America and the World: Part III. The Crash of 2008 and Eurotragedy.

The two books under review analyze the financial crash of 2008 from different perspectives. Adam Tooze, the historian and director of the Columbia University European Institute in New York, authors Crashed: How a Decade of Financial Crises Changed The World, Allen Lane, 2018, which he calls the first crisis of the global age. The Iraq invasion of 2003, followed by the Lehmann crash of September 2008, and then by Donald Trump’s election to the US Presidency in 2016 are all signs of fading US dominance, he asserts. Ashoka Mody, former deputy director in the IMF’s Research and European departments and currently visiting Professor in International Economic Policy at Princeton, presents Eurotragedy: A Drama in Nine Acts, Oxford University Press, 2018, and sets the scene in his statement that  “true European values can flourish only when the bonds that tie Europe so tightly today are loosened”(p.22).

I shall start by presenting the structures, content and observations which I take to be central in both books, one after another, and follow up with my own comments.


What drives global trade are not relations between national economies, Tooze writes following in the footsteps of the late Susan Strange,[1]but multinational corporations co-ordinating value chains. This is not to say that the only thing that matters is market process, with national politics and geopolitics as ephemera: the foundations of the modern monetary system, he writes, are irredeemably political. “At the apex of the modern monetary system is fiat money. Called into existence and sanctioned by states, it has no “backing” other than its status as legal tender. That uncanny fact became literally true for the first time in 1971-73 with the collapse of the Bretton Woods system”. The historic moment when the new system entered into effect was President Nixon’s decision of August 15, 1971 to abandon the official convertibility of the dollar into gold.

The result is to have handed credit creation to two entities: the tight-knit corporate oligarchy of Systematically Important Financial Institutions (SIFI)-numbering 20-30 global banks,perhaps up to 100 banks,  and to central banks, notably to the US Federal Reserve. The Fed’s global liquidity support, in the wake of the Lehmann crash, “handed trillions of dollars in loans to the banks, their shareholders and their outrageously remunerated senior staff”. The Europeans foolishly thought that the crash was “Anglo-Saxon”, but in fact their over-leveraged banks were highly dependent on the US-centered system. Hence the spillover from 2008 to the European financial crisis of 2010, and the linkages via EU politics, to Europe’s stagnation, its slide down the global corporate rankings, mass unemployment, the rise of “populist” movements, and the sense in the rest of the world that the Eurozone crisis was dangerous, and that the Europeans were too incompetent to deal with it.

What went wrong?

Tooze’ approach is to dig into the workings of the global financial machine. Part I , The Gathering Storm, holds five chapters, the heart of which is Tooze’s citing of a BIS study, showing clearly that financial globalization revolves around Europe.[2] In 2007, European bank claims on the US were the largest link in the system, followed by Asian and American claims on Europe. The European financial system, he writes, came to function as a giant hedge fund, borrowing short and lending long.[3]The home of this activity was London, which in 2007 hosted 250 foreign banks and bank branches, twice the number in New York. The flow of funds in Europe, the author argues, was driven by bankers looking for the best returns, pushing down local rates, and stimulating local housing booms, inflation and trade patterns.  In this first part of the book,  individual governments, notably Berlin and Paris, take a backseat to the main narrative of financial market primacy.

Part II is entitled the global crisis, and holds 8 chapters, the first of which is called “The worst financial crisis in history”. In this section, the responses and initiatives of national governments-particularly in the UK, US, Germany and China-come to the fore. Only the US emerged as the one nation-state with the capacity to backstop its huge financial sector, and impose a comprehensive solution. The US administration furthermore successfully re-capitalised its banks. Europe’s response was conditioned by Germany: Chancellor Merkel rejected any idea of collective action to bailout banks, or governments in the Eurozone or in eastern Europe, and went a whole step further in backing a constitutional amendment to impose a debt break on government, central and regional. By contrast, China responded to the crash by a massive stimulus, as did the US. Europe alone among the major global economies took a pro-cyclical stance and clamped down on demand.

