Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

In Spain, Podemos was an offspring of M15, an imaginative broad-based social movement, headed by a university teacher, with an electorate that had a larger percentage of university ...

Syriza had the most balanced representation of upper-, middle- and lower-class groups of any party in Greece. What drove the surge in support for the Left from 2008 was not fundamentalist opposition so much as ...

The immediate reaction of mainstream media to the May 2014 result was to dismiss both left- and right-wing critics...

The impatience and irrationality of the parties of protest would undo the good work of fiscal consolidation done since 2010. They were splitting Europe at a moment when it needed to stand united against the new threats on its borders.16 There were dark rumors of Russian infiltration. That was alarming, no doubt. But in 2014 a new cold war was among the more reassuring scenarios on offer. What if Europe was marching back not to the 1950s but to the 1930s? Was the script not...

When melded with fears of Putin’s meddling and terror attacks by radical Islamists, memories of Europe’s dark history could easily be stewed into a ...

When asked in the accompanying video what the last European Jew should do on departing the “Old World,” Leon Wieseltier commented simply: “Spit!” The fear and vitriol this expressed fed off memories that went back to the Holocaust and long before. What is striking is that this alarmist narrative should have gained traction when it did.

After the apparent escape from crisis in 2012, two years later Europe found itself again at an impasse. To secure its functional viability, the eurozone needed to make bold steps toward further integration. But in light of the mounting popular backlash and the ongoing economic uncertainty, where was the political momentum to come from?

After the verdict delivered by Europe’s voters in May 2014, who would want to risk a wave of referenda to ratify treaty change? Meanwhile, most of Europe outside the prosperous northern core was struggling to return to something like normal economic growth. Given time, would the German formula of austerity and reform work? Spain and Ireland were crawlin...

In 2014 the questions were getting ever louder. Would the mounting political backlash against the EU outrun Europe’s halting economic recovery? Would that recovery even continue? By 2014 the risk of deflation was undeniable. The emerging...

If stagnation threatened, the political pressures would further escalate. Would the ECB be forced out of its defensive position into a more activist policy? As ever, the place where the tens...

After six years of recession, the social crisis in Greece was manifest. In 2014 unemployment reached close to 27 percent. More than half of Greece’s young people were out of work, and whereas they might once have drawn on their families for support, the main breadwinner all too often had lost his or her source of income too.

By 2015 half of the population was relying on the pension income of a senior citizen to get by, an alarming statistic given that half the pensions paid to senior citizens were below the poverty level. According to Eurostat, if the standard of poverty was anchored at the precrisis level, then almost half of the Greek population was at risk by 2015.18

The OECD reported that one in six was going hungry on a daily basis.19 In Athens the homeless were everywhere. For those lucky enough to keep their jobs, real wages were down by 25 percent. At the same time, taxes had risen steeply. A nation of small-property owners was furious at new land t...

Contrary to popular belief, in Northern Europe, the Greece welfare safety net was far from luxurious and the health system was collapsing under the pressure of cuts. To escape the labor market crisis, since 2008, 400,000 Greeks had emigrated, out of a population of 10 million. Those who left were pre...

Not only was Greece experiencing a social crisis but it was doing so at the behest of the troika. Given that the majority of Greeks wanted very much to preserve their standing in Europe, first PASOK and then New Democracy had seen no...

But, not surprisingly, the crisis produced a broad-based mood of protest that was fueled by the desire for social solidarity and national self-assertion. On the Right the beneficiary was the racist Golden Dawn, a true neofascist movement. But by far the more popular response was Syriza, the party of the radical Left, which ...

Realizing that its support was dwindling, Samaras’s coalition government appealed to the EU and Berlin for concessions. If Greece could emulate Ireland and Portugal in making an early exit from its troika program, it would be a great win for Europe ...

But Berlin waved the suggestion away. They had never trusted Samaras and they were not about to make concessions. Hoping for a new mandate, Samaras called for elections. As was now commonplace, proausterity governments around Europe as well as the IMF chimed in. The Greek voters were left in no doubt that as far as “Europe” was conce...

Rajoy, Spain’s conservative prime minister, campaigned for Samaras in Athens. Given the rise of Podemos, Spanish conservatives were desperate to avoid a left-wing victory. But on January 25, 2015, that is what the Greek voters delivered. Syriza, led by the youthful activist Alexis Tsipras, formed a government and, refuting the expectations of moderate social democrats in Berlin and Brussels,...

The confrontation would be tough. The challenge for Syriza was to force open the painful and unresolved question of Greek solvency.

By buying out the private bondholders, the 2012 debt restructuring had removed market pressure from Athens. But given its declining economy, the Greek debt burden was still excessive. And by substituting public loans from the EU and the IMF for private debt, the 2012 deal had, if anything, raised the political stakes.

It was one thing to burn private creditors who had gambled on high-yield Greek debt. It was quite another to suggest to conservative Northern Europe taxpayers that they should make further deep con...

An unorthodox leftist who had spent much of his career outside Greece in the Anglophone academy, Varoufakis was never a Syriza insider. He had no stake in its old Left politics or in orthodox Marxism.

As Greece’s debts were no longer market loans but debts owed to the troika, his tactic was to mobilize the pragmatism of the market against the financial orthodoxy of the eurozone. He courted the support of the City of London, the Financial Times and authorities like Larry Summers, as well as a coterie of American economic advisers that included both confirmed leftists such as Jamie K. Galbraith and Jeffrey Sachs, onetime exponent of “shock therapy” for the post-Communist world.

