When the anti-austerity party Syriza came to power in Greece in January 2015, Cornel Ban and I wrote in a Foreign Affairs article that, at some point, Europe was bound to face an Alexis Tsipras, the party’s leader and Greek prime minister, “because there’s only so long you can ask people to vote for impoverishment today based on promises of a better tomorrow that never arrives.” Despite attempts by the eurogroup, the European Central Bank, and the International Monetary Fund since February 2015 to harangue Greece into ever more austerity, the Greeks voted by an even bigger margin than they voted for Syriza to say “no” once more. So the score is now democracy 2, austerity 0. But now what? To answer that question, we need to be clear about what this crisis is and what it is not. Surprisingly, despite endless lazy moralizing commentary to the contrary, Greece has very little to do with the crisis that bears its name. To see why, it is best to follow the money—and those who bank it.
The roots of the crisis lie far away from Greece; they lie in the architecture of European banking. When the euro came into existence in 1999, not only did the Greeks get to borrow like the Germans, everyone’s banks got to borrow and lend in what was effectively a cheap foreign currency. And with super-low rates, countries clamoring to get into the euro, and a continent-wide credit boom underway, it made sense for national banks to expand private lending as far as the euro could reach.
So European banks’ asset footprints (loans and other assets) expanded massively throughout the first decade of the euro, especially into the European periphery. Indeed, according the Bank of International Settlements, by 2010 when the crisis hit, French banks held the equivalent of nearly 465 billion euros in so-called impaired periphery assets, while German banks had 493 billion which they had done. In such an over-levered world, if Greece defaulted, those banks would need to sell other similar sovereign assets to cover the losses. But all those sell contracts hitting the market at once would trigger a bank run throughout the bond markets of the eurozone that could wipe out core European banks.
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