Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

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.34 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.35 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 climax of a “six-year campaign to lure Ukraine into integration with the EU and out of the Kremlin’s orbit.”

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 reason to expect generosity from the IMF. But the EU’s offer came as a real shock. 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 Association Agreement, all that the EU was willing to offer was 610 million euros. In exchange the IMF demanded big budget cuts, a 40 percent increase in natural gas bills and a 25 percent devaluation.39 It was anything but the pot of gold that Yanukovych had promised. There were Ukrainian oligarchs with personal fortunes larger than this. Even without considering the sanctions to be expected from Russia, to have accepted such a deal would have been a political disaster.40 In Kiev ther...

In light of subsequent events, Yanukovych’s decision would come to be seen as the Pavlovian response of a pro-Moscow stooge. It was quite possible that he was subject to Russian blackmail. But setting such rumors aside, his choice was hardly inexplicable. As Ukraine’s prime minister, Mykola Azarov, explained, “[T]he extremely harsh conditions” of the EU-IMF package had decided the issue.42 Nor was this logic hidden from the Europeans in the immediate aftermath of the debacle. On November 28, 2013, according to Der Spiegel, European Parliament president Martin Schulz admitted that EU officials made mistakes in their negotiations with Ukraine. “I think we underestimated the drama of the domestic political situation in Ukraine.”43 Ukraine, he said, “had been in a deep economic and financial crisis” since the introduction of democracy. “They desperately need money and they desperately need a reliable gas supply.” Schulz said he understood why Ukraine moved toward Russia. “It is not especially popular in Europe to help states which are in a crisis . . . and if you look at Moscow’s proposals, they would offer Ukraine short-term assistance that we, as Europeans, cannot and do not want to afford.”

What no one reckoned with—not Yanukovych, the Russians or the EU—was the reaction of a vocal and bold minority among the Ukrainian population. The opinion poll evidence does not suggest that there was an overwhelming majority for a decisive shift toward the EU. According to Kiev’s International Institute of Sociology, in November 2013 only 39 percent of respondents favored association with the EU, barely 2 percent more than the 37 percent who favored a Russian-led customs union.44 And those numbers were based on a hypothetical, not the stern terms offered by the IMF and the EU. But events in Ukraine in 2013 were not decided by a referendum on the basis of clearly costed alternatives. They were driven by ...

In November and December hundreds of thousands of people rallied to Kiev’s freezing streets to protest Yanukovych’s abrupt decision to reject the Association Agreement. But they made no overthrow attempt and Yanukovych might have ridden out the storm but for the ill-advised decision, encouraged by Moscow, to crack down. By using his majority in parliament to ram through constitutional changes, on January 16 he triggered a second wave of mass protests and the occupa...

Quite how deeply Washington was engaged was revealed by the infamous bugged conversation between Victoria Nuland, assistant secretary of state for European and Eurasian affairs, and the US ambassador to Ukraine, which is as illuminating in its characterization of US-EU relations at this point as it was in its blunt instrumentalization of Ukraine’s politicians. On January 28, 2014, as Nuland discussed options with Ambassador Pyatt, she casually remarked: “That would be great I think to help glue this thing and have the UN glue it and you know, fuck the EU.” For Nuland’s taste, the EU was too slow moving and too willing to compromise with President Yanukovych, with whom it had been eagerly pursuing a comprehensive Association Agreement only a few months earlier. Without flinching, Ambassador Pya...

Two weeks later, a desperate last stand in the streets of Kiev brought an end to Yanukovych’s presidency. On February 21, in talks that were brokered by the foreign ministers of Germany, France and Poland and witnessed by Putin’s representative on the spot, Yanukovych was offered the protection of his office until new presidential elections were held at the end of 2014. But as support from within his party and the security forces melted away, he thought better of taking the risk.46 He too remembered Gaddafi’s fate. Early in the morning on February 22 he fled, leaving a vacuum. Short-circuiting constitutional procedures, a new provisional government took office pending elections scheduled for May 25. What the EU had intended as a protracted transition had become a revolutionary overthrow. And rather than waiting for the outcome of the election,

the provisional government, dominated by Tymoshenko’s Fatherland Party and a sprinkling of Maidan activists, moved rapidly to consolidate the new dispensation. It would reverse Yanukovych’s abrupt decision of November. It would draw a clean line with Russia, sign the European Association Agreement and conclude new financial agreements not with Russia but with the IMF and the European Union.

