by Adam Tooze
On Saturday, July 11, with the principals scheduled to meet the following day, the finance ministers of Europe gathered in Brussels for a premeeting. It soon became clear that, far from softening, Berlin’s position had hardened. If Greece wanted to stay in the eurozone, Schäuble insisted that it must demonstrate its credibility by agreeing to a 50-billion-euro collateral fund made up of Greek national assets placed under direct creditor control. With that in place there could be further loans and another effort to make a go of extend-and-pretend. Alternatively, if Greece preferred the path of sovereignty, Schäuble offered a five-year “time-out” from the eurozone, which might be accompanied by debt restructuring and “humanitarian” relief.72 There was talk of emergency supplies of medicines to Greek hospitals. What was not on the table was a repeat of 2012, deep debt restructuring with Greece remaining in the eurozone. Haircutting banks was one thing, haircutting the German taxpayer quite another. Greece would have to exit. But what if it did? What if Greece took the time-out option? It would mean that eurozone membership was reduced to a conditional status. How long would it be before Schäuble was offering a time-out to Italy or Spain? For the French it was unacceptable.73 The Germans posed as the paymasters of Europe, but France too would bear a heavy burden in the event of any Greek rupture. The French had worked closely with Athens to draft its latest compromise proposal. Schäuble had simply swept it aside.
To clear the air, Michel Sapin, the French finance minister, proposed that they just “get it all out and tell one another the truth to blow off steam.”74 The group therapy didn’t go well. The ensuing conversation was described by one participant as “extremely hard, violent even.” Significantly, the battle went beyond national interest. In the words of France’s youthful economy minister, Emmanuel Macron, Greece was provoking a veritable European civil war, a “war of religion,” with the Nordics, the East Europeans, Germany and the Netherlands in one camp, and France, Italy, Spain and the rest in the other.75 A painful climax was reached when Schäuble and Draghi locked horns and the German finance minister ended up fuming that he was “not an idiot.” At that point Dijsselbloem thought it best to call a halt to proceedings. The deal would have to be done by the heads of government the following day.
When the climactic summit began on the afternoon of Sunday, July 12, 2015, despite the presence of the entire union, the negotiations involved only four actors: Merkel; Tsipras, who was advised by his new finance minister; Donald Tusk, as president of the European Council; and Hollande, effectively representing the wider interests of the other member states. The negotiations were laborious and painful. Merkel abandoned Schäuble’s alarming time-out proposal but clung to the guarantee fund. Tsipras conceded the fund, but could not accept that it should be run out of Brussels or Luxembourg. It would control Greek assets. It must be headquartered in Athens. As Hollande insisted, “[I]t was a question of ‘sovereignty.’”76 Merkel conceded. The fund would be sited in Greece and could be used, if necessary, to recapitalize Greece’s banks and for other domestic investment purposes. But even with that compromise agreed, by early in the morning of Monday, July 13, there was still no deal. At seven a.m., after a full night of talks, Merkel and Tsipras were 2.5 billion euros apart. Both, it seemed, wanted to walk away in exhausted frustration. 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.
There was no rupture. Greece was still in the eurozone. Europe had regained its capacity for a rather brutal form of collective action. The ECB had demonstrated the pacifying 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.
IV
Launched by Syriza sympathizers in Barcelona on the night of July 12–13, #Thisisacoup went viral on Twitter, being taken up by 377,000 users worldwide in a matter of hours and generating a billion impressions in a matter of days.77 Closer to home, in Athens, members of the Left Platform, led by Panagiotis Lafazanis, the former energy and environment minister, met at the Oscar Hotel on the night of July 14 to discuss how they might go through with the Grexit that Schäuble had offered, but Merkel, Tusk, Hollande and Tsipras had done everything to avoid. It had been a mistake not to make the break with Brussels already in February. Now, before the prison door closed once more, they should effect a rupture, if necessary by radical means. Their target was the national mint, where they believed 22 billion euros were held in reserves, enough to cover pensions and other essential government bills until they had rolled out a new national currency. If the central bank governor, Yannis Stournaras, resisted, as they expected he would, they would have him arrested. The meeting was far from clandestine. There were journalists swarming outside the hotel. It is hard to know how seriously to take such talk. But as one participant recalled: “Obviously it was a moment of high tension. . . . [Y]ou were . . . aware of a real revolutionary spirit in the room.”78 It didn’t come to that. Tsipras and the mainstream of Syriza whipped the necessary measures through parliament. The left wing split from Syriza, only to be humiliated in the September general election, which vindicated Tsipras’s leadership, returning him with a virtually unchanged majority and the new loan deal in place. A majority of Greeks, it turned out, wanted eurozone membership, even at the price of continued troika oversight.
