by Adam Tooze
Chapter 16
G-ZERO WORLD
The commitment to austerity in 2010 drove critical economists to impatient fury. Why was the world embarked on a course that was so self-evidently counterproductive and so damaging to the prospects of tens of millions of unemployed around the world? Whose interests were being served by preserving this reserve army? Paul Krugman asked in the New York Times.1 Whose interests were served by a lopsided deficit debate in which minor tax increases were traded for huge cuts in entitlements? What kind of shock would it take to break this impasse? Historical experience was not encouraging. FDR’s New Deal had not been enough. It had been hobbled by its own timidity and by relentless opposition from the Right.2 To unleash the full capacities of the American state it had taken the national emergency of a war. “The fact is,” Krugman insisted, “the Great Depression ended largely thanks to a guy named Adolf Hitler. He created a human catastrophe, which also led to a lot of government spending.”3 That didn’t mean that Krugman was hoping for World War III. But he couldn’t resist telling Playboy magazine that “[i]f it were announced that we faced a threat from space aliens and needed to build up to defend ourselves, we’d have full employment in a year and a half.” In light of events in 2011, one can’t help wondering whether Krugman assumed too much coherence in twenty-first-century politics.
The year, in fact, began with a geopolitical earthquake: the Arab Spring. And true to Krugman’s script, this triggered military intervention and calls for a Marshall Plan for the Middle East.4 But after Afghanistan and Iraq there was no appetite anywhere in the West for nation building in foreign lands. Among conservative commentators, alarm at the overthrow of friendly Arab dictators mixed with the dismayed reaction to Bernanke QE’s to form a heady cocktail. A Wall Street Journal op-ed drew comparisons to the 1970s, when global inflation had helped to trigger the fall of the shah and Khomeini’s revolution in Iran.5 Now, by “printing money” and driving up commodity prices, it was the Fed’s QE program that was destabilizing the world. As the Tunisian and Egyptian dictatorships toppled, conservative social media activists urged their followers to tweet “Bernanke has blood on his hands.”6 Meanwhile, the liberal press fired back: It wasn’t monetary policy that was responsible for high commodity prices and food riots, it was global warming. That riposte allowed Paul Krugman to equate conservative opposition to quantitative easing to climate change denial.7 It wasn’t so much a serious debate about the Arab Spring as indicative of the increasingly unhinged quality of American political discourse.
Europe was closer to the North African drama, but its reaction was hardly more coherent. France, Britain and Germany fell out over the NATO intervention in Libya, with Germany siding, as it had done at the Seoul G20, with China and Russia. Merkel’s government refused to give its vote in the UN Security Council for the aerial campaign against Gaddafi. Meanwhile, the EU squabbled disgracefully about who should accommodate the desperate refugees and migrants who poured through Libya into Italy. It was a dispiriting accompaniment to the rolling crisis in the eurozone. In the summer of 2011 it was not only the stability of Middle Eastern regimes but the creditworthiness of Italy and the United States that would be placed in doubt. Little wonder, perhaps, that two acute observers of the contemporary scene should refer to the world in 2011 as being governed not so much by the G20, G8 or G2 but by G-Zero.8
I
By the spring of 2011 austerity was biting deep into the social fabric of Europe. Spending cuts and tax increases were slashing demand and squeezing economic activity. Across the eurozone, 10 percent of the workforce were unemployed. But unemployment for those between the ages of fifteen and twenty-four was 20 percent. And on the troubled periphery, the numbers were numbing in scale. In Ireland general unemployment reached 15 percent and youth unemployment 30 percent, in Greece 14 percent and 37 percent, respectively. In Spain 20 percent of all adults and 44 percent of young people were unemployed by the summer of 2011. Half a generation had their launch out of education and into working life aborted. Nevertheless, the demand for further austerity was unrelenting. After Ireland and Greece had subordinated themselves to troika programs, on March 23, 2011, Portugal’s prime minster, José Sócrates, resigned after failing to gain support for budget cuts. A week later, on April 2, Spain’s social democratic prime minister, José Luis Rodríguez Zapatero, announced that he would not run for reelection and would prioritize stabilizing Spain’s finances. On April 7 Portugal became the third country to place itself under a troika program.9