Part III is entitled Eurozone, holding five chapters and tells the familiar story of the EU’s near decade long economic stagnation, and growing political tensions. Besides the leitmotif of Germany saying Nein to bailout and to effective banking union, there are a number of sub-themes.

One is why France backed away from support of the Commission’s proposal for a collective underwriting of risk within the Eurozone: the clear answer is that in the light of Berlin’s intransigeance, Paris agreed to load Greece with an unrepayable liability in order to salvage French-and German- banks that had lent to Greece during the boom years.

Another is the emergence of Merkel’s proclaimed motive that the cause of the crisis was excessive debt, and not-as US Treasury secretary Geithner argued-the mercantilist trade policies of Germany and China. In Merkel’s formulation, Europe, ie the EU,  had 6% of the world’s population; 25% of the world’s gdp; and 50% of the world’s welfare handouts. This, said Merkel, was unsustainable. For Europe to be competitive in world markets, the EU had to become lean and mean. Germany would show the way.

The third is the process whereby the ECB bent its own rules, and launched quantitative easing in 2012 as the means to defuse speculation in global financial markets that was threatening to tear the Eurozone apart. The result, among other things, was to raise serious questions, especially in Germany, about the legitimacy of the ECB’s policies. In the longer term, the ECB’s salvaging of the Eurozone, the author writes, entailed “appalling” costs: the overturning of the democratically elected governments of Italy and Greece; the tutelage of Ireland and Portugal under the IMF; brutal recession in Spain; mass unemployment, especially in southern Europe; business confidence in the cellar; and a rising German trade surplus with the Eurozone and the rest of the world.

Part IV is entitled Aftershocks, composed of seven chapters, including one “the shape of things to come”, an effort to peer through the dark glass of the future. The chapter essentially asks the question whether the crash in the heartlands of the world economy-the Atlantic-will spill into emerging markets. In this section, Tooze analyses the emergence of “populisms”, in the US and in Europe, the cooling of US relations with China, and the EU’s -and NATO’s-flawed handling of relations with Russia. In the US, he writes, “America’s downward slide, the long-running trends towards inequality and oligarchy, the disaster of 2008, the lopsided recovery from it, were all symptoms of the profound corruption brought about by government meddling and its capture by interest groups”. In the slogan of the post-crash Occupy movement, “the system isn’t broken, its rigged”.

Obama’s election in 2008 to the presidency did nothing to reverse the trend. In fact, his rescue of the banks, and counter-cyclical policies further aggravated inequalities. These, Tooze points out, citing a study covering over three decades, have been steadily worsening[4]as the life expectancy of the white working class continues to fall, hostility to Washington DC mounts, the Tea Party flashes across the darkening political skies, confidence in the American Dream fades, and eventually in 2017, Donald Trump gets elected to the Presidency.

Meanwhile, the EU, pulled by Poland’s fears of Russia-he writes-drifts into conflict with Moscow over the Ukraine, further widening the gap in public opinions either side of the Atlantic. A notable change is the trend in German public opinion not to trust the US as an ally.[5]Tooze rightly mentions Moscow’s turn to China as a component of Moscow’s anti-western stance. But Tooze also notes Moscow’s deep reservation at moving too close to the emerging giant of the Asian continent. Although Tooze does not make much of it, he points out that Germany sided with Russia and China over Iraq (2003); Libya(2011) and-confirming Yanis Varoufakis’ account- [6]he writes that the US, China and Russia all declined to help Greece, on the grounds that they would not meddle in Germany’s sphere of interest. With clear leadership from Berlin, he adds, the EU-27 agreed to a “tough bargaining position” over the Brexit melodrama.

Arguably the punchline of Tooze’ indispensable account of the crash of 2008, and of its aftermath, runs: “Financial globalization that Greenspan(the former head of the Fed) and his ilk had worked so hard to institutionalise as a quasi-natural process had been exposed as just that-an institution, an artifact of deliberate political and legal construction with stark consequences for the distribution of wealth and power”. (p.575) The political in political economy, he ends, deserves to be taken seriously.



