The Alchemists: Three Central Bankers and a World on Fire (49 page)

The thing is, though, it didn’t matter. Thanks to the work of the Super Mario Brothers, the winter and spring were a period of optimism. Yes, the longer-range question of European financial integration was unsettled, but the ECB’s wall of money had stabilized the banking system. And Mario Monti was carrying out fiscal reforms in Italy that had been mere empty promises for Berlusconi. The country’s ten-year borrowing cost, 6.57 percent on November 25, 2011, was down to 4.19 percent on March 9, 2012. Meanwhile, Ireland and Portugal continued enacting their bailout agreements, painful though they were, with a remarkable degree of political cohesiveness. And Spain, under its new center-right government, went through its own series of painful reforms. Once more, Greece was the outlier.

Papademos was an accomplished economist and central banker, with a doctorate from MIT and the wisdom accumulated over three decades of working in the highest reaches of European policymaking and as a professor at Columbia. He was not, however, a politician. He spoke quietly and without obvious charisma, and he viewed the challenges his country faced mainly as complicated technical problems. Typically for a central banker, Papademos made decisions with cold analysis rather than a politician’s instinctive sense for public opinion. His job, though, was one that would challenge even the most skilled of politicians: He had to assemble a cabinet on the fly in December 2011, taking care to bring together leaders from both of the parties that had formed the coalition, then lead a group of ministers who were normally at each other’s throats.

That made the January and February 2012 negotiations over a “second memorandum”—a revised set of conditions for Greece to fulfill in order to receive its bailout money—particularly onerous. That Papademos had personal credibility didn’t suddenly make the Greek political system more accepting of troika-ordered pay cuts and privatization. Neither did it make the European Commission and the ECB more flexible in their demands. And with Dominique Strauss-Kahn out of the picture, the IMF was less inclined to move slowly on tightening fiscal policy. Papademos and his team first had to negotiate with the troika over what unpleasant wage cuts and unpopular privatization measures would take place, then turn around and bargain with the two coalition parties to get them both on board. The talks often went until four or five in the morning.

The eventual result was two documents totaling eighty-two pages and spelling out the newest round of Greek concessions. The government got its bailout deal and would be able to meet its financial obligations come March. But it had to pay a terrible political price.

Some eighty thousand people took to the streets of Athens on February 13, protesting the wage and pension cuts the nation’s parliament had just agreed to. There were 150 stores looted, 45 buildings burned, and 104 police officers injured. “
It felt like war
,” a doorman named Dimitris Arvanitis told the
New York Times
. “I could not believe I was in Athens. I have never seen this in my almost 60 years of life, and I have been working here all my life.”
One Greek newspaper
,
Dimokratia,
published on its front page a photo of Angela Merkel manipulated so she appeared to be dressed like Nazi official, swastika and all.

It was the beginning of the end for the unity government, then just three months old. The right-leaning New Democracy party saw its opening and demanded new elections—after all, the left-leaning Panhellenic Socialist Movement, or PASOK, was widely loathed, blamed for an unemployment rate that was at 21.7 percent and climbing as well as the various austerity measures the Greek populace had already endured. It was a startlingly shortsighted decision. With more economic pain to come, it would have made more sense to allow Papademos—who had no political ambitions of his own—to remain in power and endure popular discontent, and then call for elections once the worst was over.

But Papademos wasn’t the only Greek official who had trouble with political calculus. Antonis Samaras and New Democracy were too eager to be back in power. Elections there would be.

•   •   •

T
he success of the ECB’s wall of money didn’t mean that all was well. Huge chunks of the continent were in recession that spring, and even those that continued to grow did so at a glacial pace. Italy’s economy contracted at an annual rate of 3 percent in the first half of 2012, Spain’s by about 1.5 percent. France’s economic growth flatlined. Of the large countries, only Germany’s economy was growing, and at a tepid 1.5 percent annual rate. There was unemployment on a mass scale—in April 2012, 10.1 percent in France, 10.5 percent in Italy, 14.9 percent in Ireland, and a shocking 24.4 percent in Spain. In countries with stronger economies—Germany, the Netherlands—the rate was a bit above 5 percent, and even lower in Austria.