The sense that Europe’s welfare state was being subjected to a relentless program of rollback driven by the demands of bankers and bond markets provoked outrage. Stéphane Hessel, former French resistance fighter and ecological activist, survivor of Buchenwald, Dora and Bergen-Belsen, became an unlikely bestselling author with his well-timed manifesto Indignez-Vous! (Time for Outrage!).10 To oppose the demands of global finance Hessel summoned the spirit of resistance martyr Jean Moulin, who died in 1943 at the hands of the Gestapo. Taking up Hessel’s slogan on May 15, 2011, ahead of local elections, a crowd of twenty thousand Spanish protesters occupied the most symbolic square in Madrid, the Puerta del Sol. The indignados would remain there for a month, defying efforts by the police and courts to evict them.11 Building a tent city, they declared that “we are not goods in the hands of politicians and bankers.”12 And the M15 movement continued long after their original camp was dispersed. June 19, 2011, witnessed the largest wave of demonstrations in Spain’s tumultuous modern history, bringing perhaps as many as 3 million people—7 percent of the Spanish population—onto the streets.13 Scaled to the size of the United States, the equivalent demonstration would have involved 19 million protesters. Among the more humorous Spanish chants was one directed at Greece, their partners in austerity: “Hush! The Greeks are sleeping.” In 2010 Greece had been rocked by massive protests. But since the fall, resistance in Greece had ebbed. On May 28, 2011, Athens answered the Spanish challenge and the latest round of cuts demanded by the troika with the occupation of Syntagma Square. A week later, June 5 saw a gigantic rally, with between 200,000 and 300,000 participants in the capital city. Syntagma would be cleared only after violent clashes on June 28–29 pitting revolutionary militants against riot police, many of whom made no secret of their sympathy for Greece’s neofascist Golden Dawn movement.
A resurgent nationalism, defending sovereignty against the impositions of the crisis, would be one of the most powerful political responses to the crisis. This had both left- and right-wing variants. Both were at their most vocal in Greece, where the diktat of the troika awakened memories of occupation, civil war and dictatorship. On the Left it was commonplace in the demonstrations of 2010 and 2011 to associate Germany’s veto over eurozone economic policy with Nazi imperialism. Meanwhile, Greece’s own fascists paraded openly in the streets.14 The membership of the Golden Dawn party reveled in torch-lit processions, adorned with runic flags and shielded by heavily muscled storm troopers. Golden Dawners harassed and attacked leftists and non-European immigrants, while laying on soup kitchens, reserved, of course, only for hungry Greeks. In a textbook rerun of the 1930s, a comprehensive social and economic crisis provided the setting for a program of national racial community.
The modes of resistance produced by the crisis were significant in their own right. Marches, demonstrations and strikes were combined with encampments, claiming territory. Public spaces manicured and modernized beyond recognition during the boom years were reclaimed for an alternative mode of life.15 In Greece, defiance of the troika took the form of the nonpayment of taxes and fines. In Spain, with 500,000 families facing eviction and a life crushed under unpayable debts—there is no bankruptcy protection for mortgage debtors under Spanish law—protesters specialized in new forms of nonviolent, direct confrontation.16 So-called escraches brought flash mobs together, organized via social media, to “get in the faces of politicians,” forcing the unresponsive elite to acknowledge the scale a
nd intensity of the emergency.17 If markets were entitled to panic, why should citizens be expected to preserve a proper demeanor? Why was it only the “confidence” of investors that mattered?18
The new Left that began to take shape in response to the eurozone crisis would in due course shake up European politics.19 In Greece, the coalition of the radical Left, known as Syriza, a combination of antiglobalization movements and breakaway elements of the Communist Party that had first formed ten years earlier, positioned itself under its charismatic young leader, Alexis Tsipras, as the radical alternative to PASOK, as the party willing to lead the Greek people in their struggle against oligarchs at home and the troika in Brussels.20 In Spain the ranks of the protesters of 2011 included the articulate professor of political sociology and left-wing talk show host Pablo Iglesias, who would go on to be the main mover behind the Podemos party that was founded in 2014.21 Like Syriza, Podemos activists freely invoked the language of “the people” to bind together a broad-based coalition against the government’s austerity line.22 Podemos championed the cause of “la gente” against “la casta”—the corrupt clique bent on stealing “democracy from the people.”23
Greek and Spanish politics would never be the same again. The crisis had leaped from the financial to the political sphere. But in the spring of 2011 the protests were held at arm’s length by the incumbent governments. What forced a change in policy was not protest, however passionate and imaginative, but the inescapable realization that extend-and-pretend, the “fix” cobbled together in 2010, simply did not work.
