|The Deep Deformation of Europe. Economic Conflict in the European Union by Elli Louka|
The Deep Deformation of Europe. Economic Conflict in the European Union by Elli Louka
ЧИТАТЬ В .DOC
The Deep Deformation of Europe
Economic Conflict in the European Union by Elli Louka*
“The man who desires to be rid of an evil knows what he wants; but the man who desires something better than he has got is stone blind.”
1. The Tipping Point
Romantics are people who, instead of resolving a conflict, imagine an alternative reality in which conflict does not exist. Political romantics in Europe believed that the perpetual conflict among European states could be stopped if Europe was transformed into a European Union (EU). Such metamorphosis would stem from the ‘spillover effect’: economic integration was to spill over to other policies and gradually lead to a political union — something akin to a United States of Europe. Despite these high hopes, seventy years after World War II erupted, the euro crisis took on the dimension of conflict between creditor states and debtor states. Europe has not been transformed into a Union. The successive transformations have only led, instead, to a deep deformation: an asymmetric conflict through the instrument of economic power. Political romantics who had visualized Europe as a United States of Europe are now staring reality in the face: the European Union as an archetype of the coercion dynamics in international politics.
In 1951 the EU is born out of the disaster of World War II. The United States is instrumental in the incubation of the first European Communities as it sees in a United Europe a parapet against Soviet-styled communism. European states see in a United Europe an assurance that the coal and steel production of Germany will not be used again to make war against them. There is a consensus in Europe that the industrial Goliath of Germany must be contained. Germany seizes the opportunity to rebrand itself as a Community-oriented country.
In 1992, after forty years of economic integration, the Maastricht Treaty is adopted establishing a monetary union. In September 1992 the European Exchange Rate Mechanism (ERM), the foundation of the monetary union, collapses when the UK is forced to exit the ERM. George Soros, a hedge fund manager and a billionaire, makes one billion dollars by selling the British pound and he is labeled ‘the man who broke the Bank of England.’ In 1997 the European Union agrees to adopt the Stability and Growth Pact under the insistence of Germany that financial discipline and sanctions must be imposed on states that exceed a specific budget deficit ceiling. In January 1999 the euro is established. In 2001 Portugal exceeds the deficit ceiling imposed by the Stability Pact and is chastised by the European Commission for that violation. In November 2003 Germany and France violate the deficit ceiling. The European Commission brings a case against France and Germany, but eventually France and Germany prevail. Political interference so that the Stability Pact does not apply to the largest EU countries strengthens beliefs that the pact is practically unenforceable. The Stability Pact is relaxed in 2005, reinforcing expectations that the rules included in it are malleable. In fact, the majority of EU member states do not hesitate to engage in creative accounting and misreporting in order to fudge their real debt and deficit numbers. In 2005 the French public and the Dutch public reject the European Constitution, a treaty that, as its name suggests, embodies the ideal of a United States of Europe.
In June 2007 the global financial crisis hits with the first signs of the collapse of the United States subprime mortgage market.  The crisis quickly spills over to Europe. The European Central Bank (ECB) injects more than two hundred billion euros into the banking system to improve liquidity. The United States Federal Reserve, the Bank of Canada and the Bank of Japan begin to intervene in the markets. Two German banks announce that they face severe losses due to their investments in the subprime mortgage market. In September 2007 Northern Rock, a British bank, asks for emergency assistance. Depositors withdraw one billion British pounds from Northern Rock, the largest run on a British bank for more than a century, but eventually the UK government declares that their savings are guaranteed. In February 2008 the British government nationalizes Northern Rock.
In September 2008 Lehman Brothers, an investment bank, collapses, turning the financial crisis into financial panic. The European banking and insurance company Fortis is partly nationalized because it is too big and important, for the European banking sector, to fail. The Netherlands, Belgium and Luxembourg agree to inject 11.2 billion into the bank. On September 30, Dexia, another bank, gets a bailout when France, Belgium and Luxembourg agree to put in 6.4 billion to save the bank. The Irish government decides to guarantee all deposits in Irish banks — undertaking a burden of four hundred and forty billion — more than twice Ireland’s GDP. Germany announces a fifty billion plan to save one of the country’s biggest banks, Hypo Real Estate. By October 2008 all three major banks of Iceland collapse. A diplomatic row erupts between Iceland and Britain about the handling of the banking collapse. At stake are hundreds of millions of British pounds that have been deposited in Icelandic banks by British savers. Iceland expresses shock at the decision of the UK to invoke anti-terrorism legislation to freeze Icelandic banks' assets in the UK. The UK condemns Iceland for guaranteeing domestic deposits but failing to guarantee British savers' deposits. Iceland eventually requests an International Monetary Fund (IMF) stand-by arrangement to help resolve the banking and currency crisis that has decimated its economy.
