Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

The Russia that emerged from the Ukraine clash was above all a nationalist regime whose citizens were called upon to pay whatever price was necessary for their nation’s reemergence on the global stage. It was tough, but it was a role that came easily. And, indeed, in some respects one might even say it was convenient.73

Russia suffered, but if the economy was a weapon, it cut both ways. You could not damage Russia without damaging its neighbors. The much-feared emerging market crisis hit the post-Soviet world with a vengeance.76 Between the end of 2013 and early 2015 the currencies of Kazakhstan, Azerbaijan and Belarus devalued by 50 percent against the dollar. The Kyrgyz, Moldovan and Tajik currencies lost between 30 and 35 percent of their value.

In Tajikistan, the most remittance-dependent country of the world, where approximately one half of its working-age males earned their living in Russia, it threatened a catastrophic fall in household income and foreign exchange earnings. Kyrgyzstan, the world’s second-most remittance-dependent country, was also badly affected.

But if the crisis took its toll on the entire region, the epicenter of the shock was Ukraine. In the emergency bailout of April 2014, the IMF had started its estimate of Ukraine’s economic situation from an exchange rate of 12.5 hryvnia to the dollar. The IMF had called on Kiev to impose currency controls to prevent capital flight, while letting its currency float and allowing domestic prices to adjust to whatever level would ensure the viability of government-owned gas firms.

If this program had been adopted, it would have squeezed both ordinary Ukrainians and wealthy Ukrainians, who would see their funds trapped in a depreciating currency. Instead, the Ukrainian central bank did the reverse.80 It permitted billions of dollars to flee the Ukrainian banking system while using its precious exchange reserves to stem the decline in the exchange rate. While prices surged by 50 percent, the result was to favor the most wealthy Ukrainians, who swapped their assets into dollars at favorable exchange rates. All told $8 billion drained from the currency reserves. Whatever money was pumped into Ukraine simply bled out. With exchange reserves depleted to as little as $4.7 billion by February 2015, the central bank finally abandoned the exchange rate.

As the European powers struggled to make diplomacy work and the hawks in Washington and at NATO headquarters were urging ramped-up military support, between February 5 and February 6 the currency plunged by 50 percent in twenty-four hours.81 Prices were adjusted on a daily basis, and to combat hoarding, a system of de facto rationing was introduce...

With the battle in the Donbass ongoing, the government of the revolution of 2014, like its predecessor in 2004, was seeing its legitimacy evaporate in the face of insurmountable economic problems. To enable the new Ukrainian regime to survive, in the spring of 2015 there was no alternative to further foreign assistance. On March 11, 2015, the IMF recommitted itself to Ukraine, relaunching the agreement of the previous year, this time rated at $17.5 billion. It would be the cornerstone of a $40 billion four-year deal, supported by the EU. But this time, at last, the IMF acknowledged that there would have to be debt restructuring.

In 2014, the comprehensive crisis, both geopolitical and financial, that had threatened the post-Soviet sphere in 2008 had arrived and the verdict it delivered on the hegemony of the United States and its alliance system was ambiguous, to say the least.

A popular upheaval had swung Ukraine forcibly toward Europe. The Association Agreement eagerly signed by President Poroshenko in June 2014 was finally ratified in July 2017. The West had not let Ukraine sink. But neither had it saved it from crisis.

Ukraine’s financial position remained precarious. The debt restructuring deal that was eventually done in August 2015 satisfied the IMF’s demand for private sector involvement in formal terms. But, in fact, it imposed minimal losses on the hedge funds that had gobbled up Ukraine’s distressed debt. It bought Ukraine only the slightest amount of debt relief...

The viability of the package would depend on the unpredictable course of domestic reform and the intensity of the confrontation with Russia, which neither the United States nor Europe had mustered...

As far as Russia was concerned, even in combination with the oil price shock, the sanctions were painful but not decisive. By the spring of 2015 Putin’s regime had regained its grip. If and when oil prices began to stabilize, Moscow’s position would recover. Sanctions would soon prove deeply unpopular within the EU. To g...

While it bided its time, Moscow could cause trouble in the Middle East, it could fish in troubled waters in the United States and it could look f...