How was Moscow to react? The choice at Vilnius in November 2013 had been pitched by both sides as a strategic turning point. Thanks to the niggardliness of the IMF-EU offer, Moscow had won a significant victory, only for that to be overturned by popular protest and regime change, which, even if it had the support of a considerable fraction of the Ukrainian people, was of dubious legality and was undeniably Western inspired. For Russia to have meekly accepted this outcome would have been worse than if Yanukovych had signed the Association Agreement in the first place. On the night of February 22–23 the Kremlin decided to act. Taking advantage of local protests and activating plans prepared in 2008 to counter a fast-track NATO application, on February 27, 2014, Russian troops in perfu...

The comprehensive economic, political and diplomatic clash between the West and Russia that had been foreshadowed in the proxy war in Georgia in 2008 was now unleashed on an altogether more significant stage. With Ukraine’s territorial integrity at stake, on April 13, 2014, the provisional government in Kiev launched an “antiterrorist” operation to take back control of the Donbass. In Washington and at NATO headquarters there were those calling for immediate military aid for Kiev and a full-throated return to the cold war. McCain and other Republican hawks would have loved to

have rallied a war party. Doing so perhaps might have contributed to restoring coherence to their troubled party. But as he had done in Syria in 2013, Obama refused the call to escalate.48 In Europe there was no support for military action. It was not that Ukraine would be denied weapons. But, as in Syria, the arms would be supplied through covert channels. The public front of the West’s reaction was economic sanctions. Putin’s line had always been that geoeconomics were geopolitics. In Ukraine, struggles over trade negotiations and customs treaties had escalated into an undeclared war. Now the economy itself would be weaponized.

To pressurize Iran, the United States had developed a ferociously effective regimen of sanctions. Russia as a globally integrated economy was far more vulnerable. Not only did Russian businesses need to export but they had supped deeply at the trough of cheap dollar credit. By early 2014 they owed $728 billion.49 But by the same token, large vested interests in the West were at stake. Apart from anything else, Russia was the number two supplier of oil and gas exports to world markets. At a time of extreme fragility in the emerging market economies, the United States did not want to precipitate further tension in commodity markets. To the frustration of the hard-liners, the United States stayed its hands and never applied the full force of its sanctions weapon. Instead it targeted individual members of the clique close to Putin, the most prominent of whom was Igor Sechin, the boss of oil giant Rosneft.50 Furthermore, Washington limited access to capital markets for key corporations—Rosneft, Novatek, Gazprombank and VEB.51 This was painful, but given the limited volume of US-Russian economic relations, it was far from decisive. The crucial question was whether Europe would throw i...

oligarchs, was the place to make sanctions tell. The Cameron government talked a good game, but was less quick to act. Nor was it merely economic interests that were at stake. In Germany there was deep skepticism about any overhasty alignment with the United States.52 Since the summer of 2013 the NSA spying scandal had cast a deep shadow over German-US relations. A year later, the percentage of Germans who saw the United States as a “trustworthy partner” was down to 38 percent, numbers last seen in the Bush era.53 Whereas 68 percent of Americans...

To the indignation of right-wingers in Congress, all that the EU could agree to were individualized sanctions against eighteen leading Russian figures. Senator John McCain was moved to declare, “If the Europeans decide that the economic considerations are too important to impose severe sanctions on Vladimir Putin . . . then they are ignoring the lessons of history.”54 Appeasement had failed against Hitler in 1938. It would fail against Mr. Putin. In May transatlantic tensions were mounting to such a pitch that Merkel and Obama hastily convened talks in the White House. Merkel had no doubt about the need for action, but she could not ignore European public opinion, an...

