On September 1, 2011, Pedro Passos Coelho, Portugal’s new prime minister, made his first visit to Berlin. His host, Chancellor Merkel, began the joint press conference by announcing how pleased she was to hear that the troika had just submitted its first report on Portugal’s structural adjustment program and had declared itself satisfied with the progress being made. She was delighted also to hear that Coelho saw no obstacle to incorporating a German-style debt brake into Portugal’s constitution. Then, in the question-and-answer session that followed, it seemed that Chancellor Merkel let the cat out of the bag. Asked about the question of parliamentary control over the European Financial Stability Facility, recently mandated by the German constitutional court, Merkel deadpanned: “We do live in a democracy and we are pleased about that. It is a parliamentary democracy. That means that the budget is a key prerogative of parliament. Thus we will find ways to organize parliamentary codetermination in such a way that it is nevertheless market conforming, so that the appropriate signals appear in the markets. I hear from our budget specialists that they are conscious of this responsibility.”1
Market-conforming codetermination—was this what European democracy had been reduced to by the autumn of 2011? Was this the hidden agenda of the troika programs, imposed not only on the parliaments of Greece, Ireland and Portugal but on the Bundestag as well—to make them market conforming? For many who joined the protests of 2011, Merkel’s words confirmed their jaundiced view of the EU as little more than a container for the rule of the markets, or that new buzzword of the crisis, “neoliberalism.”2 Merkel did little to clarify the situation. On September 22, a few days ahead of the IMF meeting in Washington, she welcomed the first German pope, Benedict XVI, to the chancellery. Quizzed by curious journalists, Merkel volunteered that the European crisis had been at the heart of their conversation: “We spoke about the financial markets and the fact that politicians should have the power to make policy for the people, and not be driven by the markets. . . . This is a very, very big task in today’s time of globalization.”3
In their flailing generality, these statements are symptomatic of the depth of the crisis by the autumn of 2011. In the space of barely three weeks, the German chancellor managed to tell the press that politicians should be responsible to markets and to tell the pope that politicians should make policy for “the people” regardless of those markets. Was it a contradiction? Or was she implying some kind of synthesis? If so, was it a matter of finding the market-conforming mode of expression that would allow politicians to slyly exert their power or, more ominously, a matter of hammering democracy into such conformity that no market ever need fear the policy parliament might make? Did anyone in Berlin know? No surprise that Gregor Gysi, the sharp-tongued spokesman of Die Linke, should lash Merkel’s handling of the eurozone crisis as an engine of chaos and confusion.4
The very least one can deduce is that the optimistic dogma under which democracy and markets were seen as natural and necessary complements—the mantra of the aftermath of the cold war—was dead.5 In its place the crisis had put a more realistic awareness of the potential tension between the two. But this generalization too has its risks, particularly when it is assumed that it is financial markets, not politics, that force the tension. Certainly in the course of the eurozone crisis that had not been the case. The pressure the more fragile members of the eurozone were under depended not on some inescapable clash of peoples and markets, or global capitalism and democracy.6 It was dictated, first and foremost, by the willingness, or not, of the ECB to buy bonds. In the markets many banks and traders were not just crying out for the EU to undertake a stabilization effort but betting billions that it ultimately would. What delayed the stabilization and escalated the conflict between democracy and markets to an extraordinary pitch was the struggle among Germany, France and the ECB over the future governance of the eurozone, a question in which politics and economics were inseparably intertwined. Ironically, the result, as in 2010, was to escalate the crisis to the point that European affairs could no longer be safely left to the Europeans.
The compromise of July 21 on a new Greek aid package was supposed to be flanked by a new round of bond buying by the ECB. Ireland and Portugal, at least, were judged to be making sufficient progress under their IMF-supervised programs. So on August 4, 2011, the ECB let it be known that it was once again in the market for their bonds. Prices and yields promptly stabilized. This was the cheery backdrop to Coelho’s visit to Berlin. But as far as Italy and Spain were concerned, Trichet did not want to let them off the hook so easily. The ECB needed further proof of conformity. To make the point, on August 5 Trichet dispatched a confidential memo to prime ministers Zapatero and Berlusconi, spelling out what would be necessary for the protection of the ECB’s bond purchases to be extended to them.7 In the case of Italy, weight was added to the missive by the signature of Mario Draghi, head of the Italian central bank and Trichet’s anointed successor at the ECB.
Neither Spain nor Italy had applied for a troika program, but that did not stop the ECB from demanding huge cuts to government spending and increased taxation. In the Italian case, Trichet and Draghi called for the privatization of local public services, a proposal that had recently been decisively rejected in a nationwide referendum.8 The ECB also called for dramatic changes to labor market policy, infringing on rights of Italian and Spanish trade unions. Such changes were necessary, the ECB insisted, to cut unemployment and increase growth. It was a blatant attempt to shift the balance of social and political power by means of monetary policy, poorly disguised by the ECB’s proviso that care should be taken to ensure that the social safety net remained intact. In case these unpopular measures encountered opposition, Trichet and Draghi suggested that the Italian government should invoke the decree powers of Article 77 of the Italian constitution, which allowed executive action “in cases of extraordinary need and urgency.” Originally designed to counter the specter of Communist insurrection during the cold war, Article 77 was a legal fig leaf that had been repeatedly invoked since the 1970s to cover “emergency measures.”9 Its overuse had been criticized by the Italian courts. If Berlusconi was worried about the legality of these proceedings, Trichet and Draghi advised that he should apply retrospectively for parliamentary sanction. Perhaps not surprisingly, legally minded members of Berlusconi’s cabinet wondered whether it was their malodorous prime minister or Draghi and Trichet who posed the greater risk to the rule of law.