It was a bifurcated continent, with those living in a handful of nations experiencing either mild economic growth or mild recession while millions of their neighbors were in dire straits. And the ECB could set only one interest rate policy for all of them, which meant that the great fear of the Euroskeptics of the 1990s had come to pass.

What was increasingly clear that spring was that even against the backdrop of more stable financial markets, the status quo couldn’t endure. With the GIPSI countries going through with their agreed-upon austerity, their economies were shrinking without the benefit of a countervailing force such as dramatic ECB rate cuts. Across the continent, the conversation started to shift from austerity to growth. How might countries like Italy and Spain find their way back to a path of expansion that would make their fiscal problems all the more manageable?

Draghi in particular emerged as a voice urging governments to focus not merely on reforms that would save money in the present, but also those that would strengthen economic growth in the future. Governments, he told the European Parliament on April 25, “
must undertake determined policy actions
to address major weaknesses in the fiscal, financial and structural domains,” adding that steps already under way “need to be complemented by growth-enhancing structural reforms to facilitate entrepreneurial activities, the start-up of new firms and job creation. Here, governments should be more ambitious.”

Translation: Given that we at the ECB (1) can’t tailor our monetary policy for the various countries of Europe individually and (2) aren’t willing to accept the high inflation in stronger European countries that might help the GIPSI nations get out from under their heavy debt loads, it’s on you elected officials to find policies that will get European growth going. It was quite a shift in tone from the ECB, which under Trichet had emphasized the urgency of governments cutting their deficits above all else.

But nowhere was the shift in emphasis from austerity to growth more dramatic than in France. Its presidential election, held in two rounds on April 22 and May 6, pitted Sarkozy against François Hollande, who had emerged as the Socialist Party standard-bearer after Strauss-Kahn’s arrest in New York. Sarkozy had spent the previous three years attached at the hip to Merkel—“Merkozy,” the headline writers enjoyed calling them—and their partnership had significantly shaped Europe’s response to the crisis.

Within that partnership, the French president frequently argued for greater European unity and more generous accommodation of the countries in need of help. But Sarkozy often seemed more committed to maintaining good relations with Merkel than to any specific policy. And he could give the impression of being more attuned to coming up with a splashy announcement than coming up with the right answer.

Offering more than just the appearance of activism, Hollande campaigned on a promise to raise taxes on the wealthy to cut budget deficits while maintaining social welfare benefits. In the end, he won, and then he began swiftly to deliver. Significantly for Europe as a whole, he was skeptical of Germany’s all-austerity-all-the-time model for how Europe ought to fix itself. Combined with the emergence of Monti in Italy, his election left Merkel an isolated advocate of an approach that had, to that point, been failing.

It also marked a near-complete ejection of the national leaders who’d fought the earlier stages of the global crisis, with only Merkel still in place. In some countries (Britain, Spain, Portugal) voters ousted parties on the left in favor of those on the right, in others (France and arguably the United States in 2008) on the right in favor of those on the left. It was a matter of who was in power. It’s no coincidence that Merkel not only survived politically, but also received high approval ratings in mid-2012: Germany’s economy had been performing better than that of any other large Western nation. Voters elsewhere didn’t know exactly what they wanted in their elected leaders—they just knew they wanted something different from what they’d had.

In this volatile political climate, voters in Greece seemed to want something very different. On May 6, the same day Hollande prevailed over Sarkozy, Greeks went to the polls to choose the parliament that would replace Papademos’s coalition government. The results stunned the world—or at least that portion of the world that hadn’t tracked the growing discontent on the streets of the Hellenic Republic.