II
Greece’s situation was deteriorating. It was implementing austerity but the debt to GDP burden was rising, not falling. Cutting government expenditure did not have the energizing effect on private business activity that the advocates of expansionary austerity imagined, but rather the reverse.24 Consumer spending and investment plummeted. As demand collapsed, this led to further job losses and declining tax revenues. By the early summer of 2011 it was clear that Greece would not be able to access capital markets in 2012, as had been assumed. This meant that the Europeans would have to come up with further loans or find some way of reducing Greece’s obligations ahead of the 2013 deadline. The IMF would not continue to disburse money into a program that was not fully funded. One year on from the crisis of the spring of 2010, patience was running out in Berlin too. At a G7 meeting on April 14, after Strauss-Kahn had set out the IMF’s terms, Schäuble weighed in. “We cannot just buy out the private investors with public money,” he admonished.25 Merkel’s coalition was fragile. The FDP was, frankly, Eurosceptic. The SPD, if it was to vote with Merkel on Europe, demanded that the bondholders must be burned. But the EU Commission and the French government demurred, and Trichet would stop at nothing to keep restructuring off the agenda. When on April 6 the Greeks formally requested a discussion of reprofiling—restructuring the debt not by reducing the amounts owed but by extending the period of payment and the interest owed—Trichet forced them back into line by threatening to cut off the Greek banks.26
The ECB’s position was not purely negative. What Trichet wanted was for the national governments to take over the task of bond market stabilization that the ECB had undertaken since May 2010. The European Financial Stability Facility agreed among the European governments on May 10, 2010, had begun operating. It was the vehicle for the bailout loans to Ireland and Portugal. But its legal status was fragile. Its funding was on a voluntary and bilateral basis. And it was to be used only in emergencies to buy up new debt issued by states shut out of the capital markets. It was not authorized to do the job that had been offloaded on the ECB, buying bonds in the secondary market to stabilize prices and yields. For Merkel to designate a common European fund for bond market stabilization was political poison because it smacked of debt mutualization, with all the political and legal ramifications that entailed. The Bundesbank might not like the ECB’s bond buying, but it could be justified as routine central bank intervention. To let Trichet carry the can was the lesser of two evils as far as Merkel was concerned.
This was the basic inconsistency in the German position. Berlin was not just the relentless advocate of austerity. It was also the most consistent and clearheaded on restructuring and PSI. But when it came to its necessary concomitants, starting with backstopping the rest of the bond market, Berlin was inconsistent and incoherent. Nor did Berlin show any particular energy in recapitalizing its banks, allowing Hypo Real Estate and the weaker Landesbanken to become millstones around its neck. Bailing in creditors without backstopping the bond market and strengthening the banks was not so much responsible policy as a high-wire act that the ECB, the French and the Americans all regarded with horror. And this is the most charitable interpretation of Berlin’s motivations. The less charitable reading was that Germany was engaged in a strategy of tension, deliberately fostering market uncertainty to bully the rest of the eurozone into submission.27 Meanwhile, Germany enjoyed the privileges of a safe haven. While the PIIGS groaned under rising yields, Germany’s interest rates were sliding inexorably toward the zero lower bound. The uncertainty in the eurozone was not good for export business. But Germany’s exports to the rest of the world were booming. Labor markets were tightening. It was a long way from the affluence and complacency of Munich or Frankfurt to the turbulent streets of Madrid and Athens. Berlin could afford to wait it out.
