Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

From Beijing’s point of view, America’s Asian pivot took on a distinctly darker coloration with the election in December 2012 of the nationalist politician Shinzo Abe as the Japanese prime minister. Abe was deeply concerned about China’s power. He was unabashed in his support for a stronger and more independent Japanese military. And he was also willing to override domestic economic interests for the sake of strategic cooperation with the United States. He was even willing to sacrifice Japan’s rice farmers to make his country into a key pillar of TPP.5 If he was willing to do that, what else might he do? By 2014 there was talk of a war scare between Japan and China.

On November 28, 2013, speaking 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.”

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 let Ukraine win. Kiev’s only hope was that while military escalation placed ever greater stress on Ukraine’s fragile economy, it would also clarify the political stakes of the conflict and suck in the West.

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.

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.

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.79

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 clear, the Moscow leadership resolved on a strategic approach to China.83 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. The EU had shown no interest in joining America’s “de facto containment alliance” in Asia. Russia would provide the bridge.

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.

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.

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’s moribund and dysfunctional austerity fixation and its collaborators in Greece and beyond.

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 crisis had been denied to the governments of Eastern Europe, Ireland, Spain and Portugal. 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 Berlin saw it, were the foundations for long-term economic success.

Varoufakis struck a more conciliatory tone, insisting on Syriza’s European credentials and its commitment to work in good faith. He insisted that they were not “populists, promising all things to all people.” 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 “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 it. 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 approval of the creditors, to offer its own list of reform proposals to replace the memorandum.34 The release of the outstanding 7.2 billion euros was postponed until agreement was reached and the reforms were implemented.

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.

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 squeezing countries that are in the midst of depression.”39 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 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.

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.”42

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.44

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.”46

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

After another round of bullying by the Eurogroup at the Riga summit on April 25, with Merkel’s active encouragement, Tsipras moved Varoufakis aside. He remained as finance minister, but Euclid Tsakalotos, the minister for international economic relations, would be the lead debt negotiator. Another opportunity to deploy the Greek deterrent went begging.

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.54 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 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

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. For forty-eight hours this raised hopes of a deal. But there were sticking points. While agreeing to run a huge primary budget surplus, Syriza was still insisting on “political essentials,” weighting the adjustment less toward welfare cuts and more toward tax increases on wealthy Greeks. This satisfied the demand for social equity, but creditors insisted that it “could end up strangling the economy.”60 Furthermore, what Syriza wanted in return was a precommitment to debt restructuring. On that Germany would not budge.

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. It would be up to the Greek people to decide either to accept or to reject the creditors’ memorandum. Tsipras, for his part, declared that he would campaign against acceptance, calling on the Greek population to reject the “blackmail ultimatum.”62 The Eurogroup was horrified. As Merkel made clear, with the Athens government campaigning against agreement there could be no further compromise.63 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.

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, Zimbabwe, Afghanistan and Cambodia under the Khmer Rouge.67 And the size of its debts was unprecedented. Greece owed repayment on $26 billion to the IMF over the next ten years.

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 declared the policy of extend-and-pretend practiced since 2010 both economically and politically unsustainable. Greece would have to make further tough decisions, no do...

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 financing to allow Greece to survive until 2018.70

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 billion euros. For the left wing of Syriza it was shameful surrender. Varoufakis, who resigned following the referendum, joined the internal party opposition.

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” over what was in the final analysis a trivial amount of money. 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 important than finally resolving the question of Greek debt. She split the difference. Germany would agree to yet another bailout. Greece would receive new loans from Europe totaling 86 billion euros. In exchange, Athens accepted severe intrusions on its sovereignty. It was required to whip through yet more cuts within forty-eight hours. Parliamentary sovereignty was reduced to a rubber stamp.

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-and-pretend and its concomitant, relentless austerity, to continue.

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. Austerity without QE would have been paralyzing in economic terms. 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 delivered serious blows to the conservative and centrist parties that had toed the line of austerity since 2010.

With its economy limping back from the dead, Spain, like Ireland, would be celebrated as the poster child for austerity adjustment policies.

Instead, in a constitutionally dubious arrangement, Silva made Costa’s appointment conditional on promises.89 The government must respect Portugal’s commitments to the European Union’s stability pact, whereby all eurozone members were required to reduce budget deficits to below 3 percent of GDP. It must remain committed to NATO. It must continue with the restructuring of Portugal’s ailing banking system as previously planned. It must limit the role of trade unions in deciding government policy and respect the existing balance between employers and labor. Schäuble had announced that elections should not change economic policy. Portugal’s president clearly agreed. Watched over by the president, the creditor governments of the EU, the ECB, the bond-rating agencies and the bond markets, the Left coalition took office. What it could do with political power, whether Portuguese democracy within the frame of the eurozone was more than a matter of extend-and-pretend, would depend on its ability to bend the constraints imposed upon it. At least, unlike Greece, the arithmetic of Portugal’s debts did not condemn it from the start.

For all their bravado and the genuine excitement they awakened both at home and abroad, the governments of Tsipras and Costa did not promise revolution. They promised national autonomy and self-respect, and, above all, social improvement. This made them vulnerable to the threat of immediate economic suffocation. After all, what good was a small increment to your pension or shorter waiting lists for social housing if a cap on ECB liquidity assistance left you unable to get cash out of the bank?

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.

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 and their relationship to the United States. 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.

Less than ten years earlier, the City of London had been riding high. It was the prized jewel in New Labour’s economic crown. It was Britain’s ticket to global significance. It was the standard the deregulators of Wall Street aspired to, the location of choice for fast-moving, high-end global finance. All the more shattering was the shock of 2008. The City became a site of crisis and failure.1 Tens of thousands lost their jobs.

