Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

Given Greece’s weakness, it is melodramatic to describe this as the nuclear option. But what Varoufakis was prepa...

To force the Eurogroup to negotiate in earnest, Greece would threaten to unhinge the fragile political balance on which Draghi’s stabilization of the entire eurozone depended. It wou...

Due to legal technicalities, it was in fact unclear whether a Greek default would hit the ECB directly or simply Greece’s own central bank. But the threat certa...

Varoufakis had the legal order for a default drafted and kept on hand in his ministry. The question was whether the Tsipras government would have the nerve to...

The first round of meetings between Greece’s new government and its creditors in Brussels went so badly that they came close to precipitating an immediate “rupture.”

Merkel, her foreign minister, Frank-Walter Steinmeier, and their French counterparts jetted into Brussels on February 12, 2015, for a European Council meeting fresh from grueling negotiations with Putin over the Minsk II ceasefire in Donbass.

Ukraine, not Greece, was top of the agenda, and the new Greek foreign minister did not endear himself to his colleagues by threatening to...

In his first Eurogroup meeting on February 11, Varoufakis struck a more conciliatory tone, insisting on Syriza’s European credentials and its commitment to work in good faith. He insisted that they wer...

But Schäuble’s response was blunt. Syriza had not been part of the 2012 deal with the Greek political parties. But Varoufakis needed to understand, as far as the fundamentals of the eurozone were concerned, that...

It was an astonishing statement on its face, but one that encapsulated the dilemma in which the eurozone found itself. As a result of the crisis, national economic policy was increasingly a matter of international agreements. As far as the Eurogroup was concerned, the Greek debt memorandum was the road map. What...

Though form was preserved, tempers frayed and there were rumors that Varoufakis and Dijsselbloem had almost come to blows.33 Schäuble would no doubt have been happy to see Greece thrown out there and then. But a personal intervention by Merkel on February 20 secured a stay of execution, allowing the new Greek government, with the approv...

What followed were months of agonizing back-and-forth over achingly familiar ground. Would Athens be able to satisfy the creditors with its austerity proposals? Would the creditors be willing to discuss Syriza’s demand for a second round of debt restructuring? It was attritional.

As the negotiations dragged on, Greece’s banks drained reserves, becoming ever more dependent on the ECB, while the Syriza government lost steam. For many on the left wing of Syriza, the February 20 compromise that kept Greece in the euro would come to seem a mistake.

Tsipras’s government had wasted the political momentum of its victory, missed its chance to carry out a popular rupture with Brussels and henceforth negotiated from a weakening position. But Tsipras did not want to provoke a break before negotiations had even begun. Varoufakis wanted to see whether leverage would work. He knew that eve...

essential. But Lagarde was loath to break with her European partners. Given her own political background, she had little sympathy for Syriza.

And the IMF team on the ground was embedded with the troika and committed to implementing its tough program. As if to reinforce the Fund’s commitment, the former head of its delegation to Greece, Poul Thomsen, was promoted to head the IMF’s entire European operation.

Off the record Thomsen agreed with the majority of his IMF colleagues that the Greek debt was unsustainable. But as Athens would discover, harping on the issue of sustainability was a double-edged sword. Sustainability depended not j...

Though on issues like the fiscal multiplier the IMF had come around to a more “liberal” view, when it came to long-run economic growth the Fund cleaved to the old religion. To raise its growth rate Greece must undo labor market regulation and free restrictive business lice...

Furthermore, the Greek government could always raise money through privatization sales. To implement such measures was painful for any government. For a Left coa...

If the IMF was of two minds, would its key shareholder, the United States, swing the balance? Five years earlier, when the crisis began, Papandreou’s embattled PASO...

In the immediate aftermath of Syriza’s victory Obama again sounded encouraging.38 Too much should not be asked of a people that were already on their knees, the president opined. “You cannot keep on sq...

Meanwhile, America’s celebrity economists of the center-left, headed by Paul Krugman and Joseph Stiglitz, threw their weight behind Varoufakis’s call for a “rational” debt program for Greece. But none of this went down well in Berlin. Nor did Athens get much sympathy from Obama’s new Treasury secretary, Jack Lew. A lawyer, hedge fund manager and Citigroup alumnus, Lew came from the hawkish side of the Obama administra...

Lew pointed out. It was up to the Greek government to do its best to win its creditors’ trust.40 As tension escalated in April, Jason Furman, the latest chairman of Barack Obama’s Council of Economic Advisers, weighed in to comment that a Greek crisis was not “an experiment we want to run.” But when he was asked to rank a disorderly Greek exit on a “scale of one to 10, where the collapse of Lehman is a ...

When the stakes had been high, Washington had not hesitated to meddle in the politics of the euro area. For a crisis that registered only 6 out of 10, Washington was not about to jeopardize its relationship with Berlin. As one American official told Varoufakis: “For us you be...

If no help could be expected from Washington, what about China, the new power in the global economy? Beijing saw the Eastern Mediterranean as a natural extension of its Eurasian One Belt, One Road logistical network. China had alread...