The Spanish government chose to keep the ECB’s letter secret. If it was to be humiliated it preferred not to have the fact made public. As a sign of their compliance, Spain’s two largest political parties agreed to amend the Spanish constitution, unchanged in thirty-three years, to provide for a balanced budget amendment.10 By contrast, Berlusconi accepted Trichet’s terms but under public protest. He would later say that the ECB’s instructions “made us look like an occupied government.”11 But rather than embarrassing the ECB, the expostulation from Rome served only to enhance Trichet’s reputation as a hard-liner, which, in an ironic twist, freed him to act. On August 7 the ECB began buying Italian and Spanish bonds under the Securities Markets Programme (SMP).12
This was enough to calm the markets and stave off the immediate risk of a disaster. But Berlusconi’s government was evasive about the full scale of the austerity measures it was willing to adopt. The Italian economy was perched on the edge of a severe recession. Markets remained jumpy. And as everyone realized, things were going to get worse before they got better. The compromise on Greece hammered out on the weekend of July 20–21 had been inadequate from the start. Rather than achieving sustainability, Greece’s consolidation program was falling consistently behind schedule. To escape insolvency Greece needed a haircut far larger than that squeezed out of the bankers over the summer: not 21 percent but something closer to 50 percent. If this was not to cause panic, it would need to be framed by a solid Franco-German agreement on the future governance of the eurozone. France was truly the last line of defense. If the crisis spread by way of Rome to Paris, the game would be up. Ominously, in the fall of 2011, as the ECB intervened to prop up Italian public debt, the spread of the ten-year French bonds relative to bunds nudged upward to 89 basis points.13 In reaction, Merkel and Sarkozy tightened their alliance. What Sarkozy desperately needed was a wall of money. With the ECB pursuing a strategy of tension, the only way to really calm markets would be to expand the EFSF or to agree to a wholesale mutualization of eurozone public debt. It was Berlin’s agonizingly slow acceptance of these basic facts that set the pace of the crisis.
On September 29 the Bundestag finally voted on the puny expansion of the EFSF bond market stabilization fund agreed on July 21. It was widely seen as a decisive vote for the future of Merkel’s coalition.14 Though the EFSF was supported by the majority of the Bundestag, on the German right wing the bond buying of the ECB had triggered a furious reaction. At the crucial ECB board meeting in August, Merkel’s hard-line new appointee as head of the German Bundesbank, Jens Weidmann, once a star pupil of Axel Weber and Merkel’s personal economic adviser, not only voted against bond buying but made his opposition public.15 On September 9 Jürgen Stark, the German member of the ECB board and the bank’s chief economist—the man widely thought to be behind the ECB’s interest rate hikes earlier in the year—resigned in protest. To stop the momentum of the conservative rebellion Merkel needed to win the EFSF vote in the Bundestag, not with the votes of the pro-European SPD opposition but on the basis of her own Kanzlermehrheit—with the votes of her coalition partners. In the event, on September 29 Merkel got the votes, but by a painfully narrow margin. Out of the 330 members of the government coalition, only 315 voted for the motion, 4 more than the 311 needed. Merkel was on top, but she had little room for maneuver.
In any case, as soon as the Bundestag had voted it was clear that it had been overtaken by events. As everyone in the markets realized, the EFSF fund that had been agreed over the summer was too small. The Bundestag vote on September 29 was simply the occasion to start talking about how the fund might be leveraged, something that had been explicitly ruled out by Schäuble ahead of the vote.16 Unless the markets suddenly calmed, Merkel’s government would soon be rolling the parliamentary dice again.
In the summer it had finally been acknowledged that any Greek debt restructuring would require a full-scale bailout of Greece’s own banks. They held so much Greek public debt that their balance sheets would not survive the debt write-down. What the European governments were still struggling to accept was that the problem was far wider than that. The politics of extend-and-pretend might have the benefit of deflecting attention from the creditor banks to the bankrupt government borrowers. It was the citizens of the troika-supervised countries who paid the price. But it also allowed European policy makers to avoid getting to grips with the underlying problems of financial stability. The assumption, presumably, was that given time the banks would take care of themselves. But despite the fairy-tale numbers produced by the European stress tests, it was clear that this was wishful thinking. In fact, Europe’s banks were sliding back toward the cliff edge in the fall of 2011. They were struggling to cope with pressure from six directions at once. The legacy losses from 2007–2008 were still on their books. Their holdings of European sovereign debt were increasingly impaired. The troubles of the eurozone economy were bad for new business. The new capital and liquidity requirements of Basel III required painful balance sheet adjustment. In their most profitable niche markets in the United States, Europe and Asia, the European banks faced fierce competition from the resurgent American and Asian banks. And in light of all this, wholesale money markets were increasingly leery about offering funding. A slow contraction of balance sheets was one thing. If funding markets shut down, Europe would face a repeat of 2008. Given that acute threat it was not without risk to openly address the long-term issues of the sector. But if the problem of recapitalization was not squarely faced, how would the banks ever be made safe?
In August 2011, as she established herself as managing director of the IMF, Christine Lagarde took up the baton that Strauss-Kahn had dropped when he was carted off to Rikers Island jail. Already in 2009 IMF analysts had highlighted the inadequacy of European bank recapitalization.17 Now, two years later, in light of the escalation of the eurozone sovereign debt crisis, the IMF estimated that the minimum the European banks needed was $267 billion in new capital.18 It was a daunting challenge, but without it, all other crisis-fighting measures on the side of fiscal and monetary policy would lack a solid foundation. European political obfuscations were obscuring the basic lesson of 2008: Questions of macroeconomic policy and systemic stability could not be hygienically separated from the workings of megabanks, now more politely known as systemically important financial institutions.
The banks, of course, defended what they took to be their own interests. Never one to shrink from alarmism where bank regulations were concerned, the Institute of International Finance estimated that Basel III plus national regulations would force banks worldwide to raise their capital by $1.3 trillion by 2015.19 It was a huge ask and many banks might simply prefer to shrink their balance sheets, flattening the fragile recovery. At the meeting of the Financial Stability Board on September 23 in Washington, Jamie Dimon of J.P. Morgan counterattacked. He condemned the new capital rules and challenged Mark Carney, the chairman of the Bank of Canada and head of the SFB, so violently that Lloyd Blankfein of Goldman Sachs felt it necessary to personally intercede.20 Bizarrely, Dimon denounced the Basel III rules as anti-American, whereas, in fact, the pressure they placed on the Europeans was far more severe. Rather than raising capital, like their American counterparts, Europe’s main lenders were deleveraging en masse, cutting the size of their loan business. On the basis of plans published by the banks themselves, analysts predicted a contraction of between 480 billion and 2 trillion euros. From the point of view of the regulators, this was exactly what was intended. The banks needed to “derisk.” But it wasn’t only a matter of corporate strategy. What was driving the contraction as much as anything else was the collapse in demand for loans. That spelled trouble ahead for the eurozone economy and it threatened a vicious circle in which a widening depression forced banks to make ever larger provisions for a new wave of nonperforming loans, further tightening pressure on their balance sheets.