In the wake of the crisis “rebalancing” was an agenda shared by both Labour and the coalition government that replaced it.2 British banking legislation went well beyond Dodd-Frank. The once widely touted FSA was abolished. Banking supervision was reincorporated into the Bank of England. The new conception of macroprudentialism did not allow for a neat distinction between regulation and economic policy functions. The Banking Reform Act of 2013 would divide up bank functions and ring-fence retail activity. Financial services were no longer part of Britain’s narrative of national success.

unlike in the case of Wall Street, tightening the regulation of British banks is not the same as curbing the City of London. The City is not first and foremost a national financial center. Its main business is global.

Mervyn King had sport on his mind. The City of London, he remarked, was like the All England Lawn Tennis and Croquet Club, the hosts of Wimbledon.3

The modern City of London had been built on the eurodollar system. Thanks to the Fed, that had survived the crisis. But the American regulators understood London’s role as the platform for some of the most extreme risks that the American banks had built up. As it was put to a congressional committee in 2012 by a senior US regulator, the United States had allowed its risks to migrate to London only for them to “come right back here, crashing to our shores.”4 Within the capacious framework of Dodd-Frank, US regulators were now sharply tightening the regulations of foreign banks in the United States and of US bank operations overseas.5 The European banks that had epitomized the connection between the City of London and Wall Street, the likes of Barclays and Deutsche, UBS and Credit Suisse, were under huge pressure. By 2015, of all the European banks that had once challenged for top rankings on Wall Street, only Deutsche Bank was still competing for a top spot in global investment banking, and that was widely seen as a sign of its desperation.6 Deutsche had no other secure business line to fall back on.

The “British” bank that had done best out of the crisis was HSBC. Driven by competitive pressure, London embarked on a remarkable twenty-first-century gamble. As it had done for the United States, the City of London would remake itself as China’s financial gateway to the world.8

In the spring of 2012, the City of London Corporation initiated a project to make the City into a key center for renminbi trading. The result was a series of spectacular firsts. Already in 2012, HSBC had issued the first RMB-denominated bond and London claimed 62 percent of

Once the Tory-led coalition began to force through its austerity agenda, the strain that immigration allegedly imposed on the NHS and social services provided a lightning rod. Britain’s lopsided growth added further to the sense of frustration. Whereas the production sectors of the UK economy—manufacturing, construction, etc.—stagnated, between 2010 and 2014 financial services surged ahead by 12.4 percent.11 Driven by the wealth of the City, in London and its environs, house prices rocketed by 50 percent between 2013 and 2016, spectacularly outstripping growth in the rest of the country. London was the cosmopolitan global city par excellence, the preferred home of oligarchs. In economic terms “rebalancing” was a myth. In political terms it was not. Across much of the UK, London’s cosmopolitan affluence aroused a deep antipathy.

It is easy to forget in retrospect, but the Brexit referendum was not conceived as an in-out choice on UK membership in the EU “as is.” Nor was it merely a means to extract minor concessions. London operated from the hubristic assumption that Britain could change the EU’s course. While the euro countries continued on their path toward deeper integration, Britain would force Brussels to formally recognize not just a multispeed but a multidirectional model. The UK was not heading more slowly to ever closer union. If the Tories had their way, it was not heading there at all. Brussels needed to be brought to accept that fact as well as its implications for the political economy of Europe. The “offshore” status of the City of London as an inside-outside financial hub had to be permanently recognized. Not only was this confrontation inescapable, but now was the moment for London to force the issue.

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.

In 2016 no big names in American finance wanted to be associated with the platform from which Trump would give his apocalyptic acceptance speech. Even if some of the Wall Street top brass felt loyalty to the GOP, they could not stomach Trump and did not want to risk insulting their clients or their workforce. It was a matter of business culture. As one PR adviser commented: “Any corporation will look at this from the perspective of whether or not they would want their CEO sharing a stage at Davos, Aspen or Sun Valley with the Republican nominee. If the answer is no, they won’t be going to Cleveland.” Remarkably,

His response was striking. How he voted did not matter, Greenspan declared, because “(we) are fortunate that, thanks to globalization, policy decisions in the US have been largely replaced by global market forces. National security aside, it hardly makes any difference who will be the next president. The world is governed by market forces.”34 This was the mantra of an age of globalization without alternatives. Of course, Greenspan didn’t simply approve of a world governed by market forces, he had done as much as anyone to create it. As Fed chair he had made the markets into the ultimate arbiter of American economic policy. In the early years of the Clinton presidency, he had helped to shepherd the Democrats into a new partnership with Wall Street, thus further limiting the political alternatives on offer. Globalization was not a natural process, opposed to politics. It had been shaped since the 1940s by an alliance of America’s politicians, business elites and policy experts like Greenspan.

Most fundamentally, the crisis had exposed the deep unreality of Greenspan’s conception of a world governed by markets. As the crisis revealed, government by market forces was at best a fragile condition. As the global financial system imploded it was the markets themselves that needed governing, by state action on a gigantic scale. And that meant that who governed and where they obtained their political support was not incidental. Elections and party politics did matter.

Were the Trump and Sanders campaigns crazy or simply stating what should have been obvious: the fiasco of the project of Greenspan’s generation. Financial globalization that Greenspan and his ilk had worked so hard to institutionalize as a quasi-natural process had been exposed as just that, an institution, an artifact of deliberate political and legal construction with stark consequences for the distribution of wealth and power.