Mody’s book is very different. It is about the genesis and execution of the Euro.  His introductory chapter, entitled “Europe ends up someplace else”, asks the following questions: Why did the Europeans attempt such a venture that carried no obvious benefits and such high risks? How did they reconcile its obvious contradictions? How did those contradictions play out once the Euro was launched? And, where has Europe ended up? The short answer is: not where it intended.

The origins of the single currency, Mody correctly writes, is a French initiative, the logic being that a single currency rather than a multi-currency system in Europe, would gain France greater equality with Germany. The DM, in short, would not rule the roost. How to get there, when the German population after the war was so devoted to the DM?

Mody deploys two concepts, which are not part of the Brussels in-house vocabulary: “falling forward”, which is a rather more graphic rendering of “the spillover effect”-the well used EU-speak which signifies that once one policy is embedded irreversibly in the acquis communautaire, by its own internal logic, the process leads on to further policy initatives. The process is familiar: the Commission proposes; the member states negotiate and legislate, the ECJ judges in the light of the Treaty terminology of “ever close union”, and of its own body of case law; and the states implement. Integration is ever tighter; policy is ever more centralized; nation state powers are ever more hollowed out.

The second concept is group think. Despite the powerful arguments against the single currency, levelled from its very inception, its advocates and servants show an unwavering belief in the correctness of their actions. On the way to Maastricht, the history he tells is if you fail once, try again, and again until you succeed. In the Maastricht Treaty negotiations, success came but on German terms. And those terms have proved not to be temporary, but have helped to enthrone Germany as more equal than others, to paraphrase George Orwell. The evidence, he writes in his introduction, is that what has been will continue to be: group think will continue to prevail, and sovereign barriers to its success will continue to flourish. “True pro-European values can flourish only when the bonds that tie Europe so tightly today are loosened”(p.22).

I must confess that I agree entirely with Mody- a double challenge for me to strive for objectivity. I do not have to look too far: the question that a reading of Eurotragedy invites is whether there is any chance thatthe denizens of the EU will change course. The evidence from past experience is: none, whatsoever. That is the reality of the EU. Mody rightly places that reality in the context of another reality, and he invokes the words of the French mandarin, Robert Marjolin -economist and jurist, secretary general of the OEEC, then EEC Commissioner-,who, writing shortly before his death in 1984, stated that too many European leaders “underestimated the strength and vitality of the nation-state”. [7]

His account is the confrontation of these two realities: French-led determination to create a Euro, German insistence to have its own way, French and Italian efforts to weaken Germany’s grip; and the irreducible barrier to this policy of the nations of Europe. It makes for good reading.

The book is organized chronologically. Chapter one, Three Leaps in the Dark, traces the early years, the Coal and Steel Community, the Rome Treaty, the Werner Report of 1970 on a single currency, and the European Monetary System, launched by Giscard d’Estaing, with the self-interested support of Chancellor Schmidt to stabilize currencies within the then EEC. Schmidt was self-interested because German business was worried stiff about the dollar’s devaluation under President Carter, the rise of the DM on the exchanges, and the expected impact on German export competitiveness. Giscard’s interest in stabilising the exchange rates, to help in the annual setting of farm prices within the Common Agriculture Policy (then taking up 80-90% of the EEC budget), this coincided with German business interests to keep the DM as undervalued as possible. Keeping the currency competitive is a consistent feature of German economic policy.

Chapter two holds the pithy title, Kohl’s Euro, and covers the years 1982-1998.  As soon as he came to office, Kohl headed to Paris where he told President Mitterrand that he would do everything to prevent the reappearance of a Bismarckian state. The political trajectory he took to make good on his promise proved anything but straight. In 1986 when Mitterrand renewed the demand for a single currency, Kohl prevaricated; by 1990, he was branding opponents to the single currency as “nationalistic”.