In the meantime, if no military aid was forthcoming and only minimal sanctions were applied to Russia, would the West at least provide generous financial support to Ukraine? Just to meet its outstanding obligations, the new government in Kiev estimated that it needed $35 billion over two years. That was not far off the estimates presented by Yanukovych’s regime six months earlier, which had been rejected out of hand. In March 2014 Kiev put in a request for $15 billion from the IMF. The Obama administration backed the appeal and sought to leverage it to break the deadlock in Congress over IMF reform. The administration linked a $1 billion loan guarantee for Ukraine that was popular with ...

United States. Globalist critics of the IMF pounced on the pronouncement.56 The subservience of the IMF as a tool of US policy stood starkly revealed. Except that the Republicans in Congress d...

Lagarde and the IMF soldiered on without America’s full backing.57 For a well-run country, at peace and with the institutions to make the most of its ample endowments, Ukraine’s debt burden would have been far from excessive. But Ukraine was none of those things. Given the huge political uncertainty, the insecurity produced by Russian intervention and its weak institutions, there was, in fact, a strong case to be made that Ukraine’s debts were insupportable. Ukraine was insolvent and its debt should be written down. That would have been IMF protocol. But Ukraine was no ordinary case. In 2010 Greece had been funded under the “systemic exemption.” The risk of financial contagion justified an unsustainable bailout. In April 2014 in Ukraine, systemic risk was recast in geopolitical terms. The IMF’s main shareholders did not want to see the embattled pro-Western regime in Kiev declared bankrupt within weeks of an anti-Putin revolution. So despite the obvious risks and despite Ukraine’s appalling track record of program compliance, the IMF plunged in once again. Out of enthusiastic talk of reform and overoptimistic assumptions about economic recovery, the IMF concocted a scenario that...

It was a substantial commitment. But it fell well short of what Ukraine needed. The aid from Europe would be stretched over seven years. The IMF loan, as always, came with tough conditions. Gas prices were to be raised by 56 percent and the government payroll cut by 10 percent.58 The foreign exchanges were to be liberalized to allow the exchange rate to adjust to a competitive level, a high-risk operation that...

eastern Ukraine. The IMF had never previously lent to a country at war. So in putting together the April 2014 package, the Fund simply ignored the evidence of the escalating conflict. As Lagarde admitted in a press statement, this put the entire program in jeopardy from the start.59 Within days of the conclusion of the financial package it became clear that Ukraine did indeed face the worst-case scenario. Rather than calming, the conflict in eastern Ukraine intensified.60 In early May, scrambling to raise an army, Kiev was forced to reintroduce conscription. As the oligarch Petro Poroshenko took office as Ukraine’s president in the last week of May 2014, he faced the impossible challenge of implementing an IMF austerity program while fighting a war; a war, moreover, that Russia would not le...

In July a vigorous offensive by Ukraine’s forces was on the point of overwhelming the Donbass rebels. Moscow’s response was to resupply the breakaway militia with heavy weapons. A conflict of small-scale skirmishes was escalating into a more or less openly declared war involving the mobilization of tens of thousands of men, mass displacement and thousands of casualties. On July 17 a rebel antiaircraft battery armed with new Russian missiles jubilantly reported that they had shot down a heavy transport plane. It turned out to be Malaysian Airlines flight MH17, with 298 passengers and crew on board. It was the moral indignation in the aftermath of that outrage that enabled Merkel to push through a much stronger sanctions regime. The EU blocked the export to Russia of any military equipment, oil industry equipment and the issuance of long-term debt in the EU by Russia’s state-owned banks and energy corporations. The United States doubled down by restricting access to capital markets for Sberbank and pressuring ExxonMobil and BP to drop their collaborations with Russian energy partners. But the real thrust of twenty-first-cent...