Varoufakis argued that the ideologues on the Greek debt question were not those who insisted that unpayable debts were unpayable. The ideologues were the conservative disciplinarians in the Eurogroup who insisted that debts must be paid as a matter of principle regardless of the cost. The “system” that Varoufakis attacked was not capitalism but Europe...

Juxtaposing rational economics against conservative ideology was an effective political argument on Varoufakis’s part. It would win him a...

But it underestimated his opponents. The project of fiscal consolidation imposed on Europe under German leadership was certainly political. But it was not only that. It was a vision of a long-term reordering of Europe’s society and economy. Merkel was fond of shocking unsuspecting visitors with t...

In pursuit of its goal, to be realized over the course of a decade, Berlin did not flinch from imposing heavy short-term costs. That is what reform of a failing social and economic model entailed. That was the lesson of the collapse of communism, the economic project of...

In pursuing that project one could make concessions neither to the short-term time horizons of markets nor to Syriza-style protest politics. To ensure that Europe stayed the course, it was essential to contain “political contagion.” It would be disastrous to make concessions to the Far Left government in Greece, concessions that during the...

Whatever the misery of the Greek population, it hardly mattered in the wider economic balance of the eurozone. The battle was about the wider questions of political discipline and authority, which, as the conservative globalists in Berl...

The fight was all the more bitter because the austerity hawks in the Eurogroup knew that the centrist governments of ...

In 2012 Hollande’s government in France had wanted to push a more expansive policy. The growth agenda, which had been so crucial to the political maneuvering following Hollan...

Now the new government in Rome headed by the popular centrist Matteo Renzi was tempted in a similar direction.24 That made it all the more im...

Germany was the anchor, but in the most crucial negotiations, Finance Minister Schäuble barely needed to speak. The Dutchman Jeroen Dijsselbloem chaired the Eurogroup session, and the argument against Syriza would be carried by austerian stalwarts like Spain’s Luis de Guindos and Portugal’s Maria Luís Albuquerque. They knew that in stopping Syriza they were fighting for their own political lives an...

The irony was that in expressing their preference for the established parties in Greece, the Eurogroup and the IMF were aligning themselves precisely with those political forces and social interests ...

Nor were these entanglements limited to politics. At the heart of the business oligarchy and its media network were Greek banks. They had been recapitalized in 2012 as part of the restructuring deal at the expense of the Greek taxpayer. But they continued t...

Since June 2014 the Greek central bank had been headed by Yannis Stournaras, another of Greece’s persuasive economics professors, one of the architects of Greece’s admission to the original eurozone an...

When it became clear in December 2014 that Syriza was ahead in the polls and that it might soon come to power, Stournaras did nothing to staunch a slow-bleeding bank run. Ahead of the election, better-off Greeks had already withdrawn 16 billion euros from the banks. When Tsipras took office, a further 8 billion euros were pulled out in a matter of only three weeks.26...

If the Syriza government refused to cooperate with the troika, the ECB, as it had done in Ireland and Greece before, could threaten to curtail emergency lending ...

But did the troika really want to risk a renewed crisis in the eurozone? This threat of financial contagion was the major bargaining counter of the Greek government. If Brussels, Frankfurt and Berlin pus...

But in this regard, three days before Syriza took office the game was decisively changed. On January 22, 2015, Mario Draghi announced that the ECB was finally adopting full-scale QE. Two and a half years after Draghi’s “whatever it takes...

Between 2012 and 2014 Draghi had allowed the balance sheet of the ECB to contract. What forced his hand in 2015 was the acute threat of deflation. To counter slumping prices, Draghi had tried every alternative. A new installment of the Long-Term Refinancing operations th...

It was not until September 2014 that Draghi commenced “QE lite” by buying private asset-backed securities.27 Predictably, there was immediate indignation in Germany. The trigger for bolder action was a preliminary opinion issued on January 14, 2015, by the European Court of Justice, which decided in a case referred to it by the German supreme court that Draghi’s bond-buying scheme of 2012 had not constituted a prima facie breach of the ban on monetary financing.28 Without waiting for a final ruling, the ECB acted. On January 22, 2015, Draghi announced tha...

In the coincidence of the ECB’s turn to monetary activism with Syriza’s election victory in January 2015, the economic and political consequences of the eurozone crisis finally caught up with each other.

The conjuncture would have fateful consequences. Ironically, it was the ECB’s bond-buying program, long opposed by Europe’s conservatives, that freed them to fight the battle for political containment by any means necessary.

With the ECB in the market there was no risk that the Greek drama would spill over into financial contagion. As the ECB’s purchases kicked in and drained sovereign bonds from the markets, y...

In 2010 the IMF had advocated precisely this course so as to allow the Irish banking crisis to be resolved in an equitable fashion—through PSI and not entirely at the expense of taxpayers. Then, Trichet had blocked the way. Now Draghi’s deployment of QE enabled the conservative majority of the Eurogroup to lay sie...

As an economic theorist, Varoufakis’s specialty was game theory. He knew that Draghi’s turn to QE boxed Athens in. If the Syriza government wanted to gain purchase on the debt negotiations, it needed a threat of its own that would restore the risk of financial contagion.

Varoufakis believed that a wrinkle in the bailout agreement of 2012 combined with the mounting wave of nationalist resentment in Germany gave Greece the leverage it needed.

On the books of the ECB were 30 billion euros in bonds purchased under Trichet’s SMP program. These were left untouched by the 2012 restructuring and they were under Greek law. If Greece unilaterally defaulted on those bonds, it would inflict severe losses on the ECB, highlighting the dangers involved in bond buying and more or less forcing the German right wing to reopen the question of the legality of QE. With QE’s legal foundation in question, confidence would crumble. The firewall would be down. The entire eurozone periphery wo...