by Adam Tooze
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 last, the IMF acknowledged that there would have to be debt restructuring.
IV
In 2014, the comprehensive crisis, both geopolitical and financial, that had threatened the post-Soviet sphere in 2008 had arrived and the verdict it delivered on the hegemony of the United States and its alliance system was ambiguous, to say the least. A popular upheaval had swung Ukraine forcibly toward Europe. The Association Agreement eagerly signed by President Poroshenko in June 2014 was finally ratified in July 2017. The West had not let Ukraine sink. But neither had it saved it from crisis. Ukraine’s financial position remained precarious. The debt restructuring deal that was eventually done in August 2015 satisfied the IMF’s demand for private sector involvement in formal terms. But, in fact, it imposed minimal losses on the hedge funds that had gobbled up Ukraine’s distressed debt. It bought Ukraine only the slightest amount of debt relief, cutting its debts from $71 billion to $67 billion, while Ukraine’s GDP continued to plunge.82 The viability of the package would depend on the unpredictable course of domestic reform and the intensity of the confrontation with Russia, which neither the United States nor Europe had mustered the resources or political will to decisively repel. As far as Russia was concerned, even in combination with the oil price shock, the sanctions were painful but not decisive. By the spring of 2015 Putin’s regime had regained its grip. If and when oil prices began to stabilize, Moscow’s position would recover. Sanctions would soon prove deeply unpopular within the EU. To general amazement, Russia would find prominent sympathizers even in the United States. While it bided its time, Moscow could cause trouble in the Middle East, it could fish in troubled waters in the United States and it could look for new strategic partners farther afield.
In the cold war the interplay among Washington, Beijing and Moscow had been crucial in shifting the balance of power. In principle, a resurgent China could pick and choose. It had no particular reason to prefer Putin. But in the spring of 2014 in the East Asian arena, tensions between Japan and China were rising to a dangerous level. Washington gave notice that it meant to stand behind its strategic pivot. It would not countenance China’s assertion of rights in the South China Sea. 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. A start was made in May 2014 with the signing of a $400 billion, thirty-year Sino-Russian gas deal.84
Though the strategic logic was strong, in practice, Moscow found that doing business with China was fraught with difficulty. The Chinese were tough negotiators. Russia’s hard-pressed oligarchs were reluctant to commit to long-term deals when they were not negotiating from a position of strength. Laying the necessary infrastructure eastward was monumentally expensive and Russia’s elite were leery of opening up Siberia to ever greater Chinese influence. Gas diplomacy in an age in which prices for fossil fuels were gyrating was a volatile business. But for both Moscow and Beijing, the point went beyond economics. It was about redefining the balance of power and affirming multipolarity. It would not be the incumbent hegemon that would shape the twenty-first-century order but the rising power of Asia and its allies. In so doing, Moscow and Beijing were also giving a new ending to the twentieth century.85 The symbolism of guest lists at the anniversary celebrations for victory in World War II in 2015 was hard to ignore. Seventy years after that struggle, in which China, Russia, the United States, Britain and France had been united against the Axis, a new relationship was being constructed between China and Russia, a relationship that had the potential to reshape Eurasia. In Moscow on May 9 and Beijing on September 3, Xi Jinping and Vladimir Putin were each other’s guests of honor at spectacular commemorative ceremonies. Obama, Cameron, Hollande and Merkel gave their excuses.86 In the spring of 2015 the one Western leader who would look to the former allies of World War II for support would be the embattled left-wing prime minister of Greece.
Chapter 22
#THISISACOUP
In the Maidan demonstrations of the winter of 2013–2014 Ukrainians enthusiastically waved the blue banner of the EU. After the grinding battles of the eurozone it was something of a relief for Europe to be celebrated by anyone anywhere. The pro-EU demonstrators in Kiev hailed Europe as the future. To them it offered the promise of democracy, freedom, prosperity, the rule of law, the “good Europe.” It was an image that stemmed from the era of the 1990s and early 2000s, when Europe had celebrated the end of the cold war, economic growth and the prospect of “ever closer union.” For some pundits, in both Europe and the United States, the clash with Putin was an occasion to reaffirm that vision against outside threat.1 But the question in the wake of the eurozone crises of 2008–2012 was whether the main threat to the good Europe, in fact, came from without or from within. Anxiously watched by the rest of the world, the 2012 stabilization of the eurozone had been based on a compromise among Germany, Italy, Spain, France and the rest. It was driven by the fear of an escalation that would take down first Spain and then Italy. A year later the acute phase of the crisis had passed. But as the second recession to hit Europe in short succession began to make itself fully felt, the EU entered a new season of discontent.