Putin and his entourage had hundreds of millions of dollars frozen in US accounts.61 Moscow, for its part, resorted to more classic retaliation. It did not cut off gas supplies. But it issued a blanket ban against agricultural imports from Europe while increasing its military support for the Donbass rebels, who mounted a bloody counteroffensive on August 23–24. With the front line frozen, Kiev was forced to accept a ceasefire brokered in Minsk by Germany and France on September 5. With the new cold war b...

Since the shock of 2008, Russia’s official financial position had been rebuilt. In early 2014 Moscow’s foreign currency reserves stood at $510 billion. As in 2008, it was not the state but Russia’s globalized private sector that was vulnerable. Though the oligarchs of course toed Putin’s line, the markets did not lie. The escalation of tensions over Ukraine caused an immediate capital outflow. When the Russian Federation Council, on Saturday, March 1, 2014, gave a patriotic vote of approval for the deployment of Russian troops on Ukrainian territory, it was followed on “Black Monday,” March 3, by a spectacular 11–12 percent market slump.62 For internationalized Russian banks like Sberbank—a giant that controlled 28 percent of Russian bank assets—sanctions created a truly schizophrenic situation. As its CEO, Herman Gref, mused, 50 percent of Sberbank’s freely marketable shares were held by US and British investors, but the bank was now barred from raising funds in the West.63 Perforce, over the course of 2014, Russian companies paid down their foreign debt from $729 billion to $599 billion, with the central bank deploying its reserves to enable the repayment.64 Tension was building, but it was not until autumn that the crisis broke.

The third round of sanctions in the wake of the downing of MH17 bit deep. At the same moment, Janet Yellen’s Fed finally ended QE3, tightening credit conditions around the world. And then cooperation in OPEC broke down. Saudi Arabia ended its production restraint and oil prices collapsed. With or without sanctions, by the autumn of 2014 Russia would have been in serious financial difficulty. The combination of sanctions, Fed monetary tightening and a plunge in commodity prices was devastating. So devastating, in fact, that it has raised the question of whether this conjunction was entirely coincidental, or whether the United States and the Saudis were collaborating to launch a strike against Russia.

From the point of view of the Russian economy, in any case, the ultimate motivation was irrelevant. Oil prices plunged from $112 per barrel in June to around $60 per barrel by December 2014 and kept on falling. On top of sanctions and tightening credit conditions, it was a body blow.

In October the Russian central bank intervened heavily to prevent an immediate ruble collapse. But it needed to husband its reserves, and in November it exited the market. Starting at 33 to the dollar before the Ukraine crisis began, by December 1, 2014, the ruble had fallen to 49 against the dollar. This was terrifying for Russian corporate borrowers, who owed $35 billion in debt repayments by the end of the year. There was a scramble for survival. Rosneft, which had $10 billion to pay, was in the market hoovering up euros and dollars.67 The strain on weaker Russian businesses was unbearable. In December, Trust Bank, a high street lender, and UTair, Russia’s third-largest airline, failed, and the central bank was forced to offer guarantees for the entire banking sector.68 On the morning of Monday, December 15, the ruble began to plunge, ending the day down by 8 percent. That night, after a long evening of debate involving Putin himself, the

central bank decided that it would hike interest rates from 6.5 percent to 17 percent. The announcement was made at one a.m. It was intended to reassure investors and punish speculators. It didn’t work. It was read not as reassurance but as a sign of panic. As markets opened on the morning of Russia’s “Black Tuesday,” December 16, the foreign exchange market went into free fall. By the end of the day the ruble had fallen to 80 against the dollar. The following day Sberbank came under concerted attack. A million of its customers received text messages from addresses outside Russia warning that the bank was about to be cut off altogether from external liquidity. On December 18, $6 billion were withdrawn. Over the following week the total came to $20 billion.69,70 It was a spectacular bank run even by the standards of 2007–2008.