Europe’s Banks Under Pressure: Fall 2011 (in billions of euros)
|
2008 legacy assets |
PIIGS debt |
Expected deleveraging |
|
|
RBS |
79.6 |
10.4 |
93–121 |
|
HSBC |
54.3 |
14.6 |
83 |
|
Deutsche Bank |
51.9 |
12.8 |
30–90 |
|
Crédit Agricole |
28.2 |
16.7 |
17–50 |
|
Sociéte Générale |
27.5 |
18.3 |
70–95 |
|
Commerzbank |
23.8 |
19.8 |
31–188 |
|
Barclays |
20.7 |
20.3 |
20 |
|
BNP Paribas |
12.5 |
41.1 |
50–81 |
Note: PIIGS debt refers to holdings of Portuguese, Italian, Irish, Greek and Spanish sovereign debt.
Sources: Bank of England, Financial Stability Report 30 (December 2011), and http://www.forecastsandtrends.com/article.php/770/.
It was not the misery of youth unemployment in Spain and Greece that made the eurozone crisis into an object of global concern. The world would wake up late to what would be dubbed the “populist danger.” In 2011 it was the prospect of European banking crisis that seized the attention of policy makers around the world. If the trillion-dollar balance sheets of the French, German, Swiss, Italian and Spanish banks were shaking, then the City of London and Wall Street would not be safe. And, as in 2008, the influence ran both ways. If the withdrawal of funding from American sources put the European banks under excessive pressure, they would drastically curtail their business in the United States. As William Dudley of the New York Fed later explained to Congress: “Money market mutual funds which were providing dollar funding to the European banks during the summer and fall [of 2011] were pulling back. Other lenders, large asset managers, were also pulling back from the European banks. And this was causing those banks to start to get out of their dollar book of business. . . . [T]his was going on at a pretty feverish pitch through the late fall and in through the early winter.”21 The panic was spreading to the American banks themselves. In the fall of 2011 the premium on American bank credit default swaps began to rise ominously.22
On the morning of September 16, 2011, Treasury Secretary Geithner flew to Warsaw to attend, for the first time, the monthly meeting of European finance ministers and central bankers. In his widely leaked remarks he apparently began on a humble note.23 “Our politics are terrible, maybe worse than they are in many parts of Europe,” he said. The debt ceiling battle had ended in Congress only six weeks earlier. “Given the damage we caused the world in the early stages of the financial crisis and given the challenges we have, we are not in a particularly strong position to provide advice to all of you, so I come with humility.” But he then went on to insist that the “ongoing conflict” between Europe’s governments and the ECB was “very damaging.” “You have to, governments and the central banks have to, take out the catastrophic risk from markets.” Austria’s outspoken finance minister, Maria Fekter, later commented that the American Treasury secretary’s tone had indeed been “very dramatic.”24 What Geithner proposed was standard American maximum-force firefighting doctrine. “The firewall you build has to be perceived as larger than the scale of the problem. You can’t succeed by shrinking the problem to fit your current level of financial commitments. . . . It’s more dangerous to escalate gradually and incrementally than with massive preemptive force.” According to the Treasury’s own estimates, the eurozone needed a fund of at least 1 trillion euros and preferably 1.5 trillion.25 Picking up an idea launched by Mark Carney of the Bank of Canada and Philipp Hildebrand of the Swiss Central Bank, Geithner argued that the European Financial Stability Fund should be leveraged to give it sufficient firepower to act as a firewall.26 The EFSF could borrow against the capital invested in it by Europe’s governments. It was a neat solution, but controversial in Europe, particularly in Germany, because as it increased the fund’s firepower, it also increased the liability for losses.
It was the Europeans who invited Geithner to Warsaw. But in the wake of the Wall Street crash of 2008 and the congressional budget crisis of July 2011, there was probably no moment in living memory in which Europe was less willing to listen to financial advice from America. Jean-Claude Juncker refused point-blank to discuss Geithner’s bailout fund proposal with a nonmember of the eurozone. Geithner stalked out of the encounter refusing comments to the press. As one New York analyst commented: “I’m not sure it’s productive for Secretary Geithner to have gone to Poland given the European resentment towards the U.S. . . . I fear that it may cause Europeans to cut off their nose to spite their face.”27 That trivializing diagnosis was telling in its own right. But the rebuff to the United States was undeniable. On Geithner’s return, the New York Times ran an unflattering piece contrasting the reception he had received with the triumphalism of the 1990s, when Time magazine had hailed his mentors—Greenspan, Summers and Rubin—as “The Committee to Save the World.” In September 2011 Sheila C. Bair, Geithner’s longtime nemesis as the chair of the FDIC, commented that the Treasury’s advice might have been more compelling if it had come jointly from the United States and China, a point that the Chinese would make at the next G20 meeting.28
As the leaders of world finance convened in Washington for the annual IMF meeting at the end of September 2011, the mood was grim. The world’s financial institutions were staring into “the abyss,” they declared.29 From the sidelines Larry Summers, recently retired from the White House, declared: “Now, when these problems have the potential to disrupt growth around the world, all nations have an obligation to insist that Europe find a viable way forward.”30 The Europeans could not go on pretending that all that was at stake were matters of eurozone governance. The G20 premeeting issued a communiqué stressing that, in the face of the ongoing eurozone crisis, “[w]e commit to take all necessary actions to preserve the stability of banking systems and financial markets as required.” Geithner and his British counterpart George Osborne combined to demand an end to Europe’s “political crisis.” The emphasis on politics was telling. Canada’s finance minister expressed incredulity that the global gatherings had been talking about Greece since January 2010.31 Geithner warned of a “cascading default, bank runs and catastrophic risk” if Europe failed to build a big enough firewall. Lagarde, from her new vantage point in Washington, insisted that there was still “a path to recovery,” but “much narrower than before, and getting narrower.”32 And yet a week after the IMF meeting, the EFSF plan that Merkel would squeeze through the Bundestag was undersized, and Finance Minister Schäuble publicly denied any plan to increase it by means of leverage. The Europeans, and the Germans in particular, still did not “get it.”