I
The eurozone’s stabilization in 2012 was conditioned on the expectation of further forward movement. That was the program with which the European Council of June 28–29 had addressed the Spanish crisis. It was the message that Draghi had delivered in London. The fiscal compact, the banking union, the development of the ESM and the ECB’s OMT were major steps toward the consolidation of the eurozone. The question, as ever, was whether they were sufficient and whether the EU had the will to move at the requisite speed. On the banking union everything remained to be done, and Berlin was in no hurry to sign up to a common resolution fund until the full extent of the damage in Southern Europe was uncovered.2 Germany and France were bitterly divided over the banking crisis that exploded in Cyprus in 2013.3 Meanwhile, Merkel had her own reform agenda. Not satisfied with having transferred the Schuldenbremse to Europe, she wanted to push the German vision of labor market reform to the European level as well.4 In 2013 her mantra was competitiveness and unit labor costs. For this too, as for budget discipline, Germany wanted contracts and rules.
Merkel’s authority in the wake of the eurozone crisis was remarkable and Germany was the most comfortably situated of Europe’s economies. Labor markets were tight and global demand for Germany’s exports was booming.5 Even if exports to the rest of Europe were flat, Germans had little reason to doubt the narrative of their own national success. But even in this cocoon of prosperity, German politics were not immune to stress. The weak link was the FDP, Merkel’s chosen coalition partner since 2009.6 The FDP’s probusiness, tax-cutting agenda had no more than niche appeal in Germany at the best of times. Its national sovereignist position came increasingly under pressure in the course of the eurozone
crisis. It would have made a good basis for opposition. Inside a government constantly forced to make compromises to hold the eurozone together, the FDP was playing a losing hand. The indignation aroused in Germany in 2012 by talk of eurobonds, the further round of assistance for Greece and Draghi’s activism heightened the party’s political difficulties. And these became acute in the spring of 2013 with the emergence of the first overtly Eurosceptic party in modern German politics, the Alternative für Deutschland.7 Though in 2015 it would go on to lead the campaign against Merkel’s refugee policy, gathering a nativist electorate around it, the AfD was originally founded by a group of conservative professors opposed to Merkel’s compromising policy on the eurozone. In the German general election of September 2013, to the relief of the mainstream, the AfD failed to break through the 5 percent hurdle required to enter the Bundestag. But it took enough of the FDP’s votes to drop them out of parliament for the first time since 1949. On the back of a much-increased vote for the CDU, Merkel would become chancellor for a third time, once more in coalition with the SPD. Despite coming in second, the SPD drove a hard bargain and claimed a remarkable share of the key cabinet portfolios. But the grand coalition gave Merkel a broad parliamentary base, and the most vital element of continuity was provided by Wolfgang Schäuble, who continued as finance minister. In September 2014 Schäuble announced to the Bundestag the joyous news that for the first time since 1969 he would be budgeting for zero new debt. In a world shaken by the violence in Ukraine, Syria and Iraq and terrified by the Ebola epidemic, he declared, Germany’s robust financial position would send a message of confidence.8 The program of the debt brake on which Germany had embarked in 2009 was being realized ahead of time.
The rest of the eurozone had more immediate worries. In both economic and political terms the pressure was relentless. The crisis fighting of 2012 had stopped the immediate catastrophe. But the shocks to confidence delivered between 2011 and 2012 sucked the eurozone economy down and the straitjacket of fiscal consolidation squeezed tightly. The deep recession did not begin to ease until the second half of 2013. By that point unemployment in Greece and Spain had peaked at 26–27 percent. When it came, recovery was agonizingly slow and was overshadowed by the increasingly worrying news from the emerging markets. In 2014, with prices falling all around the world economy, the EU was stalked by the fear of deflation. Was the EU sliding toward the economic quicksand that had trapped Japan since the 1990s, with bad debts weighing on recovery and inadequate demand feeding on itself?9 How could Europe respond? The fiscal compact constrained government spending even on much-needed investment. In Spain, which was undergoing one of the most severe adjustments, public spending both on infrastructure and education was slashed.10 But net of depreciation it was Germany that had some of the lowest levels of public investment in Europe. Would the ECB finally make good on its promise to do “whatever it takes”? Draghi cut rates, but would the ECB go a step further and embark on QE?11 As inflation slid toward zero and expectations moved into negative territory, the economic case for action by the ECB was serious. But with nationalist resentment on the rise in Germany and the Bundesbank still smarting from its defeat in 2012, so too were the political risks.
