Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

The following day, Sunday, June 28, the ECB pulled the trigger. It froze its emergency liquidity support for Greece’s banks at its current level. The next day this would unleash a disastrous bank run. The ECB could have gone further. It could have terminated emergency liquidity assistance altogether and demanded repayment. At the crisis meeting of the ECB’s board, there were certainly votes to be had for such a drastic course of action. But the ECB’s overwhelming power put Draghi in a delicate position.64 As a member of the troika and chief provider of financial life support to the Greek banking system, the ECB was “judge, jury and executioner.”65 Draghi did not want to appear as though he were further escalating the tension or “deliberately worsening Greece’s financial plight.”66 Capping Greek access to liquidity assistance was drastic enough. To avoid an immediate collapse, the Greek banks were preemptively closed, cash withdrawals were limited to 60 euros per day and capital controls limited capital flight. Middle-class depositors formed impatient queues to withdraw their cash. Greece’s privately owned media were in an uproar. The irresponsible radicals of Syriza, they told their audience, had taken the country over the edge.

With the creditors refusing either to negotiate or to make concessions until the results of the referendum were known, on June 30 Athens announced that it was delaying payment on money owed to the IMF.

This was no mere administrative matter. The IMF is acknowledged as the super-senior creditor in international lending. Being in arrears to the IMF put Greece on a short list that included Sudan, Somalia, Z...

And the size of its debts was unprecedented. Greece owed repayment on $26 billion to the I...

But at this crucial moment the IMF did not respond as one might have expected. In the summer of 2015, the dissatisfaction inside the Fund over the European approach to the Greek debt crisis finally broke into the open. Between a first blog post by its chief economist, Olivier Blanchard, in mid-June and the formal issuance of a paper on Greek debt sustainability in mid-July, the world’s leading financial authority de...

Greece would have to make further tough decisions, no doubt, but the troika and the Eurogroup needed to stop pretending that that would be enough. D...

With the backing of the US board members, overriding resistance from the European representatives, on July 2 the IMF published a preliminary report outlining the full absurdity of the programs so far. Instead of the 50 billion euros in privatization receipts scheduled in 2012, Greece had received 3.2 billion. The current...

No one who was serious would proceed on the basis that primary surpluses of 4 percent, massive structural changes and 2 percent GDP growth per annum were a realistic scenario.69 After what their country had been through since 2010, no political par...

Without ownership, one could not expect fulfillment. The IMF now called for at least 50 billion euros in debt relief, a doubling of repayment times and 36 billion euros in short-term ...

It was a nasty surprise to the Europeans that the Americans would have let this happen. As late as early June, at the convivial G7 meeting in Bavaria, Obama had acted the part of a loyal ally. But it was a measure of the stability that Europe ha...

The only consideration that had justified the IMF’s involvement in the Greek bailout in May 2010 was the risk of systemic contagion. Thanks to Mario Draghi’s bond-buying, there was no longer any risk of that. The IMF could afford to voic...

For the Greek population the choices were starker. Did they dare to challenge the creditors? Would a no vote mean the end of Greek membership in the euro or even the EU? Despite overt and massive intimidation, on July 5 a remarkable 61.31 percent voted against accepting the troika proposal.

Given that the plan had by that point been repudiated as unsustainable by the IMF, the vote was not so much a wild act of political desperation as a brave and much-needed assertion of common sense. But the response from the creditor side was unyielding. Athens had until July 12 to come up with an even more austere and even less sustainable proposal or face expulsion from the eurozone.

On July 9, with help from the French Treasury, the Syriza government cobbled together a new scheme, taking up a compromise on welfare cuts and tax increases proposed by the commission and coupling it to an appeal for modest debt write-offs and new credits of 53...

Varoufakis, who resigned following the referendum, joined the internal party opposition. Meanwhile, Tsipras set off to Strasbourg in the hope of rallying support across Europe. On July 10 he made an appearance in the European Parliament, where he was greeted by a storm of approving whistles not only fr...

European politics were dividing between upholders of the status quo and a motley crew denouncing the...