In the first week of October, as if to demonstrate that the dark talk in Washington was not merely alarmism, a run began on the Franco-Belgian bank Dexia, one of the casualties of 2008 that was most exposed to peripheral eurozone debt.33 Once again the European Banking Authority had embarrassed itself. Over the summer Dexia had passed the third European stress test with flying colors. A postmortem revealed that the stress tests had failed to account adequately for losses resulting from a restructuring of Greek debt. Furthermore, they had ignored altogether the issue of liquidity. In 2008 it had been collateral calls that triggered the disaster at Lehman and AIG. In 2011 they did the same to Dexia.34 The bank had contracted a huge portfolio of interest rate swaps on which it now faced demands for tens of billions of euros in collateral. The Belgian and French governments were forced into an expensive bailout at the worst possible moment. Given the potential impact on French public debt, the governor of the Banque de France, Christian Noyer, was forced to deny claims that France’s credit rating might be in jeopardy.35
Meanwhile, from the other side of the Atlantic came news of trouble at the high-profile brokerage firm MF Global. American regulators had ordered MF Global to boost its net capital to cover against the multibillion-dollar position it had built in Irish, Spanish, Italian and Portuguese sovereign bonds. Inverting the legendary big short position that speculators had built against mortgage-backed securities in 2007, MF Global had taken a “big long” in eurozone sovereign debt. It was gambling that other investors were underrating the stability of the eurozone and the value of peripheral bonds. As institutional investors like pension and insurance funds and banks offloaded their eurozone securities, it was MF Global that bought them up. As had been true in the case of the big short, there was a race between market sentiment and the ability of the contrarian investor to stay liquid. In October 2011 time ran out on MF Global. The regulator’s call for more capital triggered inquiries into its balance sheets and revealed that to tide it over in the face of huge market pressure it had been dipping into client funds. By the end of October one of the most high-profile investors betting that the eurozone did indeed have a future collapsed.36
It was a bitter irony that it was precisely as MF Global filed for protection that the eurozone finally began to take steps toward a more decisive resolution of the crisis. On October 23 the European leaders held a gathering to sketch the outlines of yet another stabilization plan. It involved deep debt restructuring, new loans for Greece, an expansion of the EFSF, bank recapitalization—finally, all the elements of a solution were on the table. Indeed, the issues were beginning to be monotonously familiar. That, however, did not mean that the way forward was obvious or politically easy. On October 26 Merkel addressed the Bundestag to tell them that the expansion of the EFSF they had voted to approve a month earlier had not been enough and that the fund might, after all, need to be leveraged.37 On the promise that under all circumstances Germany’s liability would remain capped at 211 billion euros, Merkel again got the majority she needed. With Germany at least formally on board, European leaders assembled for a second time in Brussels on the afternoon of October 26 to finalize the third rescue package for Greece.
Composition and Estimated Bond Holdings of Creditor Committee (in billions of euros)
|
Steering Committee Members |
Further Members of the Creditor Committee |
||||
|
Allianz (Germany) |
1.3 |
Ageas (Belgium) |
1.2 |
MACSF (France) |
na |
|
Alpha Eurobank (Greece) |
3.7 |
Bank of Cyprus |
1.8 |
Marathon (US) |
na |
|
Axa (France) |
1.9 |
Bayern LB (Germany) |
na |
Marfin (Greece) |
2.3 |
|
BNP Paribas (France) |
5.0 |
BBVA (Spain) |
na |
MetLife (US) |
na |
|
CNP Assurances (France) |
2.0 |
BPCE (France) |
1.2 |
Piraeus (Greece) |
9.4 |
|
Commerzbank (Germany) |
2.9 |
Crédit Agricole (France) |
0.6 |
RBS (UK) |
1.1 |
|
Deutsche Bank (Germany) |
1.6 |
DekaBank (Germany) |
na |
Société Gén. (France) |
2.9 |
|
Greylock Capital (US) |
na |
Dexia (Belg/Lux/Fra) |
3.5 |
UniCredit (Italy) |
0.9 |
|
Intesa San Paolo (Italy) |
0.8 |
Emporiki (Greece) |
na |
||
|
LBB BW (Germany) |
1.4 |
Generali (Italy) |
3.0 |
||
|
ING (France) |
1.4 |
Groupama (France) |
2.0 |
||
|
National Bank of Greece |
13.7 |
HSBC (UK) |
0.8 |
||
Notes: Estimates of bond holdings refer to June 2011, creditor committee composition to December 2011.
Source: Jeromin Zettelmeyer, Christoph Trebesch and Mitu Gulati, “The Greek Debt Restructuring: An Autopsy,” Economic Policy 28, no. 75 (2013): 513–563.
This time PSI would be the cornerstone of the entire deal. The haircut would be deep. Banks and their shareholders would have to recognize tens of billions of euros in losses. Rumor had it that the Germans were pushing for 60 percent. The creditors, negotiating from offices in the basement of the EU’s Justus Lipsius building, held out for less, and they were a powerful group. Despite the ongoing sell-off of peripheral bond assets, in 2011 all the major banks of France, Germany and Italy still held Greek bonds. So too did Greece’s own banks, major insurance funds and American hedge funds.
To shift this weighty coalition of financial interests it took not only financial inducements but also a forceful personal intervention by Merkel and Sarkozy. At 4:04 a.m. on the morning of October 27, a deal on “voluntary bond exchange” at 50 percent was announced.38 The plan promised to reduce Greece’s debt below 120 percent of GDP. To tide it over Greece was to receive another 130 billion euros in funding, bringing the total in emergency loans it had received since 2010 to 240 billion euros, or more than 100 percent of Greek GDP. To contain the fallout from this momentous decision, all other euro area member states solemnly reaffirmed “their inflexible determination to honour fully their own individual sovereign signature.” The EFSF was to be boosted to close to 1.2 trillion euros by means of leverage or by using its resources not to make loans directly but as an insurance fund to cover losses on private securities. And Europe’s banks were expected to recapitalize to the tune of 106 billion euros, though it was left up to them how they raised the funds. At last, Europe had produced a package that at least in outline recognized the fundamentals of the problem. Debt reduction, recapitalization and backstopping were the keys. The questions of who would pay and how exactly the EFSF would be equipped still had to be settled, but before those essential technical issues could be broached, Europe had to deal with the political fallout.
By the end of October 2011, after two years of economic disaster and financial panic, the Greek political system was coming apart. Unemployment now stood at 19.7 percent, up from 8 percent in 2008. The public mood was ugly. Since the onset of the crisis the Greek opposition—on both the left and right—had consistently refused to join with the government in facing the demand of the foreign creditors. The entire disastrous austerity program had been conducted on the strength of the majority that PASOK had won in October 2009. The party was paying the price. In the third week of October giant demonstrations across Greece challenged the latest round of cuts. The strikes were unprecedentedly wide-ranging. “[T]rash collectors, teachers, retired army officers, lawyers and even judges walked off the job.”39 A member of the Communist party was killed in clashes with the police. On October 28, the day of commemoration of national resistance, the venerable president of the republic Karolos Papoulias, himself a partisan veteran, was howled down by protesters in Thessaloniki. Seeking to regain the initiative, on the evening of October 31 Prime Minister Papandreou convened a meeting of his party and announced that it was time to call the majority of the Greek people into action and to shame the opposition into supporting the measures dictated by the troika.40 There would be a referendum—yes/no on the EU’s latest debt restructuring and austerity program.