Varoufakis eagerly explored the possibility of attracting additional Chinese capital and even Chinese intervention in the market for Greek Treasury debt. Beijing seemed interested. But the bond buying Beijing promised never materialized. When Varoufakis inquired why, the answer he received from Beijing was stark. Beijing had pulled back because Berli...

China and America as partners appealed to those Greeks like Varoufakis who thought of themselves as “modernizers” and did not have deep roots in the Greek Communist milieu. For the O...

In 2015 Merkel and Hollande were still struggling to contain the Ukraine crisis. Putin was making increasingly interventionist moves in Syria. Could Greece exploit its strategic locat...

On April 8 Tsipras traveled to Moscow to meet with Putin. But in the Kremlin he heard the same thing that the Greeks were hearing from Washington and Beijing. Putin’s message was si...

But who in Germany was Greece to deal with? The authority in financial policy was held by Finance Minister Schäuble, but, as he made increasingly clear, he did not believe that Greece had a future in the euro area.

Did Merkel share the same view? She was a more pragmatic politician than Schäuble; surely she would not want to see the breakup of the euro. Tsipras thought he could prevail upon her through personal diplomacy.

Varoufakis, on the other hand, thought that what Merkel needed to understand was the threat that Greece could pose t...

Merkel exploited the gap between them. Seeking to split the Greek prime minister from his more left-wing cabinet members, she favored him with a series of personal meetings that convinced Tsipras that she would eventually deliver a compromise. The question was when and on...

Back in 2012 this might have triggered anxiety in Rome, Madrid and Lisbon. But now there was no contagion. The ECB was unfazed. As Draghi remarked: “We have enough instruments at this point in time...which although they have been designed for other purposes would certainly be used at a crisis time if needed. . . . We are better equipped than we were in 2012, 2011 and 2010.”

With the ECB’s bond purchasing not only soaking up all newly issued government debt in the eurozone but reducing the total stock of sovereign debt available for private investors by 265 billion euros, there was little reason to fear bond vigilantes.

The deliberate default on the ECB’s bond holdings planned by Varoufakis was supposed to puncture this complacency. But, as was becoming clear...

If no compromise could be reached and if Tsipras was unwilling to use Greece’s only real weapon, was the...

For the creditors, it would have been easiest if Tsipras and his eccentric crew simply disappeared from the scene. But so soon after their handsome elect...

The EU was haunted by the ghosts of 2011. As the Financial Times noted, Brussels was “sensitive to accusations” that “the EU was complicit in ending the tenure of George Papandreou, Greece’s prime minister . . . and Silvio Berlusconi.”50 But the Eurogroup made no secret of the fact t...

Historical precedents were readily to hand. Europe had a track record of curbing radical left-wing governments. After a few “wild months” in the autumn of 1998, Germany’s Red-Green government under Gerhard Schroeder had jettisoned Oskar Lafontaine as finance minister.52 In 1983 Mitterrand’s turn to a hard currency policy had presaged the ouster of the Communists from his coalition government. Looking f...

Would Tsipras be Greece’s Ramsay MacDonald? After another round of bullying by the Eurogroup at the Riga summit on April 25, with Merkel’s active enco...

He remained as finance minister, but Euclid Tsakalotos, the minister for international economic relations, would be the lead debt negotiator. Another opportunity...

Athens was bending. But months of siege warfare were taking their toll on both sides.

Merkel and Schäuble might sleep easily, but Brussels had more invested in the idea of the good Europe. In May it seemed that the troika might be wavering. The commission was warming to the plucky Tsipras. The French government did not want to see Greece humiliated. The IMF was skeptical about the sustainability of the creditors’ demands. It took a meeting on June 1 in Berlin to harden the resolve of the troika and to force Syriza finally into the corner.

The IMF and the eurozone “bridged their differences.” The Fund’s worries about sustainability were soothed by requiring Athens to force through tough reforms of its labor markets and business regulations. That would allow the creditors to make optimistic assumptions about future growth and reliev...

As far as Athens was concerned, it was the worst possible outcome.56 Economists in the City of London estimated that under the creditors’ plan, the Greek economy would plunge by a further 12.6 percent by 2019 and the Greek debt ratio would soar to a staggering 200 percent. As Wolfgang Munchau put it in the Financial Times, Greece had nothing to lose by saying no. “[A]cceptance of the troika’s programme would c...

Was it suicide or assassination? When Athens refused to yield, European efforts to delegitimize the Syriza government in the ey...

Jean-Claude Juncker and Slovak finance minister Peter Kažimír publicly declared that their disagreements were only with Mr. Tsipras’s gov...

In early June Tsipras and Tsakalotos once more sought a compromise. Athens would meet the creditors’ austerity target by a combination of increased retirement age and heavy increases in tax and social security contributions.

Without access to the last tranche of the 2012 program, Athens was days away from defaulting. In a desperate bid to rally support, Tsipras sprang a new surprise.61 At one a.m. on the morning of June 27 he went on television to announce that he was calling a referendum.