Across Europe, what shocked centrists was the violence of the July clashes. Donald Tusk, who had seen the final round of negotiations up close, agreed with the Greek radicals. There was a real mood of revolutionary impatience in the air. As far as Tusk, a cold war liberal and veteran of Solidarność, was concerned, it was all very alarming. “[T]oo much Rousseau not enough Montesquieu,” he told a bemused audience of financial journalists.79 Jürgen Habermas, the closest equivalent to those Enlightenment thinkers twenty-first-century Europe has to offer, was aghast. Merkel had “carried out an act of punishment” against Greece’s left-wing government, he told the Guardian. “I fear that the German government, including its social democratic faction, have gambled away in one night all the political capital that a better Germany had accumulated in half a century.” Germany had “unashamedly revealed itself as Europe’s chief disciplinarian and for the first time openly made a claim for German hegemony in Europe.”80
There was no doubt, of course, that Merkel and Schäuble had played a strong hand. But what exactly did they have to show for it? What upset German right-wingers was not the bruising nature of the encounters with Greece but how little Germany had gained. Who, after all, was the victor in the decisive encounters of July 12–13, 2015? Certainly not Schäuble, who had been cut loose by his own chancellor. What had prevailed was the determination to “pre
serve Europe” at the price of another unsustainable bailout deal. For the German Right, Merkel’s sellout in the Greek crisis was a fitting prelude to her disastrous betrayal of the German nation in the Syrian refugee crisis that autumn. The beneficiary was the AfD—the right-wing, promarket party that had first come into existence in April 2013 to protest against Berlin’s endless concessions in the eurozone crisis. As Schäuble would snark, the AfD’s rise was 50 percent down to Draghi; the other half, presumably, was down to his boss and her liberal posturing over the Syrians.81 Schäuble was no xenophobe. The historic stakes were high. What Merkel was jeopardizing with her dithering concessions was the historic mission of the CDU: to tame German nationalism and to bind it to Europe.
The German right wing saw some things clearly. They understood that, as powerful as it was, Germany’s dominance was incomplete at best. What had stabilized the eurozone in 2012 was a halfhearted lurch toward deeper integration covered by the markets’ perception that Draghi was finally “Americanizing” the ECB. 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.
In the Spanish general election of December 2015, the two-party system based on the conservatives and the Socialists that had shaped the transition to democracy since General Franco’s death in 1975 imploded. With the conservatives crashing to 28 percent and the Socialists to 22 percent, they commanded the loyalty of only half the electorate.83 The majority of the rest was shared between two entirely new parties, Podemos and the Citizens party. Podemos scored 20.7 percent, which was disappointing only when compared with the 30 percent plus it had commanded in the polls shortly after its formation in 2014. It lost support in 2015 in part because of the beating being dealt out to Syriza, but also because of the rise of the even newer Citizens party, which described itself as a “progressive” party espousing a program of social, cultural and economic liberalism. Both Podemos and the Citizens party promised a new set of clean hands to overcome corruption. Both did remarkably well. But the outcome of the election was inconclusive. No side had a clear majority to govern. The divide between the Socialists and Podemos was too deep to enable a left-wing government. In 2016, after a second round of voting, the dogged conservative prime minster, Rajoy, clung on. With its economy limping back from the dead, Spain, like Ireland, would be celebrated as the poster child for austerity adjustment policies.