It was a reasonable political move on Papandreou’s part, but did Greece still have the kind of freedom of maneuver a referendum implied? The complex deal that had been announced in the early hours of October 27 was the result of months of agonizing discussion between Paris and Berlin, Brussels, the ECB and the IIF representing creditors from around the world. Merkel had twice whipped the Bundestag. The July 21 plan had been ratified by every parliament in Europe. Now, without prior warning, the Greek premier was adding a further democratic hurdle. Markets aside, how were the other parliaments to react? What if the Greek voters rejected the proposal? Merkel, at least, had been given some prior intimation of Papandreou’s gamble. But October 31 was the first that Paris had heard of it and Sarkozy was incandescent. The Greeks were putting the entire stabilization package in doubt and France knew that it was no longer safe. On November 2 Papandreou was summoned to the G20 meeting in Cannes, not a forum to which Greece was normally invited, to explain himself.41
At a press conference in Cannes Sarkozy and Merkel laid down the law: If there was to be a referendum there could be only one question: “in or out” of the eurozone. “Our Greek friends must decide whether they want to continue the journey with us. . . . We want them to stay inside the euro, but they must obey the rules.” Otherwise, they would receive “not a single cent” from French and German taxpayers. In fact, the majority of the Greek political class and Barroso as commission president judged the proposition of a monthlong referendum campaign far too risky. On November 3–4, in side meetings at Cannes, Merkel and Sarkozy maneuvered with the Greek opposition and Papandreou’s ambitious finance minister, Evangelos Venizelos, to abort the referendum proposal and end Papandreou’s premiership. Papandreou was replaced by a safe technocratic pair of hands, Lucas Papademos. The new Greek prime minister was an American-trained economist and central banker, a former vice president at the ECB.42
But the real stuff of the Cannes meeting, once the Greeks were hammered into line, was the search for a fix for Italy. If the worst came to the worst Greece could be let go. Italy had to be stabilized. In a preemptive move to restore confidence, the IMF had proposed an 80-billion-euro precautionary program that would come with such tight financial provisions that it would rob Berlusconi of any wiggle room.43 Berlusconi refused the role assigned to him. The only public result that emerged from Cannes was an agreement by Rome to accept IMF monitoring on a voluntary basis, as a matter of pride and self-vindication, but not as the condition on a loan. Indeed, Berlusconi let it be known that he had rejected an offer of IMF money. Italy thus got the worst of all worlds: the stigma of having been considered for an IMF program and the duress of oversight, without access to new money.
This, at the time, appeared to be the dispiriting upshot of the Cannes conference: the removal of the Greek prime minister, deadlocked negotiations, no aid for Italy and a further faux pas by Berlusconi. Three years later it emerged that something far more dramatic had transpired. Lagarde’s Italian proposal was a sideshow. The real news was that Paris and Berlin were maneuvering to unseat the Italian prime minister. As Geithner put it in transcripts compiled for his memoirs: “The Europeans actually approach us softly, indirectly before the thing [Cannes meeting] saying: ‘we basically want you to join us in forcing Berlusconi out.’ They wanted us to basically say that we wouldn’t support IMF money or any further escalation for Italy, if they needed it, if Berlusconi was prime minister. It was cool, interesting.”44 Geithner could not hide his approval of the basic idea: “I really actually felt, I thought what Sarkozy and Merkel were doing was basically right which is: this wasn’t going to work. Germany, the German public were not going to support, like, a bigger financial firewall, more money for Europe, if Berlusconi was presiding over that country.” Unfortunately, a further page of Geithner’s candid observations was redacted. In his memoirs, Geithner says that he informed the president of this “surprising invitation” from Europe, but concluded, “[W]e couldn’t get involved in a scheme like that. ‘We can’t have [Berlusconi’s] blood on our hands,’” Geithner told the president.45
But whether the White House accepted the “suprising invitation” or not, Berlusconi’s days in office were numbered. His government was disintegrating from within. The Northern League was refusing to cooperate in the changes to the pension system demanded by the rest of Europe and the IMF. Finance Minister Tremonti was pushing for Berlusconi to resign.46 Already in mid-October, Angela Merkel had made phone calls directly to the Italian president, Giorgio Napolitano, to explore alternatives.47 Napolitano, a longtime PCI apparatchik—Henry Kissinger’s favorite Eurocommunist—had agreed that it was “his duty . . . to verify the conditions” of Italy’s “social and political forces.” By November 12, with his coalition crumbling, Berlusconi lost a vote of confidence in parliament and resigned. What the “condition” of Italy’s “social and political forces” apparently demanded was rule by technocrat. The man who recommended himself was Professor Mario Monti.48 Like the new Greek prime minister, he had a background as an academic economist with exposure to the United States. As European commissioner for internal market and then for competition between 1995 and 2004, he acquired the nickname “the Italian Prussian.” After leaving the commission, Monti served as international adviser to Coca-Cola and Goldman Sachs and founded Bruegel, Europe’s most influential think tank.49 In 2011 he was summoned from his position as president of Bocconi University to become Italy’s prime minister. To make this elevation to the head of government possible, Monti, who held no elected office, received from Napolitano the honorary position of “life senator.”
In mid-November the governments of two eurozone members were taken over by men without democratic credentials whose main qualification was that they were undeniably market conforming.50 Critics pounced on the web of connections that tied key eurozone decision makers to Goldman Sachs and its bond market dealings in Europe.51 It was surely more than coincidence that Monti, Draghi and Otmar Issing, Merkel’s favorite economic adviser, had all worked for Goldman. But to describe this simply as a defeat of democracy at the hands of global markets would be misleading, to say the least. There have been many governments felled by market pressure. But Geithner was right. The driving force in the eurozone in the fall of 2011 was political, not economic. Berlusconi had to go because otherwise there would be no agreement from the “German public,” at least as represented by Merkel’s government, to a bigger European firewall. The gutting of Greek and Italian democracy in 2011 was the result of a toxic combination of massive financial integration with Berlin’s dogged insistence on intergovernmentalism. The lack of overarching structures with which to compensate for the asymmetric effects of the crisis enforced conformity to Berlin’s vision of financial probity, one state at a time. Around the chancellery in Berlin, in the wake of the changes in Greece and Italy they were not bemoaning the oppressive force of markets. Senior officials could be heard boasting: “We do regime change better than the Americans.”52
But the twisted logic of the crisis was far from fully played out. Installing “Prussians” at the head of two of the most dangerously indebted eurozone countries no doubt made Merkel and Schäuble more comfortable. But as far as the markets were concerned, the character of the national governments in Italy and Greece was a secondary concern. What the markets and the rest of the G20 were waiting for was the next step: a decisive move toward a higher level of European integration. What was needed was a decision on the EFSF, and that depended not on Greece or Italy but on overcoming Germany’s objections to a larger stabilization fund.
