Crashed
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Not only was Greece experiencing a social crisis but it was doing so at the behest of the troika. Given that the majority of Greeks wanted very much to preserve their standing in Europe, first PASOK and then New Democracy had seen no option but to comply with the demands of the troika creditors. But, not surprisingly, the crisis produced a broad-based mood of protest that was fueled by the desire for social solidarity and national self-assertion. On the Right the beneficiary was the racist Golden Dawn, a true neofascist movement. But by far the more popular response was Syriza, the party of the radical Left, which in the May 2014 European elections easily overtook the governing party, New Democracy.
Realizing that its support was dwindling, Samaras’s coalition government appealed to the EU and Berlin for concessions. If Greece could emulate Ireland and Portugal in making an early exit from its troika program, it would be a great win for Europe and might give the Eurogroup’s collaborators a chance at the polls. But Berlin waved the suggestion away. They had never trusted Samaras and they were not about to make concessions. Hoping for a new mandate, Samaras called for elections. As was now commonplace, proausterity governments around Europe as well as the IMF chimed in. The Greek voters were left in no doubt that as far as “Europe” was concerned, New Democracy, PASOK and the centrist To Potami party were the acceptable choices. Rajoy, Spain’s conservative prime minister, campaigned for Samaras in Athens. Given the rise of Podemos, Spanish conservatives were desperate to avoid a left-wing victory. But on January 25, 2015, that is what the Greek voters delivered. Syriza, led by the youthful activist Alexis Tsipras, formed a government and, refuting the expectations of moderate social democrats in Berlin and Brussels, picked as its coalition partner not the centrist pro-European To Potami but the ultranationalist ANEL. Their views on religion and cultural values might not mesh, but ANEL could be relied upon to go all the way in a confrontation with the EU.21
The confrontation would be tough. The challenge for Syriza was to force open the painful and unresolved question of Greek solvency. By buying out the private bondholders, the 2012 debt restructuring had removed market pressure from Athens. But given its declining economy, the Greek debt burden was still excessive. And by substituting public loans from the EU and the IMF for private debt, the 2012 deal had, if anything, raised the political stakes. It was one thing to burn private creditors who had gambled on high-yield Greek debt. It was quite another to suggest to conservative Northern Europe taxpayers that they should make further deep concessions to Greece’s rebellious left-wing government. The result in 2015 was a renewed political confrontation, but one in which the fronts were dizzyingly inverted, or at least so they appeared in the rendering of the Greek situation offered by its new finance minister, Yanis Varoufakis.22
An unorthodox leftist who had spent much of his career outside Greece in the Anglophone academy, Varoufakis was never a Syriza insider. He had no stake in its old Left politics or in orthodox Marxism. 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. He courted the support of the City of London, the Financial Times and authorities like Larry Summers, as well as a coterie of American economic advisers that included both confirmed leftists such as Jamie K. Galbraith and Jeffrey Sachs, onetime exponent of “shock therapy” for the post-Communist world. 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.
Juxtaposing rational economics against conservative ideology was an effective political argument on Varoufakis’s part. It would win him a considerable international following. But it underestimated his opponents. The project of fiscal consolidation imposed on Europe under German leadership was certainly political. But it was not only that. It was a vision of a long-term reordering of Europe’s society and economy. Merkel was fond of shocking unsuspecting visitors with the remark that unless Europe reformed it would go the way of Inca civilization.23 In pursuit of its goal, to be realized over the course of a decade, Berlin did not flinch from imposing heavy short-term costs. That is what reform of a failing social and economic model entailed. That was the lesson of the collapse of communism, the economic project of German unification and the incorporation of Eastern Europe into the EU. 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.
The fight was all the more bitter because the austerity hawks in the Eurogroup knew that the centrist governments of France and Italy were susceptible. In 2012 Hollande’s government in France had wanted to push a more expansive policy. The growth agenda, which had been so crucial to the political maneuvering following Hollande’s election, had made precious little headway. Now the new government in Rome headed by the popular centrist Matteo Renzi was tempted in a similar direction.24 That made it all the more important to hold the line against Syriza. Germany was the anchor, but in the most crucial negotiations, Finance Minister Schäuble barely needed to speak. The Dutchman Jeroen Dijsselbloem chaired the Eurogroup session, and the argument against Syriza would be carried by austerian stalwarts like Spain’s Luis de Guindos and Portugal’s Maria Luís Albuquerque. They knew that in stopping Syriza they were fighting for their own political lives and the project they had dedicated their countries to when they signed up to the austerity agenda in 2011.
The irony was that in expressing their preference for the established parties in Greece, the Eurogroup and the IMF were aligning themselves precisely with those political forces and social interests that had created Greece’s deplorable fiscal situation. Nor were these entanglements limited to politics. At the heart of the business oligarchy and its media network were Greek banks. They had been recapitalized in 2012 as part of the restructuring deal at the expense of the Greek taxpayer. But they continued to depend heavily on funding from the Greek central bank and the ECB. Since June 2014 the Greek central bank had been headed by Yannis Stournaras, another of Greece’s persuasive economics professors, one of the architects of Greece’s admission to the original eurozone and finance minister in the outgoing Samaras government.25 When it became clear in December 2014 that Syriza was ahead in the polls and that it might soon come to power, Stournaras did nothing to staunch a slow-bleeding bank run. Ahead of the election, better-off Greeks had already withdrawn 16 billion euros from the banks. When Tsipras took office, a further 8 billion euros were pulled out in a matter of only three weeks.26 The effect of this capital flight was to push the banks ever deeper into dependence on the ECB.