Mody’s summary of his legacy is worth quoting in full, and it is damning: “We have Kohl’s word that he was pro-European, and we have his gift: the euro. Kohl might well have believed that a single currency used by all Europeans was essential to securing peace. However, in pursuing that vision, he-hesitatingly at the start but decisively in the end-overrode economic and political good sense. He refused to hear his critics..he rejected the wisdom of public opinion. Kohl created the stability ideology that masked the destabilizing nature of the eurozone’s policies and institutional structure. He gave the eurozone Italy. Perhaps, above all, he legitimized the use of rhetoric and groupthink as a substitute for real economic and political analysis”.(p.123)

Chapter three is how “Schröder asserts the German National Interest, 1999-2003”. Schröder pushed back against the ECB’s stability orientation, pushed for more voting rights for Germany in the EU, went along with French support for Greek Euro membership, and partnered with President Chirac is disregarding the stability and growth pact rules, that Kohl’s governments had negotiated. Mody briefly mentions Schröder Nein to co-operation with its western allies over Iraq, and does not mention the domestic reforms-the Hartz IV measures-which Schröder drove through to boost German productivity, keep wages under wraps, and over the coming years, sent the German trade surplus through the roof.

Chapter four covers the years of “irrational exuberance” , named after the Yale university economist Robert Schiller, who pointed out that bouts of irrational exuberance recurred throughout history. But many European preferred to think that such patterns were the province of “Anglo-Saxon” economies, and not relevant to the continentals. With the ECB now under French direction pushing interest rates down, and financial markets irrigated with abundant liquidity from the recycled trade surpluses of Germany and China, bubbles blossomed on Europe’s periphery. To celebrate the tenth birthday of the Euro, EU élites published a study[8]which argued that, all in all, the Euro was a good thing. Mody’s judgement begs to differ: “The eurozone’s operating ideology had made the recession in the first five years worse than it would otherwise have been; and the inability to tailor monetary policy to diverse countries had caused the bubbles in the next five years to grow to sizes that few could have imagined”(p.192)

Chapter five, “ After the best, the denial, 2007-2009”, covers the problems in  the interbank market-which forms the central focus of the Tooze study-the exposure of the banks, the ECB’s loss of credibility, the vigorous counter-cyclical and banking measures than in the US, and the China stimulus, the big beneficiary of which was Germany. As I have pointed out on this blog, total German corporate sales in China are now equivalent to about three times total German corporate sales to France. If we add to this Tooze point that the markets of central-eastern Europe are collectively a larger market for Germany than France, then we can state without much concern for contradiction that one of the prime interests of Germany in keeping the Euro is to ensure that its exports to its largest collective market in western Europe stay competitive.

The next three chapters-Delays and Half Measures: Greece and Ireland, 2010; Policy Wounds Leave behind Scar Tissue, 2011-2013; The ECB Hesitates, the Italian Fault Line Deepens, 2014-2017”-cover the same territory as Tooze regarding the Euro crisis, the toxic political reactions to successive measures cobbled together by the EU institutions, the tensions between Paris and Berlin, and the emergence of German primacy. Mody quotes the Bulgarian Finance Minister Simeon Djankow, who wrote his own account of his experiences: “Germany led azll discussions on eurozone issues, sometimes showing token respect for France’s views. Germany’s main allies-Finland and the Netherlands-played important but secondary roles. No one else mattered much, or at least mattered consistently”.[9]

Chapter 9, The Final Act: A Declining and Divided Europe, amounts to a devastating critique of France’s Euro initiative. Since the launch of the Euro, eurozone economies have fallen steadily down the league tables of major world economies; economic disparities between and within states have widened. Despite the western power’s 1953 debt write off for Germany, Germany brooked no debt write off for Greece; the fact that eastern European neighbours, not in the Euro, buy more from Germany than France and Italy combined, gives the lie to the supposed trade creating virtues of a single currency.

He cites President Macron’s speech in the Sorbonne from September 2017, [10]in which he calls for a “sovereign, united and democratic Europe” as the desired direction for policy in the face of the “populist” wave. There is no sense in Macron’s speech that the direction of policy may have been the prime reason for the stirrings of national sentiment, and with it, the visible revival of Europe’s diplomatic habit of Realpolitik.

What about the future?  More of the same, he predicts, with Germany as Europe’s bully. The alternative, though, is a less integrated and therefore more united Europe, predicated on its cultural traditions. Such a European Republic of Letters, he writes, would revive economic dynamism and political goodwill, which has been trashed by the tragedy of the Euro.