The oligarchs were once again exposed. Estimates vary, but the combination of the Ukraine imbroglio, the oil price shock and the December 2014 turmoil cost the twenty richest Russians between $62 billion and $73.4 billion.71 Once again Putin called in favors and demanded action. Measures were passed calling for the end to the offshore hoarding of wealth. An amnesty was offered to those who would bring their cash home. Meanwhile, the central bank attempted to get a grip on the situation with an increase in deposit insurance and the recapitalization of ailing banks. President Putin called for the authorities to abandon general principles of policy. They would need to be in “manual override” to see the country through. But there was one general principle that would not be abandoned. Russia did not want to ruin its reputation in the eyes of foreign investors by resorting to capital controls. Instead, to provide the necessary foreign exchange, the central bank ran down its reserves, which dipped as low as $388.5 billion on December 26. This cushioned the collapse of the ruble, but the pressure continued. The Western ratings agencies started by downgrading Gazprom. In January they low...

eurozone until 2012. But what was now at stake was not just financial solvency but victory in a geopolitical tug of war. In his first period as president, Putin’s legitimacy had been based in large part on a sustained recovery in living standards. That easy narrative was broken by the crisis of 2008. From 2014 onward economic expectations were further diminished. Over the winter of 2014–2015 GDP was falling by more than 10 percent per annum. It would not stabilize until the second half of 2015. For ordinary Russians the crisis of 2014–2015 was considerably worse than that of 2008–2009. Real wages fell more sharply and rebounded less vigorously. 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 As prime minister during the 2008 crisis Putin had thrown himself into hands-on domestic crisis fighting.74 Since his return to the presidency in 2012, the Kremlin had been inciting nationalism to offset disappointing econ...

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 hour...

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 la...

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.30 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 would be in peril once more and the Eurogroup would have to take Greece’s demands seriously for fear of panic spreading through the markets.

what Varoufakis was preparing was certainly a dirty bomb. 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 would deliberately unleash civil war in the eurozone. 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 certainly caused alarm in Frankfurt and Brussels. 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 deploy its deterrent at the crucial moment.

But Varoufakis needed to understand, as far as the fundamentals of the eurozone were concerned, that “elections cannot be allowed to change economic policy.”32 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. Whatever the complexion of its national government, Greece was expected to stick to

Sustainability depended not just on the debt level but on the future course of Greek growth. 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 licensing. This required detailed and highly intrusive “supply side reform.”37 Furthermore, the Greek government could always raise money through privatization sales. To implement such measures was painful for any government. For a Left coalition like Syriza it was political suicide.

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 administration. A new Greek crisis “would not be a good thing in a world economy just recovering from a deep recession,” 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 10,” Furman opined that “a Greek default would likely register as a six; that is down from eight in 2012.”41 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 belong to the sphere of influence of Berlin, which we will not question.”

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 already taken a high-profile and controversial stake in Piraeus port.43 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 Berlin had let the Chinese know that it did not welcome their intervention in the Greek crisis.

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 Old Guard of Syriza, Russia was the obvious option.45 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 location in the Eastern Mediterranean to gain leverage? 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 simple: “You must strike a deal with the Germans.”

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.47 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 to Draghi’s stabilization efforts. 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 what terms. The longer Merkel waited, the more desperate Greece became.

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 relieve them of the need to make any immediate commitment to future debt forgiveness.55 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 constitute a dual suicide—for the Greek economy, and for the political career of the Greek prime minister.”57 Was it suicide or assassination? When Athens refused to yield, European efforts to delegitimize the Syriza government in the eyes of its own population were overt. Jean-Claude Juncker and Slovak finance minister Peter Kažimír publicly declared that their disagreements were only with Mr. Tsipras’s government and not with the Greek people.58 Taking the hint, on June 18 a rally of pro-Euro anti-Syriza Greeks was called on Facebook. The riot police were pulled back; the government avoided any public confrontation with the pro-EU crowd. But Syriza’s confidence was rattled. The demonstration made clear that the Left were not the only ones who could...

what Syriza wanted in return was a precommitment to debt restructuring. On that Germany would not budge.