In the cold war the interplay among Washington, Beijing and Moscow had been crucial in shifting the balance of power. In principle, a ...

It had no particular reason to prefer Putin. But in the spring of 2014 in the East Asian arena, tensions between Japan and China were rising to a dangerous level. Washington gave notice that it meant to stand behind its strategic pivot. It would n...

But for America to take a strong line in Asia while at the same time confronting Russia in Europe had its price. It offered Russia an opportunity and Putin seized it. In the spring of 2014, as the seriousness of Russia’s confrontation with the West became cl...

China would provide Russia with support against the West. If the United States and the EU were determined to oppose Russia in economic terms, it would find markets in China and sources of capital in Shanghai and Hong Kong. China, for its part facing resistance in the South China Sea, could build a Eurasian land route via Russia and Central Europe....

Russia would provide the bridge. A start was made in May 2014 with the signing of a $400 billion, thirty...

Though the strategic logic was strong, in practice, Moscow found that doing business with China was fraught with difficulty. ...

Russia’s hard-pressed oligarchs were reluctant to commit to long-term deals when they were not negotiating from a position of strength. Laying the necessary infrastructure eastward was monumentally expensive and Russia’s elite were ...

Gas diplomacy in an age in which prices for fossil fuels were gyrating was a volatile business. But for both Moscow and Beijing, the point went beyond economics. It was about redefining the balance of power and affirming multipolarity. It would not be the incumbent hegemon that would shape the twenty-first-century order but the rising power of Asia and its a...

The symbolism of guest lists at the anniversary celebrations for victory in World War II in 2015 was hard to ignore. Seventy years after that struggle, in which China, Russia, the United States, Britain and France had been united against the Axis, a new relationship was being constructed betwe...

In Moscow on May 9 and Beijing on September 3, Xi Jinping and Vladimir Putin were each other’s guests of honor at spectacular commemorative ceremonies. Obama, Cameron, Hollande and Merkel gave their excuses.86 In the spring of 2015 the one Western leader who would look to the former allies of Worl...

In the Maidan demonstrations of the winter of 2013–2014 Ukrainians enthusiastically waved the blue banner of the EU. After the grinding battles of the eurozone it was something of a relief for Europe to be celebrated by anyone anywhere.

The pro-EU demonstrators in Kiev hailed Europe as the future. To them it offered the promise of democracy, freedom, prosperity, the rule of law, the “good Europe.” It was an image that stemmed from the era of the 1990s and early 2000s, when Europe had celebrated the end of the cold war, economic growth and the prospect of “ever closer union.”

For some pundits, in both Europe and the United States, the clash with Putin was an occasion to reaffirm that vision against outside threat.1 But the question in the wake of the eurozone crises of 2008–2012 was whether the main threat...

Anxiously watched by the rest of the world, the 2012 stabilization of the eurozone had been based on a compromise among Germany, Italy, Spain, France and the rest. It was driven by the fear of an escal...

A year later the acute phase of the crisis had passed. But as the second recession to hit Europe in short succession began to make itself fully felt, ...

The eurozone’s stabilization in 2012 was conditioned on the expectation of further forward movement. That was the program with which the European Council of June 28–29 had addressed the Spanish crisis. It was the message that Draghi had delivered in London. The fiscal compact, the banking union, the development of the ESM and the ECB’s OMT were major steps toward the consolidation of the eurozone.

The question, as ever, was whether they were sufficient and whether the EU had the will to move at the requisite speed.

On the banking union everything remained to be done, and Berlin was in no hurry to sign up to a common resolution fund until the full extent of the damage in Southern Europe was uncovered.2 Germany and France were bitterly divi...

Meanwhile, Merkel had her own reform agenda. Not satisfied with having transferred the Schuldenbremse to Europe, she wanted to push the German vision of labor market reform to the European level as well.4 In 2013 her mantra was competitiveness and unit labor costs. For...

Merkel’s authority in the wake of the eurozone crisis was remarkable and Germany was the most comfortably situated of Europe’s economies. Labor markets were tight and global demand for Germany’s exports was booming.5 Even if exports to the rest of Europe were flat, Germans...