Some conclusions.

A number of conclusions may be taken from a reading of these two important books on the financial crash of the first decades of the twenty-first century.

The first is that, as Susan Strange pointed out, a central feature of the modern global political economy is the web of multi-national corporations, the inter-related financial markets, and the continued centrality of the dollar. US policy, she wrote, was instrumental in creating the global economy: the Tooze book records quite clearly that it was the US, with support from China, that helped to preserve it. But Susan Strange also points out that the prime components of the global power structure are the military structure, the information structure, the corporate structure, and finance in which the US dominates all four. That was the Strange analysis from the late 1980s and early 1990s. The US still dominates all four.

In other words, Tooze’ assertions about US decline should be taken with reservations. The reservations include a recognition  that if the focus is on US domestic travails-poor schooling; stagnant incomes, the loss of over 3 million manufacturing jobs since China’s entry to the WTO in 2002, under-investment in infrastructure-it is clear that the US has major challenges to confront. But so do other possible contenders to the title of world champion.

The second is that the tension between Beijing and Washington DC, that has been growing fast since 2008, requires some explanation. China played a key role in  helping the world economy out of the 2008 crash, but did so by levering as many instruments of the party-state as were available. Given that the party-state is Marxist-Leninist-Maoist, its partial success negated the Greenspan view that market processes is what matters, not political initiative. The renewed visibility of political initiative after 2008, highlighted the differences in state structure between the US and China. The US accuses the Chinese party-state of not abiding by WTO rules, precisely because competition is tilted in China in favour of corporations close to the party-state. The significance of this simple statement may be highlighted by reference to the fact that no corporation of any consequence at all escapes the purview of the party-state.

The third conclusion is that both authors cannot help but record the primacy of Germany. Tooze is reluctant to conclude that what he is observing is the return of German nationalism; Merkel, he regularly points out, is hedged about by domestic and international constraints, and the poor lady has no alternative to regretting the harsh measures she inflicts on others. Mody’s historical and evolutionary approach allows him to point out that there has been a consistent thread to German pursuit of national interest, and that has been to keep the currency competitively valued. The prime unforeseen consequence which Mody highlights is that France’s struggle to liberate itself from the DM has now imprisoned it in the Euro-straitjacket.

The fourth conclusion that flows from Mody’s book in particular is that the European crisis is home grown. The Euro has been adopted against a tide of warnings, and without overwhelming support from Eurozone populations, notably in France and Germany. The Euro, being at root a creation of European Realpolitik, is not readily reversible. It is not just that too much political capital has been sunk in the project: the main point is that the Euro is the very essence of French post-1945 policy to contain Germany. France will not relinquish the Euro; it will not give in to market turbulence, as some commentators regularly imply.

Tooze points out that the Cameron-Osborne government assumed the contrary: that the “spillover effect” of the Euro would drive the eurozone to closer integration, understood as a move towards a USE, with an ECB flanked by an EU Finance Ministry. The governance of the eurozone however flows in the opposite direction: politics prevails, not markets.

The fifth conclusion is that, yes, as Tooze argues, the populist wave in Europe and America is directly to be traced to 2008. But as Tooze points out, and as does Mody with regard to the creation of the Euro, ideas matter. Politics matters. The populist wave in the western heartlands of the global political economy is as powerful a set of movements as it is precisely because the ideas and the politics behind public policies were grounded on shifting sands. Market forces count, but they do not carry all before them; nationalism can be a source of war, but it is also the root of constitutional government.

The EU’s public purpose is to neuter nationalism. What it has successfully done is to reignite nationalisms.

The sixth conclusion to take from these two books is that for all the ink spilt since 2008, groupthink prevails. That is definitely the case in Europe. Carry on, say the Brussels insiders: we have identified the enemy as nationalism; the enemy is there for all to see; let us do battle with him. There is the additional bonus for these ideologues that Trump is one of them, decidedly not one of us. The trouble is that the US is most definitely one of us in Europe: it is the bedrock of European security, as the Poles will attest to.