In Portugal the economic recovery was slower. Unlike Spain, it had borne the brunt of a full-blown troika program. In 2015 its youth unemployment rate was just shy of 60 percent and long-term unemployment hovered around 40 percent. The PàF center-right coalition headed by Pedro Passos Coelho, who had taken office in June 2011, had fought the long fight for eurozone stabilization. When the election campaign began it had seemed as though PàF would be roundly defeated. But the turmoil in Greece and the protection offered by the ECB’s QE contributed to swinging the result. On October 4, 2015, Coelho and the PàF saw their vote plunge relative to their 2011 result by 12 percent. But at 38.6 percent they still came in far ahead of the Socialists at 32.3 percent. With relief, President Cavaco Silva, a conservative financial economist, turned to Coelho to make the first attempt to form a new government. But though PàF had won a plurality, it was a long way short of a viable majority. The Socialists, though their electoral performance had been disappointing, had other options. If they were willing to form an alliance with the radical Left Bloc, Portugal’s equivalent of Syriza, and the ex-Communist Unitary Democratic Coalition, they had a majority. Pulling off this alignment would require a break with the taboos of the cold war and the conventions of Portuguese democracy since the end of dictatorship in the 1970s. As was true in Germany for the SPD and Die Linke, the Portuguese Socialists had hitherto refused to deal with the ex-Communists. But after years of austerity, PS leader António Costa took the plunge and entered talks to form a three-party left-wing government.84
How would President Silva respond? It was for him a profound dilemma. As he stated with remarkable frankness: “In 40 years of democracy,” the Portuguese governments had never depended on the radical Left parties, which questioned the Lisbon Treaty, the EU’s budgetary treaty, the banking union, the Stability and Growth Pact, the euro and NATO membership.85 As the president made clear, as far as he was concerned, the right to govern in Portugal depended on a commitment to those institutions and the values they embodied. And in 2015 there was a further correlate. Portugal must qualify for inclusion in the ECB’s quantitative easing program. It was Draghi’s bond buying that had given Portugal shelter from the Greek storm. Eligibility for inclusion in the ECB program, in turn, depended, by fiat of the ECB, on the rating of the international credit agencies. The best-known ratings agencies—Fitch, Moody’s and Standard & Poor’s—had all downgraded Portugal to junk in 2011. The only exception was DBRS, the least well known of the international ratings agencies. It was on DBRS’s bond rating that Portugal’s membership in the “respectable club” of Europe depended.86 If it were to drop out of the ECB program, the financial consequences would be catastrophic, and as far as President Silva was concerned, that had clear implications. “This,” Silva opined, “is the worst moment for a radical change to the foundations of our democracy. . . . After we carried out an onerous programme of financial assistance, entailing heavy sacrifices, it is my duty, within my constitutional powers, to do everything possible to prevent false signals being sent to financial institutions, investors and markets.”87 To allow the left-wing majority to take power would be a false signal.
Unsurprisingly after the events in Greece, Angela Merkel was not shy about letting it be known that she agreed. The prospect of a left-wing anti-austerity coalition in Lisbon was “very negative.”88 But what option did President Silva have? He couldn’t very well call new elections with an alternative government ready and waiting. On November 24, Silva faced the inevitable and named Costa as Portuguese prime minister. But he did not simply allow the majority principle to prevail either. 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.
V
Against left-wing governments, in weak and dependent members of the eurozone, the tactics of financial pressure worked. The Eurogroup’s project of political and economic discipline prevailed. 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?
But the challenge to the status quo in the EU did not come only from the Left. Overshadowed by the struggles with Greece, the nationalist wave that had made itself felt in the European parliamentary election of May 2014 was gathering force. In 2014 it was the FN, UKIP and the Danish People’s Party that made the headlines. The following year, the British Conservative Party unexpectedly won an outright majority in the May 2015 general election. The British Conservatives were a broad church. David Cameron had led the party out of the wilderness of Opposition along the path of cultural modernization. But the right wing of the party belonged squarely in the nationalist camp—preoccupied with sovereignty, immigration and flag-waving traditionalism.90 Further to the right lurked the mavericks of the anti-EU UKIP, excluded from Westminster, but the winners of the European elections in 2014. A few weeks after the British Conservatives’ victory, the Law and Justice party won the Polish presidency on a ticket of overt nationalism and cultural conservatism.91 They too were nationalists hostile to the intrusions of Brussels and the threat of German “domination.” Over the summer and autumn of 2015, the drama of the Syrian refugee crisis and Angela Merkel’s well-intentioned but cack-handed response fed the nationalist flames. Germany was not just imperious. It was opening the doors of an alien invasion. It was a double gift for nationalist demagogues. By the autumn of 2015, Law and Justice had captured the Polish parliament and government as well as the presidency.