No eurozone member could risk a direct showdown with Berlin, and Merkel knew it. So it came as a nasty surprise for the German delegation at Cannes when at 9:30 in the evening on November 4 Sarkozy called the heads of government back for a conference on the Italian question, and it was not the French president but President Obama who was in the chair. As one member of the German delegation commented to the Financial Times: “It was strange. . . . It was . . . a signal that Europe was not able to do that; it was a sign of weakness.”53 It would have been closer to the truth to say that it was a sign of Germany’s strength and stubbornness. Sarkozy ceded the chairmanship to Obama in the hope that America’s weight and influence would be enough to overcome Germany’s political and legal objections to the solution the eurozone desperately needed. As Obama put it: “Our preference in the US is that the ECB should act a bit like the Federal Reserve.” In other words, the ECB should calm the markets by buying bonds. If that was vetoed by the Bundesbank because it blurred the line between fiscal and monetary policy, what Europe needed was a truly massive government- backed bond-buying fund with in excess of 1 trillion euros in effective purchasing power, ideally in excess of 1.5 trillion. Given the limitations of the existing EFSF, the Americans and the French proposed an improvisation that would involve topping up the fund with SDRs issued by the IMF and then leveraging the enlarged pot. It was a neat technical fix, but the subterfuge was too obvious. The Bundesbank would not agree to a plan that transferred huge influence to the EFSF by way of the IMF, entities over which it had no direct influence.54 Even Obama’s pressure was not enough. Merkel offered that if Italy agreed to be disciplined by the IMF, she could go back to the Bundestag to get authorization to approve an increase in the eurozone rescue fund. But she could not agree to the leveraged SDR fix. Even if all nineteen other members of the G20 backed by every financial authority in the world insisted that this was the best way forward, if the Bundesbank was against it, Merkel would rather let markets rip.
At the time, the G20 did no more than record the negative result of the meeting. A discreet veil was drawn over the details of the discussions. No one doubted where the obstacle lay. It was only several years later that investigative reporting established how close Merkel had come to a physical collapse under the pressure exerted on her by Obama and Sarkozy. On the verge of tears she blurted out, “That is not fair. I cannot decide in lieu of the Bundesbank: Ich will mich nicht selbst umbringen [I do not want to kill myself]. I am not going to take such a big risk without getting anything from Italy.”55 Behind closed doors there was no more talk of globalization, democracy and markets, the abstractions that Merkel had bandied about with the pope. What defined the parameters of an acceptable solution to the eurozone crisis was the constitution of the Federal Republic, the autonomy of its central bank and the political interests of the German center-right. If the Americans found this frustrating, Merkel expostulated, they had no one to blame but themselves. It was they who had created the embryo of the Bundesbank in 1948 as the founding institution of West Germany. At Cannes in November 2011, it was as if the entire transatlantic settlement since World War II were being put in play.
Merkel was not playacting. She knew how narrow her coalition’s majority was. If she had returned to Berlin with the Franco-American proposal, she might well have faced a major mutiny on the Right and the need for early elections. Given the opinion polls at the time, that was not an attractive option for Merkel. With support for her FDP coalition partners collapsing, a German election at the end of 2011 might well have yielded a majority for Red-Green.56 That was not the outcome to the eurozone crisis that Sarkozy wanted. Given the pressure that France was coming under, Paris was in no mood to take risks. The French and Americans backed off.
The showdown in Cannes in November 2011 was an indication of how serious the stresses on Europe had become. But it left the eurozone stuck on the German roadblock and divided over its future direction. At the ECB, which the hard-line Bundesbankers had abandoned in protest, the German seat was taken by Jörg Asmussen, a market-orientated but pragmatic civil servant with social democratic leanings, very much in the Rubin-Summers-Orszag mode, one of the architects of German financial globalization under Germany’s Red-Green coalition in the early 2000s. Having witnessed the workings of the ECB and the G20 up close, he commented on the cruel dilemma he faced: “Either you do what is right for Europe and they crucify you in Germany or you are the hero of the FAZ [the conservative Frankfurter Allgemeine Zeitung newspaper] and you ruin Europe.”57
The tension could be felt even inside such a major financial actor as Deutsche Bank. Among the financial blogging community a PowerPoint deck was circulating that showed Deutsche’s Anglophone and London-based research department worrying that the eurozone had reached a dangerous tipping point, from which only urgent action by the ECB could save it. Without such intervention, Europe might face a doom loop of public and private insolvency and illiquidity.58 As in Greece, bad sovereign debts would pull down the banks. Or as in Ireland, failed banks would pull down the state’s credit. Only the ECB could break this loop. It was the “missing ingredient” in all European crisis management efforts to date. Meanwhile, from Deutsche Bank’s head office in Frankfurt, Der Spiegel quoted CEO Josef Ackermann toeing the Bundesbank line.59 “If we start developing the ECB into a bank that performs completely different tasks beyond maintaining price stability,” Deutsche’s boss opined, “we will lose people’s confidence.” He was at odds with his own analysts and those of every other major bank in the Anglosphere, but in Germany it was Ackermann’s line that was the mainstream. The chief economist of insurance giant Allianz advised “strongly against unlimited purchases of government bonds.” If a country was unable to sort out its finances, he said, “we should let the markets speak.” The chief economist of Commerzbank, Jörg Krämer, warned that if “the virus of mistrust spreads to the ECB, it will have serious consequences.” ECB bond purchases permanently transferred wealth from Northern to Southern Europe, “without democratic legitimization and without the debt problems being solved.” Meanwhile, even Germany was no longer immune to the virus of insecurity. On November 23, 2011, the Bund suffered a bond auction that was described by market watchers as a “complete and utter disaster,” with only 3.644 billion out of 6 billion euros’ worth of German ten-year bonds finding buyers.60
Some direction was clearly needed in the eurozone. And it could only come from Berlin. The point was made with historic force by Poland’s foreign minister, Radek Sikorski, an Oxford-educated former journalist. Speaking on November 28, 2011, choosing as his platform the German Council on Foreign Relations in Berlin, Sikorski demanded “that Germany—read Merkel—step up and lead. If she did so, Poland would be at her side.”61 In his view the greatest threat to the security and prosperity of Poland today was “not terrorism, it’s not the Taliban, and it’s certainly not German tanks. It’s not even Russian missiles,” which Moscow had just threatened to deploy along the EU’s eastern border. In Sikorski’s view the most ominous scenario was a collapse of the eurozone, which would no doubt take the weaker states on the eurozone’s periphery with it. And Sikorski went on: “I demand of Germany that, for your own sake and for ours, you help it survive and prosper. You know full well that nobody else can do it. I will probably be the first Polish foreign minister in history to say so, but here it is: I fear German power less than I am beginning to fear German inactivity. You have become Europe’s indispensable nation. You may not fail to lead.”