On Saturday, July 11, with the principals scheduled to meet the following day, the finance ministers of Europe gathe...

It soon became clear that, far from softening, Berlin’s position had hardened. If Greece wanted to stay in the eurozone, Schäuble insisted that it must demonstrate its credibility by agreeing to a 50-billion-euro collateral fund made up...

With that in place there could be further loans and another effort to make a go of extend-and-pretend. Alternatively, if Greece preferred the path of sovereignty, Schäuble offered a five-year “time-out” from the eurozone, which might ...

There was talk of emergency supplies of medicines to Greek hospitals. What was not on the table was a repeat of 2012, deep debt restructuring with Greece remaining in the eurozone. Haircutting banks was one thing, haircutting ...

But what if it did? What if Greece took the time-out option? It would mean that eurozone membership was reduced to a conditional status. How long would it be before Schäuble was offering a time-out ...

To clear the air, Michel Sapin, the French finance minister, proposed that they just “get it all out and tell one another the truth to blow off steam.”74 The group therapy didn’t go well. The ensuing conversation was described by one participant as “extremely hard, violent even.”

Significantly, the battle went beyond national interest. In the words of France’s youthful economy minister, Emmanuel Macron, Greece was provoking a veritable European civil war, a “war of religion,” with the Nordics, the East Europeans, Germany and the Netherlands in one camp, and France, Italy, Spain and the rest in the other.

A painful climax was reached when Schäuble and Draghi locked horns and the German finance minister ended up fuming that he was “not an idiot.” At that point Dijsselbloem thought it best to call a halt to proceedings. The deal would...

When the climactic summit began on the afternoon of Sunday, July 12, 2015, despite the presence of the entire union, the negotiations involved only four actors: Merkel; Tsipras, who was advised by his new finance minister; Donald Tusk, as president of the European Council; and Holland...

The negotiations were laborious and painful. Merkel abandoned Schäuble’s alarming time-out proposal but clung to the guarantee fund. Tsipras conceded the fund, but could not accept that it should be run out of Brussels or Luxembourg. It would control Greek assets. It must be headquarte...

Merkel conceded. The fund would be sited in Greece and could be used, if necessary, to recapitalize Greece’s banks and for other domestic investment purposes. But even with that compromise agreed, by early in the morning of Monday, July 13, there was still no deal. At seven a.m., af...

Both, it seemed, wanted to walk away in exhausted frustration. At this fateful moment Tusk intervened. The two parties could abandon the talks, but if they did, he would not hesitate to tell the world that they had allowed “Europe to fail...

It wasn’t the prospect of economic disaster that brought Merkel to her senses, but the likely political fallout from letting Greece go. When it came to the moment of decision she did not feel bound by financial logic. She did not want to be the chancellor who “broke Europe.” That was more importa...

There was no rupture. Greece was still in the eurozone. Europe had regained its capacity for a rather brutal form of collective action. The ECB had demonstrated the pacifying power of central bank intervention. Greece was held on the path of “reform” demanded by the troika. But as the IMF’s démarche had made clear, this was a matter of politics as much as financial crisis management.

The European creditors had doggedly refused to discuss the only issue that mattered—debt restructuring. What was at stake was not macroeconomic performance but the imposition of discipline on a wayward eurozone member.

Shielded from financial contagion, a conservative financial settlement had been demonstratively imposed on a left-wing government with a strong democratic mandate. The perverse effect of the ECB’s “liberating” move to QE was that it allowed extend-a...

Launched by Syriza sympathizers in Barcelona on the night of July 12–13, #Thisisacoup went viral on Twitter, being taken up by 377,000 users worldwide in a matter of hours and generating a billion impressions in a matter of days.

Closer to home, in Athens, members of the Left Platform, led by Panagiotis Lafazanis, the former energy and environment minister, met at the Oscar Hotel on the night of July 14 to discuss how they might go through with the Grexit that Schäuble had offered, but Merkel, Tusk, Hollande and Tsipras had done everything to avoid. It had been a mistake not to make the break with Brussels already in February. Now, before the prison door closed once more, they should effect a rupture, if necessary by radical means.