The year 2016 began with the nationalist government in Warsaw picking fights with Brussels over the freedom of the press, the independence of the judiciary and abortion rights. In their challenge to the EU they could count on applause from Viktor Orbán’s self-proclaimed “illiberal democracy” in Hungary. Meanwhile, the British government was demanding negotiations over opt-outs from the European future. The British prime minister let Brussels know that he would be happy to take a pro-European position. But from the outset, Cameron’s approach was disconcertingly transactional. If he did not get the concessions he demanded, his threat was that he would lead the campaign against EU membership in a referendum scheduled for the summer of 2016. Nationalism and xenophobia were the common denominators of the challengers from the Right. But, unlike the leadership of Law and Justice, Cameron was in an awkward position. He was struggling to square a groundswell of popular sentiment fanned by the propagandists of his own party with a broader agenda of business-driven globalism. Since the 1970s EU membership had shaped the competitive modernization of the UK economy. The Tories, as much as any party, had participated in that drive. The City of London in its twenty-first-century form had emerged as one of the most important strands of the UK-EU relationship. Its offshore relationship to the eurozone had defined both Britain’s and Europe’s places in the networks of financial globalization...

Now, in an extraordinarily high-risk bid to channel and manage the politics of popular nationalism, the Tory government was putting London’s position as a crucial node in the network of the global economy in play.

In 2014–2015, Europe was struck by the Ukraine crisis, the struggle over Greece and the refugee crisis, all of which made the EU look bad, the UK look grossly uncooperative and Cameron’s reform agenda look trivial. Cameron spoke grandly of his new vision of the European future. But didn’t it all come down to irresponsible xenophobic pandering and the selfish interests of the City of London?

When confronting Syriza the year before, German finance minister Schäuble had declared that as far as he was concerned, elections could not be allowed to interfere with the fundamentals of economic policy. Greece’s economy accounted for 1 percent of the EU’s GDP. In the Brexit referendum a simple majority would decide over the future of a country whose economy accounted for 17 percent of the whole. For the UK the stakes were enormous. Half of Britain’s trade, or c. $200 billion, went to the EU. Of Britain’s stock of $1.2 trillion in FDI, half was from the EU. Both European and non-European investors favored Britain because of its membership in the union. The Japanese car industry had made the UK into its main base

for exports to the rest of Europe. By 2015, 3.2 million EU citizens were living in the UK, of whom 2.3 million had jobs, 7 percent of the workforce; 1.2 million UK citizens lived permanently in the EU. Of course trade, investment and migration would have happened between the UK and Europe whether or not the UK was a member of the EU. But how much? According to the best guesses of the economists, trade with other EU members was 55 percent greater than one would have expected without EU membership.27 For the City the questions were even more acute. Tens of thousands of jobs and billions of pounds in business depended on the so-called passporting arrangements, which allowed banks in London to operate as though they were inside the eurozone. It was a convenient fiction for European, British, American and Asian financial firms. It was not a concession that London could hope to maintain if it was no longer even a member of the EU.

Popular support for the EU was uncertain. Brussels was a red rag to the nationalist Right. The bankers and the London “elite” were unpopular. The answer of the Remain campaign was to double down. It set up its base camp in the City. Its strategy was never to win voters to the EU. The EU, the strategists decided, was unsellable. Europe’s politicians were asked not to make appearances in Britain. They would only make matters worse. Headed by the top PR team of the conservative party, backed up by Liberals and Labour, the Remain campaign had one message: “British voters will never love the European Union. But maybe they can be terrified into voting not to leave it.”28 It was a strategy aptly dubbed “Project Fear”—a term first coined in the context of the Scottish independence referendum in 2014. Its architects were the Australian PR guru Lynton Crosby and Jim Messina, who had been hired from Obama’s White House. Messina made clear what he thought the stakes were: “Given these challenging economic times, the very last thing we should do is risk the U.K. and EU economies with this risky [Brexit] move.”29 What Messina and his cohorts meant by “the economy” was business. So their campa...