It was Trichet and his colleagues at the ECB who found the status quo unacceptable. As a result of months of bond buying, by the spring of 2011 they found themselves as proud owners of 15 percent of Greece’s junk-rated public debt. When further negotiations about the European Stability Mechanism, the permanent replacement for the EFSF, did not provide for the purchasing of bonds in the secondary market, the ECB’s patience ran out. It was time for Frankfurt to draw the line. The public side of the ECB’s new harder stance was interest rate policy. As the eurozone crisis heated up again in April and July 2011, the ECB, in one of the most misguided decisions in the history of monetary policy, raised rates.28 In the ECB’s defense, it was true that inflation in Germany and other hotspots of the eurozone economy was picking up. The asymmetry between the relative prosperity of Northern Europe and the rest of Europe was all too real. But the ECB’s move was clearly intended as a political signal. The ECB was asserting its independence. It was putting Europe’s governments on notice. It would be up to them to take responsibility for the debt markets.29 Nor were interest rates the only way to send the message. Without fanfare, indeed, without public announcement of any kind, in mid-March the European Central Bank stopped purchases of eurozone sovereign bonds and introduced differentiated haircuts on repos for lower-rated bonds.30
It took a few weeks for the markets to register the serious tightening of credit conditions. Then they sold off. The yield spread between the safest and riskiest eurozone bonds surged. The Greek spread reached 1,200 points and this time the fear was different. In 2010 the markets had moved against individual countries, first Greece, then Ireland. Now a wall of money was moving against the eurozone as a whole. One key indicator was American money market funds, key contributors to the cash pools from which European banks sourced their funding, huge sources of liquidity managed by giant asset managers like BlackRock. Whereas in early 2011 they were still providing as much as $600 billion in funding to European banks, from the spring they drastically curtailed their exposure.31 Over the course of the year they would reduce their commitment to European banks by 45 percent. French banks were particularly hard-hit. Even giants like BNP were not exempt. On Wall Street large bets were now being placed not just on the default of the weakest borrowers—by the spring S&P was reckoning with a 50–70 percent haircut on Greek debt and a 1-in-3 chance of outright disorderly default—increasingly, investors were betting on the collapse of the euro itself. The most aggressive hedge fund managers swung their money first one way then the other, betting against the dollar on the back of the ECB’s interest rate increase and then th
e other way, taking huge positions against European sovereigns, banks and other vulnerable stock.32 Big Wall Street names like bond king Bill Gross at PIMCO and John Paulson, the hedge fund hero of 2008, let it be known that they were bearish on Europe. They had always been skeptical about the eurozone, admittedly, but with the ECB and the national governments at odds, the Europeans seemed bent on self-destruction, and there was money to be made on that too.
Nor was it only American money that was signaling its lack of confidence. A huge internal movement of funds within the eurozone was afoot. This was registered in a previously obscure but soon to be notorious appendage of the Eurosystem known as the TARGET2 balances.33 As money flowed out of bank accounts in Greece, Ireland, Spain and Portugal in search of safety, it moved to Germany and elsewhere in the core eurozone. If funding markets had been functioning normally, the stressed peripheral banks would have found replacement funding in interbank markets without troubling their central banks. The recipient banks in the north were, after all, flush with flight money, and their Greek counterparts were willing to offer good rates. But interbank lending in Europe had never recovered from the shocks of 2007 and 2008 and had been dealt a further blow in the panic of April 2010. So instead, peripheral banks drew their funding from their national central banks, which, because they were no longer sovereign issuers of domestic currency, drew their euros from the ECB headquarters in Frankfurt, while at the same time the Bundesbank and other recipients of flight money piled up credits. Suddenly, in the spring of 2011, thanks largely to the journalistic entrepreneurship of the economist professor Hans-Werner Sinn, the German public was alerted to the shocking and quite misleading news that they were secretly providing a huge “credit” to the periphery.34 Hundreds of billions of euros would be “forfeited” if the currency system collapsed.