Their target was the national mint, where they believed 22 billion euros were held in reserves, enough to cover pensions and other essential government bills until they had rolled out a new national currency. If the central bank governor, Yannis Stournaras, resisted, as they expected he would, they would have him arrested. The meeting was far from clandestine. There were journalists swarming outside the hotel. It is hard to know how seriously to take such talk. But as one participant ...

It didn’t come to that. Tsipras and the mainstream of Syriza whipped the necessary measures through parliament. The left wing split from Syriza, only to be humiliated in the September general election, which vindicated Tsipras’s leadership, returning him with a virtually unchanged majority and the new loan deal in place. A majority of Greeks, ...

Across Europe, what shocked centrists was the violence of the July clashes. Donald Tusk, who had seen the final round of negotiations up close, agreed with the Greek radicals. There was ...

As far as Tusk, a cold war liberal and veteran of Solidarność, was concerned, it was all very alarming. “[T]oo much Rousseau not enough Montesquieu,” he told ...

Jürgen Habermas, the closest equivalent to those Enlightenment thinkers twenty-first-century Europe has to offer, was aghast. Merkel had “carried out an act of punishment” against Greece’s left-wing government, he told the Guardian. “I fear that the German government, including its social democratic faction, have gambled away in one night all the political capital that a better Germany had accumulated in half a century.” Germany had “unashamedly revealed itself as Europe’s chief disciplinarian and for the first time openly made a claim for German hegemony in Europe.”

There was no doubt, of course, that Merkel and Schäuble had played a strong hand. But what exactly did they have to show for it? What upset German right-wingers was not the bruising nature of the encounters with Greece but how little Germany had gained.

Who, after all, was the victor in the decisive encounters of July 12–13, 2015? Certainly not Schäuble, who had been cut loose by his own chancellor. What had prevailed was the determination to “preserve Europe” at the price of another unsustainable bailout deal.

For the German Right, Merkel’s sellout in the Greek crisis was a fitting prelude to her disastrous betrayal of the German nation in t...

The beneficiary was the AfD—the right-wing, promarket party that had first come into existence in April 2013 to protest against Berlin’s endless concessions in the eurozone crisis. As Schäuble would snark, the AfD’s rise was 50 percent down to Draghi; the other half, presumably, was down to his boss and her liberal posturing over the Syrians.81 Schäuble was no xenophobe. The historic stakes were high. What Merkel was jeopardizing with h...

The German right wing saw some things clearly. They understood that, as powerful as it was, Germany’s dominance was incomplete at best. What had stabilized the eurozone in 2012 was a halfhearted lurch toward deeper integration covered by the mar...

In 2015 once more, it was not simply German conservatism that triumphed. The necessary complement to the containment of Syriza was QE. As it had been in the United States, it was a perversely complementary package. Auster...

QE without austerity would have been impossible politically for conservatives to bear.82 How tightly the two were coupled would become clear in the second half of 2015 as the tensions left by the eurozone crisis continued to rack European politics. The anti-Syriza front in the Eurogroup had reason to worry. First in Portugal in October 2015, and then in Spain in December 2015, elections delivere...

In the Spanish general election of December 2015, the two-party system based on the conservatives and the Socialists that had shaped the transition to democracy since General Franco’s death in 1975 imploded. With the conservatives crashing to 28 percent and the Socialist...

The majority of the rest was shared between two entirely new parties, Podemos and the Citizens party. Podemos scored 20.7 percent, which was disappointing only when compared with the 30 percent plus it had commanded in the polls shortly after its formation in 2014. It lost support in 2015 in part because of the beating being dealt out to Syriza, but also because of the rise of the even newer Citizens party, whic...

Both Podemos and the Citizens party promised a new set of clean hands to overcome corruption. Both did remarkably well. But the outcome of the election was inconclusive. No side had a clear majority to govern. The divide between the Socia...

In 2016, after a second round of voting, the dogged conservative prime minster, Rajoy, clung on. With its economy limping back from the dead, Spain, like Ireland, would be celebrated as ...