A month on from Cannes, in the first week of December 2011, two visions of Europe’s future were circulating in Brussels.62 What Merkel and Sarkozy subscribed to was an updated version of the agenda first agreed at Deauville in 2010: fiscal discipline written into domestic law and international agreements. For France it offered the safety of association with Germany. Merkel, for her part, needed Sarkozy to counter allegations of German unilateralism. But in light of the widening and escalation of the crisis in 2011 it could not but appear a minimal and essentially negative agenda. In their joint letter to the European Council in early December, Merkel and Sarkozy made no commitments on bank recapitalization and no mention of the simmering crisis in the sovereign bond market. On the most optimistic reading, the Merkel-Sarkozy fiscal compact was the essential political precondition for Germany to take further steps. But in Brussels the push was now on to actually take those steps. On December 7 Van Rompuy, the president of the European Council, published his “interim report.” Though the European Council was supposed to be the guardian of the minimal intergovernmental vision of the Lisbon Treaty, under the pressure of the crisis Van Rompuy was now calling for bold moves. He proposed a major increase in the financial firepower of the EFSF/ESM. It should be available, in extreme cases, to recapitalize Europe’s ailing banks, thus breaking the doom loop. And to back it up, in a “longer term perspective,” Van Rompuy called for the EU to face the need for debt mutualization. Limited by strict criteria and all necessary European oversight, there should be some pooling of European credit, shielding the weaker members behind the creditworthiness of the stronger borrowers, thus eliminating the element of market panic that was making the situation of Italy untenable. Some version of these steps was what the entire G20 was calling for. It was what progressive voices in Europe were advocating. Indeed, the idea of eurobonds was attracting the cautious backing of the German opposition, the SPD. But for Merkel, and in particular for her coalition partners, the FDP, they were anathema. And to add further to German indignation, whereas Sarkozy and Merkel’s fiscal compact was to be instituted by solemn amendment of EU treaties, Van Rompuy proposed that his more far-reaching measures could be put through by so-called secondary legislation and limited agreement among the eurozone members. For Berlin it was clear. Brussels was up to its usual “tricks.”
At this critical juncture another force came into play to compound the impasse. Aside from Poland, the other major EU member not in the eurozone was the UK. London had watched the eurozone crisis unfold with a mixture of Schadenfreude and frustration.63 On every possible occasion Prime Minister Cameron lectured the eurozone members on the need for deeper integration, while at the same time exempting London from any commitments. For the good of Europe, Britain and the wider world economy, London demanded that the eurozone move toward full economic union. Meanwhile, for Cameron, struggling to contain an upsurge of Euroscepticism in the Tory party, Europe’s crisis was an opportunity to haggle. By exploiting the divisions within the eurozone, Cameron thought he could obtain explicit opt-outs for the City of London, especially from demands for a tax on financial transactions. But any such concessions were violently opposed by Sarkozy, and Merkel needed France far more than she needed the UK. When he realized that he was isolated, Cameron announced that he would not only veto a collective deal among the twenty-seven EU members.64 He would exercise his right to block any steps toward deeper integration by the eurozone members within the framework of the EU.
For Britain’s relationship to the EU it was a parting of the ways. It was clear that at least as far as Britain’s conservatives were concerned, a decision would soon be necessary on whether they could continue as cooperative members of the union. For the eurozone what emerged from the clashes of early December 2011 was the lowest common denominator of both options on offer. Germany got its fiscal compact, although it was cast not in the form of the treaty change that Merkel had wanted but in the minimal legal form of an intergovernmental agreement outside the framework of the Lisbon Treaty.65 The terms of the fiscal compact were draconian. In the future, Europe’s budgets were to be balanced or in surplus. By constitutional amendment or its equivalent, deficits were to be restricted to 0.5 percent of GDP. The European Court of Justice was to oversee the transposition of these rules at a national level. States that had a deficit in excess of 3 percent of GDP would be subject to automatic sanctions unless a qualified majority of states were opposed. Countries with debt levels in excess of 60 percent of GDP were required to embark on debt reduction. It was the German debt brake vision transposed to the European level. On the broader issue of completing the eurozone’s architecture, Merkel conceded nothing. There would be no shared liability for European borrowing, no eurobonds, no bank recapitalization and no increase in the size of the EFSF/ESM. The only concession from Berlin was that as of July 2012 the improvised EFSF would be replaced by a permanent European Stability Mechanism with the power to intervene in secondary bond markets and the adequacy of the EU’s firewall would be reassessed as soon as March 2012. Berlin also agreed to lay the ghosts of Deauville to rest by limiting any future PSI to standards set by the IMF. Despite the intensity of the Italian crisis and the drama at Cannes, it was still Germany that set the pace.