While economists and politicians argued over policy options, a large segment of Europe’s population had simply had enough. Across Europe, opinion polls showed a sharp decline in support for the EU even in states that had historically been overwhelmingly favorable.12 And then came the EU’s parliamentary elections of May 2014. The results rocked the European political establishment. Eurosceptic nationalist parties made dramatic gains. UKIP won in Britain. More significantly, the National Front (FN) won in France, taking 25 percent of the vote, as compared with the middle-of-the-road conservative UMP with 20 percent and the ruling Parti Socialiste with 14.7 percent. The FN drew on France’s deep strain of nationalism, anti-Semitism and postcolonial racism. But since January 2011 Marine Le Pen had run a campaign to de-demonize the party, refashioning it as a vehicle for popular nationalism pitched against globalization and the EU. To its petit bourgeois base the FN added a large part of what would once have been thought of as the constituency of the Left—blue-collar and unemployed voters.13 When the FN’s voters were asked ahead of the May 2014 election what mattered to them they mentioned three things. For 63 percent immigration was a top priority. A similar number raised economic issues. But hostility to the EU came top of the list: 83 percent of FN voters were persuaded that belonging to the EU had aggravated the effects of the economic crisis on France; 81 percent thought that the economic policy of the current government conforming to the demands of austerity would likely fail. Given the experience of Europe since 2008, one could hardly say that these were unreasonable opinions. Two thirds of FN voters drew the conclusion that France should leave the euro.
The pool of right-wing nationalist resentment on the margin of European politics was not new, though it gained new adherents and far greater credibility in light of the disastrous mishandling of the crisis. What was new was the mobilization on the Left. By contrast with the FN’s furious, lower-class, poorly educated base, the new parties of the Left were updated and energized iterations of the kind of progressive social movement that Europe had repeatedly seen since the late 1960s. In Spain, Podemos was an offspring of M15, an imaginative broad-based social movement, headed by a university teacher, with an electorate that had a larger percentage of university graduates than any other political force in Spain.14 Syriza had the most balanced representation of upper-, middle- and lower-class groups of any party in Greece. What drove the surge in support for the Left from 2008 was not fundamentalist opposition so much as the sense that the EU was betraying Europe’s own promise.
The immediate reaction of mainstream media to the May 2014 result was to dismiss both left- and right-wing critics of the status quo as “populist.”15 The impatience and irrationality of the parties of protest would undo the good work of fiscal consolidation done since 2010. They were splitting Europe at a moment when it needed to stand united against the new threats on its borders.16 There were dark rumors of Russian infiltration. That was alarming, no doubt. But in 2014 a new cold war was among the more reassuring scenarios on offer. What if Europe was marching back not to the 1950s but to the 1930s? Was the script not hauntingly familiar? A financial crisis met with obstinate austerity led to mass unemployment and political radicalization. When melded with fears of Putin’s meddling and terror attacks by radical Islamists, memories of Europe’s dark history could easily be stewed into a terrifying image of a new Dark Continent. In perhaps the most dramatic manifestation of this apocalyptic brand of Euroscepticism, in March 2015 the widely read American monthly Atlantic posed the question: “Is It Time for the Jews to Leave Europe?”17 Influential journalist Jeffrey Goldberg constructed for his American audience a narrative in which disaffected unemployed Islamic youth, festering in Europe’s rundown housing projects and inner cities, were entangled with the continent’s deep-rooted anti-Semitic history and the rise of the new Right. When asked in the accompanying video what the last European Jew should do on departing the “Old World,” Leon Wieseltier commented simply: “Spit!” The fear and vitriol this expressed fed off memories that went back to the Holocaust and long before. What is striking is that this alarmist narrative should have gained traction when it did.
After the apparent escape from crisis in 2012, two years later Europe found itself again at an impasse. To secure its functional viability, the eurozone needed to make bold steps toward further integration. But in light of the mounting popular backlash and the ongoing economic uncertainty, where was the political momentum to come from? After the verdict delivered by Europe’s voters in May 2014, who would want to risk a wave of referenda to ratify treaty change? Meanwhile, most of Europe outside the prosperous northern core was struggling to return to something like normal economic growth. Given time, would the German formula of austerity and reform work? Spain and Ireland were crawling
their way back. But across much of Southern Europe the unemployment crisis was still acute. In 2014 the questions were getting ever louder. Would the mounting political backlash against the EU outrun Europe’s halting economic recovery? Would that recovery even continue? By 2014 the risk of deflation was undeniable. The emerging markets on which Germany relied for its growth were faltering. If stagnation threatened, the political pressures would further escalate. Would the ECB be forced out of its defensive position into a more activist policy? As ever, the place where the tensions within the eurozone were most acute was Greece.
II
After six years of recession, the social 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. According to Eurostat, if the standard of poverty was anchored at the precrisis level, then almost half of the Greek population was at risk by 2015.18 The OECD reported that one in six was going hungry on a daily basis.19 In Athens the homeless were everywhere. For those lucky enough to keep their jobs, real wages were down by 25 percent. At the same time, taxes had risen steeply. A nation of small-property owners was furious at new land taxes. VAT that bore most heavily on the poorest was up from 13 to 24 percent. Contrary to popular belief, in Northern Europe the Greece welfare safety net was far from luxurious and the health system was collapsing under the pressure of cuts. To escape the labor market crisis, since 2008, 400,000 Greeks had emigrated, out of a population of 10 million. Those who left were predominantly well-educated young people, including tens of thousands of doctors.20