If the Syriza government refused to cooperate with the troika, the ECB, as it had done in Ireland and Greece before, could threaten to curtail emergency lending to the banks. It would be a devastating blow. But did the troika really want to risk a renewed crisis in the eurozone? This threat of financial contagion was the major bargaining counter of the Greek government. If Brussels, Frankfurt and Berlin pushed Greece over the edge, it might take others with it. But in this regard, three days before Syriza took office the game was decisively changed. On January 22, 2015, Mario Draghi announced that the ECB was
finally adopting full-scale QE. Two and a half years after Draghi’s “whatever it takes,” it was not a move that the ECB undertook with any enthusiasm. Between 2012 and 2014 Draghi had allowed the balance sheet of the ECB to contract. What forced his hand in 2015 was the acute threat of deflation. To counter slumping prices, Draghi had tried every alternative. A new installment of the Long-Term Refinancing operations this time found no takers. The European banks were intent on deleveraging. It was not until September 2014 that Draghi commenced “QE lite” by buying private asset-backed securities.27 Predictably, there was immediate indignation in Germany. The trigger for bolder action was a preliminary opinion issued on January 14, 2015, by the European Court of Justice, which decided in a case referred to it by the German supreme court that Draghi’s bond-buying scheme of 2012 had not constituted a prima facie breach of the ban on monetary financing.28 Without waiting for a final ruling, the ECB acted. On January 22, 2015, Draghi announced that until eurozone inflation stabilized safely in the positive range, the ECB would buy sovereign bonds at the rate of 60 billion euros per month.29
In the coincidence of the ECB’s turn to monetary activism with Syriza’s election victory in January 2015, the economic and political consequences of the eurozone crisis finally caught up with each other. The conjuncture would have fateful consequences. Ironically, it was the ECB’s bond-buying program, long opposed by Europe’s conservatives, that freed them to fight the battle for political containment by any means necessary. With the ECB in the market there was no risk that the Greek drama would spill over into financial contagion. As the ECB’s purchases kicked in and drained sovereign bonds from the markets, yields on Spanish, Portuguese and Italian debt fell. In 2010 the IMF had advocated precisely this course so as to allow the Irish banking crisis to be resolved in an equitable fashion—through PSI and not entirely at the expense of taxpayers. Then, Trichet had blocked the way. Now Draghi’s deployment of QE enabled the conservative majority of the Eurogroup to lay siege to Greece’s left-wing government without fear of precipitating a general crisis.
Did this mean that the outcome was foreordained? Did Syriza even comprehend the depth of the predicament it was in? From contemporary sources and publicly available information it was unclear. But Varoufakis’s memoirs reveal that at least some within Tsipras’s cabinet understood the scale of the challenge. As an economic theorist, Varoufakis’s specialty was game theory. He knew that Draghi’s turn to QE boxed Athens in. If 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.
Given Greece’s weakness, it is melodramatic to describe this as the nuclear option. But 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.
III
The first round of meetings between Greece’s new government and its creditors in Brussels went so badly that they came close to precipitating an immediate “rupture.” Merkel, her foreign minister, Frank-Walter Steinmeier, and their French counterparts jetted into Brussels on February 12, 2015, for a European Council meeting fresh from grueling negotiations with Putin over the Minsk II ceasefire in Donbass. Ukraine, not Greece, was top of the agenda, and the new Greek foreign minister did not endear himself to his colleagues by threatening to veto further sanctions against Putin.31 In his first Eurogroup meeting on February 11, 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.
What followed were months of agonizing back-and-forth over achingly familiar ground. Would Athens be able to satisfy the creditors with its austerity proposals? Would the creditors be willing to discuss Syriza’s demand for a second round of debt restructuring? It was attritional. As the negotiations dragged on, Greece’s banks drained reserves, becoming ever more dependent on the ECB, while the Syriza government lost steam. For many on the left wing of Syriza, the February 20 compromise that kept Greece in the euro would come to seem a mistake. Tsipras’s government had wasted the political momentum of its victory, missed its chance to carry out a popular rupture with Brussels and henceforth negotiated from a weakening position. But Tsipras did not want to provoke a break before negotiations had even begun. Varoufakis wanted to see whether leverage would work. He knew that every time he mentioned the possibility of default on the SMP bonds, it made the ECB blanch.35
Was there any possibility that a compromise would be worked out? As far as the debt was concerned, Greece’s insolvency was manifest. But there was no evidence that the creditors were ever willing to budge. Pursuing an Atlanticist strategy, the group around Varoufakis hoped that the swing factor in the negotiations might be the IMF. Most analysts at the Fund regretted that Dominique Strauss-Kahn had enrolled the IMF in the first iteration of extend-and-pretend. Five years on from 2010, Greece’s debts were still unsustainable. Restructuring was essential. But Lagarde was loath to break with her European partners. Given her own political background, she had little sympathy for Syriza. And the IMF team on the ground was embedded with the troika and committed to implementing its tough program. As if to reinforce the Fund’s commitment, the former head of its delegation to Greece, Poul Thomsen, was promoted to head the IMF’s entire European operation.36 Off the record Thomsen agreed with the majority of his IMF colleagues that the Greek debt was unsustainable. But as Athens would discover, harping on the issue of sustainability was a double-edged sword. 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.
If the IMF was of two minds, would its key shareholder, the United States, swing the balance? Five years earlier, when the crisis began, Papandreou’s embattled PASOK government had found comfort in Washington. 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.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.”42