What is a final conclusion? Both books opt for business as usual. I doubt it. The tensions between China and the US are deeply embedded, not least because China’s party-state deploys a national strategy of greatness and revenge on the white race which humiliated it. The tensions within the eurozone are also deeply embedded in two immovable objects: the Euro and separate national states.

Russia cannot join a post-modern Europe trying to reinvent itself, and ditch its past. Putin’s rule is predicated on reconciling Russian nationalism and the Soviet legacy. It could join a German-led Europe, which talks EU-lingo, but practices a narrow pursuit of German interests in the manner of Merkel.

But Poland realizes that, as does Trump. As Trump sharpens conflict with China, he moves closer to Poland. [11]

These two books remind us that Europe’s affairs must always be analysed in the global context. The global context reminds us that global affairs impact European states differentially. That is a major reason why the EU project has to be fundamentally revised. There is no sign that this is happening.


[2]BIS Working papers No.524. Breaking Free of the Triple Coincidence of International Finance. Monetary and Economic Department. October 2015.

[3]Carole Bertaut, Laurie Pounder De Marco, Steven B. Kamin, Ralph W. Tyron, ABS Inflows to the United States and the Global Financial CrisisNBER Working Paper No. 17350Issued in August 2011

[4]B. Shapiro, “The Politics of Widening Income Inequality in the United States”, 1977 to 2014”, CBPP, Georgetown University, October 2017.

[5]“Deutsche trauen den USA nicht mehr“, July 18, 2014.

[6]  See my review of Varoufakis book, along with others:

[7]« Europe in search of its identity”,Russell G. Leffingwell Lectures, Council on Foreign Relations, New York, 1980.

[8] European Commission, Directorate General of Economic and Financial Affairs, EMU@10: successes and failures of EMU, European Economy, /2008. Luxemburg, 2008.

[9]Quoted on p 323 from Simeon Djankow, Inside The Euro Crisis: An Eyewtness Account, Washington DC, Peterson Institue for International Economics. Kindle Edition. Locations, 551-553.



About Jonathan Story, Professor Emeritus, INSEAD

Jonathan Story is Emeritus Professor of International Political Economy at INSEAD. Prior to joining INSEAD in 1974, he worked in Brussels and Washington, where he obtained his PhD from Johns Hopkins School of Advanced International Studies. He has held the Marusi Chair of Global Business at Rensselaer Polytechnic Institute, and is currently Distinguished Visiting Professor at the Graduate Schoold of Business, Fordham University, New York. He is preparing a monograph on China’s impact on the world political economy, and another on a proposal for a contextual approach to business studies. He has a chapter forthcoming on the Euro crisis. His latest book is China UnCovered: What you need to know to do business in China, (FT/ Pearson’s, 2010) ( His previous books include “China: The Race to Market” (FT/Pearsons, 2003), The Frontiers of Fortune, (Pitman’s, 1999); and The Political Economy of Financial Integration in Europe : The Battle of the Systems,(MIT Press, 1998) on monetary union and financial markets in the EU, and co-authored with Ingo Walter of NYU. His books have been translated into French, Italian, German, Spanish, Chinese, Korean and Arabic. He is also a co-author in the Oxford Handbook on Business and Government(2010), and has contributed numerous chapters in books and articles in professional journals. He is a regular contributor to newspapers, and has been four times winner of the European Case Clearing House “Best Case of the Year” award. His latest cases detail hotel investments in Egypt and Argentina, as well as a women’s garment manufacturer in Sri Lanka and a Chinese auto parts producer. He teaches courses on international business and the global political economy. At the INSEAD campus, in Fontainebleau and Singapore, he has taught European and world politics, markets, and business in the MBA, and PhD programs. He has taught on INSEAD’s flagship Advanced Management Programme for the last three decades, as well as on other Executive Development and Company Specific courses. Jonathan Story works with governments, international organisations and multinational corporations. He is married with four children, and, now, thirteen grandchildren. Besides English, he is fluent in French, German, Spanish, Italian, reads Portuguese and is learning Russian. He has a bass voice, and gives concerts, including Afro-American spirituals, Russian folk, classical opera and oratorio.
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