But even in this cocoon of prosperity, German politics were not immune to stress. The weak link was the FDP, Merkel’s chosen coalition partner since 2009.6 The FDP’s probusiness, tax-cutting agenda had no more than niche appeal in Germany at the best of times. Its national sovereignist po...

It would have made a good basis for opposition. Inside a government constantly forced to make compromises to hold the eurozone together, the FDP was playing a losing hand. The indignation aroused in Germany in 2012 by talk of eurobonds, the further round of assistance for Gr...

And these became acute in the spring of 2013 with the emergence of the first overtly Eurosceptic party in modern German politics, the Alternative für Deutschland.7 Though in 2015 it would go on to lead the campaign against Merkel’s refugee policy, gathering a nativist electorate around it, the AfD was originally founded by a gr...

In the German general election of September 2013, to the relief of the mainstream, the AfD failed to break through the 5 percent hurdle required to enter the Bundestag. But it took enough of the FDP’s votes to drop them out of parliament for the first time since 1949. On the back of a much-increased vote for the CDU, Merkel would become chancellor for a third time, once more in coalition with the SPD. Despite ...

But the grand coalition gave Merkel a broad parliamentary base, and the most vital element of continuity was provided by Wolfgang Schäuble, who continued as finance minister. In September 2014 Schäuble announced to the Bundestag the joyous news that for...

In a world shaken by the violence in Ukraine, Syria and Iraq and terrified by the Ebola epidemic, he declared, Germany’s robust financial position would send a message of confidence.8 The program of the debt brake on which Germany had embarked in 2009 was being realized ahead of time. The rest of the eurozone had more ...

The crisis fighting of 2012 had stopped the immediate catastrophe. But the shocks to confidence delivered between 2011 and 2012 sucked the eurozone economy down and the strait...

The deep recession did not begin to ease until the second half of 2013. By that point unemployment in Greece and Spain had peaked at 26–27 percent. When it came, recovery was agonizingly slow and was overshadowed by the increasingly worrying news from the emerging markets. In 2014, with prices falling all around the world economy, the EU was stalked by the fear of deflation. Was the EU sliding toward the economic quicksand that...

How could Europe respond? The fiscal compact constrained government spending even on much-needed investment. In Spain, which was undergoing one of the most severe adjustments, public spending both on infrastructure and education was slashed.10 But net of depreciation it was Germany that had some of the lowest levels of public investm...

Draghi cut rates, but would the ECB go a step further and embark on QE?11 As inflation slid toward zero and expectations moved into negative territory, the economic case for action by the ECB was serious. But with nationalist resentment on the rise in Germany and the Bundesban...

While economists and politicians argued over policy options, a large segment of Europe’s population had simply had enough. Across Europe, opinion polls showed a sharp decline in support for the EU even in sta...

And then came the EU’s parliamentary elections of May 2014. The results rocked the European political establishment. Eurosceptic nationalist parties made dramatic gains. UKIP won in Britain. More significantly, the National Front (FN) won in France, taking 25 percent of the vote, as compared with the middle-of-the-road conservative UMP with 20 percent and the ruling Parti Socialiste with 14...

But since January 2011 Marine Le Pen had run a campaign to de-demonize the party, refashioning it as a vehicle for popular nationalism pitched against globalization and the EU. To its petit bourgeois base the FN added a large part of what would once have been though...

When the FN’s voters were asked ahead of the May 2014 election what mattered to them they mentioned three things. For 63 percent immigration was a top priority. A similar number raised economic issues. But hostility to the EU came top of the list: 83 percent of FN voters were persuaded that belonging to the EU had aggravated the effects of the economic crisis on France; 81 percent thought that ...

Given the experience of Europe since 2008, one could hardly say that these were unreasonable opinions. Two thirds of FN voters drew the concl...

The pool of right-wing nationalist resentment on the margin of European politics was not new, though it gained new adherents and far greater credibility in light of the disastrous mishandling of the ...

By contrast with the FN’s furious, lower-class, poorly educated base, the new parties of the Left were updated and energized iterations of the kind of progressive social movement tha...