According to Greek opinion polls, voters overwhelmingly objected to the agreement with the troika to which their government had agreed. But they also by wide margins wanted to keep the euro. These were, practically speaking, irreconcilable views. If the nation rejected the bailout deal, it would rapidly run out of money to pay its bills—not just what it owed international creditors, but also salaries for government employees and payments to hospitals, the military, and so on. Unlike a nation with its own currency, Greece couldn’t simply print money to fund those obligations, inflationary consequences be damned. The decision to reject the troika’s demands would almost certainly have to be accompanied by a decision to convert to a new drachma or other uniquely Greek currency.

The new currency would surely plummet in value against the euro, in expectation of high inflation. That would crush the savings of any Greeks who hadn’t already moved their euros to a Swiss or German bank or stashed them in cash somewhere in their homes. It would also make all Greeks’ paychecks lower in real terms, accomplishing in one fell swoop the reduction in wages that the ECB had so eagerly sought. And it would make Greek exports and tourism much more competitive, potentially laying the groundwork for a return to growth. Suddenly, the vacationer trying to decide whether to spend his or her holiday in Greece or Italy would see the former as a bargain.

The invented word for a Greek exit from the eurozone, “Grexit,” became commonplace not just in newspaper headlines but also among high government officials discussing what to do next. The possibility of Greece leaving the eurozone had in just two years gone from something so unthinkable that European leaders were dismissive of any commentators who dared mention it to something openly discussed.

Syriza, an alliance of communist and other far-left parties, won 17 percent of the vote in the May 6 Greek election. It had won 5 percent in the previous race. Golden Dawn, the country’s neo-Nazi party, went from 0.3 percent of the vote in the previous election to 7 percent. A large proportion of the Greek electorate had looked at the economic despair that the parties of the center had brought it and rejected them for the extremes. New Democracy didn’t win enough seats for a majority, even in a coalition formed with PASOK. After days of fruitless negotiations with smaller parties, no coalition came together and new elections were scheduled. In the next round on June 17, New Democracy and PASOK had just barely enough votes combined to form a new and fragile coalition. The center had held, but by a thread.

•   •   •

I
n July 2012, Draghi used an unusual metaphor to describe the work that lay ahead in fixing the eurozone’s deep structural problems. “
The euro is like a bumblebee
,” he said. “This is a mystery of nature because it shouldn’t fly but instead it does. So the euro was a bumblebee that flew very well for several years. And now—and I think people ask ‘how come?’—probably there was something in the atmosphere, in the air, that made the bumblebee fly. Now something must have changed in the air, and we know what after the financial crisis. The bumblebee would have to graduate to a real bee. And that’s what it’s doing.”

In that same speech, Draghi pledged that “the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” But could the bank accomplish this so far impossible task before the economic schisms of the summer of 2012 transformed into the bloody political schisms of the old Europe? Six decades of European integration had been all about ridding the continent of political extremism and intolerance, the forces that had led to the twentieth century’s great upheavals. That had been the ultimate ideal of postwar Europe, the animating force behind the European Union and the euro, the “life compass” of Jean-Claude Trichet, the crowning achievement of a generation of prime ministers and presidents.

One Monday evening in late May 2012, on the rooftop terrace of the Grand Bretagne hotel in Athens, tourists speaking a variety of languages—German, Finnish, English—laughed, photographed themselves with the Parthenon lit in the distance, and enjoyed €14 gin and tonics. Drumbeats sounded in the distance, and almost simultaneously police in white helmets and riot gear streamed out of the parliament building, forming a series of defensive lines. A crowd of perhaps five hundred made its way around Syntagma Square, several people waving giant Greek flags, others waving lit flares and ominously evoking villagers charging a castle.

They were from Golden Dawn, the neo-Nazi party, the bartender explained, as the demonstrators shouted a series of chants in Greek and then went on their way. “They come through every few nights.” The night had offered two contrasting Europes: one lively, cosmopolitan, and content, the other austere, insular, and full of fury.

The work of central bankers often seems a dry and technical affair. But Draghi’s job was really about something bigger than bond markets and bailouts. His task, five years after the crisis first began, was to try to rid the Aegean twilight of angry extremists. It was to bring back a world of economic possibility that would again suppress the ugliest instincts that lurk in the hearts of men.