The global financial crisis of 2008 devastated many countries around the world and demonstrated the fragility of our economic system. However, French and German banks faced a particularly desperate situation. They have been lending trillions of euros to countries that could not sustain their debt, and out of this structure of faulty finances, Greece was the weakest pillar, threatening to send the whole institution of risky banking crashing down.
When Greece joined the Euro in 2001, it went on a huge spending spree, buying new roads, airports, infrastructure, and military manufactured by German companies which have also been accused of bribing Greek politicians to secure military and civilian government contracts.
This out of control deficit spending was irresponsibly fueled by French and German banks which kept lending to Greece up until 2007, when the United States housing market crashed, causing a worldwide credit crunch. France’s top three banks alone had loaned a staggering €627 billion euros to Italy, Spain, and Portugal and over €100 billion to Greece by 2008. If France’s banks lost just 3% of these loans to defaults, banking regulators would be forced to shut the banks down, causing further financial chaos. Simply put, French and German banks were now bankrupt, and could no longer lend to poorer eurozone countries that were now at serious risk of defaulting on their loans.
Former prime minister of the United Kingdom, Margaret Thatcher, once famously opined that socialism never worked because eventually you run out of other people’s money, who would have known that same phrase would best describe the deregulated, neoliberal capitalism she so admired.
As expected, French and German banks desperately needed government assistance in order to survive. However, unlike the United States, which has a central bank largely independent from foreign and legislative bodies, central banks in most EU countries are severely limited by the European Central Bank (ECB) in how much money they can print and many other monetary actions. In joining the eurozone, a country signs away almost all of its monetary independence. This meant that the French and German banks could not shift their massive losses onto their governments’ central banks, but needed enormous taxpayer-funded bailouts in order to survive.
As a result, Germany bailed out its banks with a rescue package worth over €400 billion ($679 billion), only to find out later that that amount would only cover their toxic US-based assets. German banks immediately requested another €500 billion just to keep their ATM’s open.
However, asking for another enormous bailout would be political suicide for German chancellor Angela Merkel, who before the crisis based her entire political career on the importance of running a budget surplus and penny-pinching on essential government services such as schools, hospitals, and infrastructure. Walking into the German parliament and requesting another €500 billion to bail out a few idiotic banks that were swimming in cash just months ago would have discredited her appearance as a strong, fiscally responsible politician.
To avoid this political disaster, Germany used its leverage within the EU and organized a bank bailout staged as an act of solidarity with the “lazy, tax-evading Greeks”. The plan was simple: Taxpayer money from EU countries and the IMF would be used to loan a bankrupt Greece over €216 billion by 2012, then, all of that money would be directly funneled back to the French and German banks that could not afford for Greece to default on its loans. A 2016 study by the European School of Management and Technology found that only €9.7 billion of the €216 billion in loans went to the Greek treasury to reboot its economy, while the rest was mostly spent on debt and interest payments to the same French and German banks that caused the crisis.
The most controversial aspect of these loans were the destructive austerity measures that came attached to them, which effectively turned Greece into a libertarian’s dream. The minimum wage was cut by 40%, state assets such as airports, marinas, and islands were quickly privatized to toxic speculators for ridiculously low prices, hundreds of thousands of jobs were cut from the public sector, and of course, dramatic cuts were made to public spending in health and education. The only non-libertarian aspect of the forced austerity measures were the explosive increases in VAT taxes, only further demonstrating the complete disregard for the future of Greece’s economy and its people.
No developed country would be foolish enough to increase its taxes and introduce government spending cuts during a recession because when you do, you get what Greece got: Unemployment at 27% by 2013 (worse than the Great Depression), sharp GDP declines, a lack of any serious private investment, and most importantly, a humanitarian crisis with tens of millions of people struggling to afford their rent and feed their families. But, as legendary civil rights leader Martin Luther King Jr. once famously declared: Out of this mountain of despair, was a stone of hope.
It is rare to find any heroes during a crippling financial crisis, but Greece’s democratically elected finance minister, Yanis Varoufakis, was nothing short of one.
In his book, Adults in the Room, Varoufakis describes his personal experience with trying to negotiate a fair deal for Greece with the powerful European financial institutions and the IMF while also describing his fluctuating relationship with the popular, left-wing Syriza government that was in power in Greece at the time.
It is painfully obvious that Varoufakis’ proposals for debt restructuring and expansionary economic policy were moderate and gave in to many EU demands. Even former Security of the United States Treasury Lawrence Summers and billionaire George Soros, who are not particularly known for being radical leftists, acknowledged the austerity measures being undemocratically imposed upon Greece as disastrous to its economy and people.
To make a long, disappointing story short, Varoufakis’ efforts to secure a mutually beneficial agreement between Europe and Greece were effectively destroyed by Europe’s political and financial institutions that went behind his back to negotiate with the Syriza government that promised to stand with him just months before. The breaking point was on July 5, 2015, when the Greek government held a referendum on whether they should accept the bailout conditions proposed by Europe’s financial institutions and the IMF. As a result of the referendum, the bailout conditions were rejected by an overwhelming majority of 61%, reigniting hope of a just deal for Greece.
However, the Syriza government had already decided to give in to the austerity measures and shamelessly ignored the referendum result, essentially weakening democracy in the very country in which it was born. Within just two days after the referendum vote, Varoufakis announced his resignation after serving just five months as Greece’s finance minister, refusing to sign on to the new austerity measures that are still crippling Greece to this day.
Maybe there is some truth in the saying that you either die a hero or live long enough to see yourself become the villain.