stagnation.

While a tiny minority grew fabulously rich, the standard of living for the least well-off was kept at a tolerable level only by a system of pensions and energy subsidies that consumed 17 percent of GDP.

In 2008 the IMF had provided emergency assistance. But the program came with demands for changes in taxes and benefits that made it impossible for a government to sustain legitimacy. By the time of the February 2010 ...

Ukraine was falling further and further behind not only its Western neighbors...

Yushc...

Tymos...

Yanuk...

Yanukovych was a corrupt manipulator who tacked back and forth between the West and Russia. He took funds from the IMF. He continued negotiations with the EU.32 He imprisoned Tymoshenko on corruption charges and used her as a pawn. At the same time, he dallied with Putin and his Eurasian bloc. As his clan enriched itself, his popularity drained and foreign exchange reserves dwindled. On the occasion of the next elections, which he had little hope of winning, it seems that he was preparing the security forces for a showdown.

But the 2014 election was not the only deadline. Already in 2013, negotiations with the EU and the Russians had reached a point that forced Kiev to a decision that would depend, among other things, on the shifting international financial climate.

Up to the spring of 2013, under the impulse of the Fed’s quantitative easing, dollars flowed even to Ukraine. On April 10, 2013, Kiev turned down the latest offer from the IMF to help finance its gaping current account deficit and instead launched a 1.25 billion eurodollar bond issue, which was eagerly taken up by the markets at the comparatively modest interest rate of 7.5 percent.

But then Bernanke’s taper pronouncement of May 22 hit the markets. Interest rates surged to 10 percent. Searching for alternative sources of funding and personal enrichment, Yanukovych canvassed the world for options. He explored shale-gas development with Shell and Chevron. In the fall of 2013 a deal was on the books to lease to China an enormous holding of 7.5 million acres of prime farmland—5 percent of the entire land mass of Ukraine, 10 percent of its arable land, an area the size of Belgium. China was not just after Lebensraum. It was also offering to put $10 billion into port facilities in Crimea.

But it was the talks with the EU that were pivotal. The promise that Yanukovych had made to the Ukrainian population was the promise of Europe. Ukraine’s officially sponsored media were talking up the Association Agreement as a prelude to full membership. The EU gave no indication that that was likely, but it did nothing to deflate expectations. Western press sources billed the Vilnius summit quite openly as the ...

The threat was not lost on Russia, and its threats of sanctions mattered: 25 percent of Ukraine’s exports went to the EU, but 26 percent went to Russia, and much of the rest went to CIS states within Putin’s reach.

In early September Yanukovych was still browbeating reluctant pro-Russian members of his party to accept the Western deal.37

What was not clear, until Kiev received the IMF’s letter of November 20, 2013, was quite how unattractive the Western terms would be. The IMF offered Ukraine only $5 billion and noted that it would be expected to use $3.7 billion of it to repay the 2008 loan due in 2014. No one in Kiev had reas...

A committee of German experts had estimated that Ukraine would stand to lose at least $3 billion per annum in trade with Russia due to sanctions. In Kiev the estimated loss had been inflated to something closer to $50 billion. Brussels swept all these figures aside.38 In conjunction with the Asso...