With intergovernmentalism resulting in such minimal and essentially negative solutions, would the one powerful federal agency of the eurozone, the ECB, rise to the challenge? All eyes were on Mario Draghi, who had taken over as president of the ECB on November 1, 2011. At the Treasury in Rome in the 1990s, he had been a crucial member of the team that carried Italy into the euro. Since 2006 he had been in the spotlight as governor of the Bank of Italy. Before that he had served as a vice chairman at Goldman Sachs, following a stint at the World Bank. He had earned his Ph.D. in economics in the cradle of American macroeconomics, MIT, in the 1970s at the same time as Ben Bernanke and Lucas Papademos, who was now serving as Greek prime minister. At MIT, Mervyn King of the Bank of England and Bernanke had been office mates. Between them the central banking fraternity at least had an immediate answer to the problems facing Europe’s financial system. The banks were under enormous pressure from the withdrawal of wholesale funding, and the shortage of dollar funding was particularly acute. It was horribly reminiscent of 2008. To relieve the funding pressures caused by the withdrawal of the American money market funds, the Bank of France, among others, had resorted to emergency measures to make dollars available to French banks.66 Now, on November 30, all the major central banks of the world—the Fed, the ECB, the Bank of England, the Bank of Japan, the Swiss National Bank and the Bank of Canada—reopened the swap lines put in place in 2008 and reduced the interest rate paid. The global reach of the deal was “theatre”; Japanese and Canadian banks were not under any pressure. It was, once more, the eurozone that needed the dollars.67
In the summer of 2012 Mario Draghi would emerge as the “savior of the euro.” As such he would be demonized as an Italian inflationist by the German right wing and celebrated by the Anglophone world as a competent central banker. But what this narrative ignores is that Draghi’s ability to change the conversation in the summer of 2012 had one essential precondition: backing from Berlin. Commonly the strength of Draghi’s relationship with Merkel is put down to Draghi’s finesses as a politician.68 But this passes over the fact that though German hard-liners opposed all activism by Europe’s central bank, for Merkel the ECB had been a useful tool from the start. She had done it quietly, but on several occasions she had effectively distanced herself from the Bundesbank, recognizing that ECB intervention was the necessary complement to the decade-long process of transferring Germany’s vision of “reform” to the rest of Europe. Despite the howls of protest from the German right wing, Merkel knew she could count on Europe’s central bankers. She had nothing to fear from a fiscal and monetary conservative like Trichet. Draghi was suitable as a partner precisely because he showed every sign of agreeing with Germany’s vision of how to revise the European welfare state.69 Indeed, that was as much part of Draghi’s identity as an American-trained economist and Goldman Sachs alumnus, as was his expansive view of central bank policy.
As Draghi reminded the readers of the Financial Times shortly after taking over at the ECB, he was a veteran of Italy’s tough stabilization efforts of the 1990s.70 In August 2011 Draghi cosigned Trichet’s ultimatum to Berlusconi demanding changes to Italy’s public services and labor markets. Draghi shared with his predecessor both the frustration over Rome’s evasiveness and the foot dragging of the rest of Europe’s governments. On December 1, 2011, Draghi marked the beginning of his ECB presidency by appearing before the European Parliament to throw his weight behind the Merkel-Sarkozy plan for fiscal discipline.71 And his sympathy with German demands for “reform” was unfeigned. As Draghi told the Wall Street Journal in February 2012, Europe’s social model that prioritized job security and social welfare was “already gone.” What, after all, did talk of a social model mean when 50 percent of Spanish youth were unemployed?72 Europe’s labor markets would have to be reinvented, presumably along the lines of Germany’s Hartz IV agenda. In his grad student days at MIT in the 1970s, Draghi recalled, his American professors had marveled at Europe’s willingness to “pay everybody for not working. That’s gone.” For the new head of the ECB there was “no feasible trade-off” between labor market reform and fiscal austerity. “Backtracking on fiscal targets would elicit an immediate reaction by the market,” and Draghi made clear that he had no intention of softening that discipline. In December 2011 in conversation with the Financial Times, he refused to discuss putting the ECB behind the EFSF as the ultimate guarantor of the EU’s firewall. Nor would he countenance talk of QE for Europe. He started his term in office by insisting that Trichet’s bond-buying program, the securities market program, was neither “eternal nor infinite.”73 Indeed, given Draghi’s subsequent reputation, it bears repeating that as of 2012, his first year in office, bond buying by the ECB ceased. His priority was to restore a “system where the citizens will go back to trusting each other and where governments are trusted on fiscal discipline and structural reforms.”
What Draghi was willing to do immediately was to prop up the banks.74 The swap lines were one mechanism. Another was to revive the ECB’s familiar device of cheap bank funding. With credit markets spooked, in 2009 and 2010 Europe’s banks had been forced to resort to increasingly short-term funding sources, which now needed to be rolled over. If they could not find new funding the eurozone was threatened by a major credit crunch.75 Already in October 2011 the ECB had announced that it would be offering liquidity to the European banking system in the form of the long-term refinancing operation (LTRO)—long-term loans at highly favorable interest rates.76 Draghi opened the spigot, offering financing at favorable rates over the unprecedentedly long term of three years and taking much lower grades of collateral.77 On December 21, 2011, 523 banks took 489 billion euros in funding. In February there were 800 takers for another 500 billion. Of the first tranche of the LTRO, 65 percent went to banks in the stressed periphery—Italy, Spain, Ireland and Greece.
Though Draghi hastened to explain that this was “obviously not at all an equivalent to the ECB stepping-up bond buying,” in due course the trillion euros in LTRO loans would feed back into bank purchases of sovereign debt.78 This raised demand in bond markets and lowered yields. It supported the sovereign debt market. It allowed banks to earn easy profits on the spread between the 1 percent charged by the ECB and the 5 percent on offer for those willing to hold Italian government bonds.79 But as in 2009, it came at a price. Rather than allowing Europe’s fragile banks to unload dubious assets in exchange for safe cash, as QE did in the United States, the ECB’s program added to their holdings of peripheral government debt.80 Spanish and Italian banks were particularly proactive. Banks and sovereigns were thus tied ever more closely together. And neither side was safe. On January 14 S&P conducted a review of its European sovereign ratings and downgraded seven of them. France and Austria lost their prized AAA rating. Portugal was reduced to “junk.” Within the eurozone only Germany, the Netherlands, Finland and Luxembourg retained their coveted AAA rating. Even the eurozone’s own bailout fund, the EFSF/ESM, was at risk of a downgrade. The Europeans protested, as had Washington following its downgrade by S&P, but this time the ratings agency was firm in its judgment. Months of negotiations had “not produced a breakthrough of sufficient size” to warrant optimism about the eurozone’s future.81 Despite the Sturm und Drang of the fall of 2011, the political impasse had not been broken. Control of the timeline was everything, and Berlin set the pace. At the G20, outside the Cannes Palais des Festivals on November 5, Merkel had opined: “The debt crisis will not be solved all in one go, [and] it is certain that it will take us a decade to get back to a better position.”82 That was revealing as to Germany’s time horizon, but the question was, did the rest of Europe have that long?