On October 12, 2008, European leaders clarify that their action plan to address the financial crisis does not involve a joint guarantee on bank debts and that each country should act alone, in coordination with other countries, to provide guarantees for its banking sector. The IMF, the EU and the World Bank announce a massive rescue package for Hungary. In November 2008 a secret task force starts to meet to devise an action plan in case a Hungary-style crisis hits a eurozone nation. Membership is limited to senior policy makers from France, Germany, the European Commission, the ECB and the office of Jean-Claude Juncker, the Luxembourg prime minister who heads the group of eurozone finance ministers. The task force is secret because even a rumor that such a task force exists could trigger speculation in the financial markets against the euro.
On November 4, 2008, as the economic crisis rages around the world, the EU finance ministers meet ahead of the G-20 meeting in Washington (planned for November 15, 2008) to forge a common position before that meeting. France offers a detailed ten-page plan, but runs into objections from Germany. The German finance minister states that the French plan is too close to supra-national economic governance at the EU level: ‘It could be interpreted that we are aiming for a coordinated, overarching economic policy [at the European level]. We would be very skeptical about that. We don’t need a European economic government.’ In December 2008 Ireland puts together a ten billion fund to recapitalize its banks.
In January 2009 Germany approves a stimulus package, the biggest in Europe, to overcome the country’s economic woes. On January 14, 2009, the S&P, a rating corporation, cuts the rating on Greek government bonds from A to A-. The rating company points to the country’s weak finances, as the global economy is entering recession. On January 30, angry protesters around the world blame governments for failing to confront the economic crisis. In February 2009 the European Commission reports that six countries — Ireland, Greece, Spain, France, Latvia and Malta — have a budget deficit that is more than that allowed by the Stability Pact. The banking sectors of Central and Eastern Europe get a 24.5 billion EU loan to help them ride out the economic crisis.
In March 2009 the US Federal Reserve announces a plan to buy 1.7 trillion dollars of government debt to boost the US economy. In addition the United States announces a plan, under the Treasury’s Troubled Assets Relief Program, to buy up to one trillion dollars' worth of toxic assets to help repair US banks’ balance sheets. In September 2009 the finance ministers of the world’s most powerful economies agree to a series of measures to regulate better the global banking system. The OECD calls for new policies to tackle high global unemployment. In 2009 Spain’s unemployment has already climbed to eighteen percent.
In August 2009 the IMF issues a country report on Greece that is mixed. Stress tests conducted jointly by the Bank of Greece and the IMF suggest that the Greek banking system has ‘enough buffers to weather the expected downturn.’ The Greek economy, despite a bloated public sector, has shown resilience — nevertheless a recession is to be expected. In October 2009 the Greek government announces that the 2009 public deficit would be 12.5 percent of GDP — a figure much larger than what was reported before (3.7 percent of GDP). The credibility of the Greek figures becomes a major issue in the markets in 2009 even though the Eurostat, the EU’s official statistics reporting agency, had issued since 2004 publicly accessible reports about the accounting failings of Greece. The IMF also had raised concerns about severe shortcomings in the area of fiscal transparency in Greece.
Greece announces plans to bring its budget deficit within the limits of the Stability Pact by 2012 and it adopts austerity measures to achieve that goal. In the meantime the yield on the ten-year Greek bond reaches 6.25 percent, the eurozone’s highest. The European Union convenes an emergency meeting on Greece. The ECB mentions that it will continue to accept Greek government bonds (now rated BBB-) as collateral. On April 23, 2010, Greece asks the EU and the IMF for a forty-five billion loan, as yields on government bonds reach 7.4 percent, launching Europe’s sovereign debt crisis. On May 2, 2010, the eurozone and the IMF agree to provide Greece with a hundred and ten billion loan under the condition that Greece will achieve thirty billion in budget cuts.
October 18, 2010 marks the tipping point in the euro crisis. This is the date when German chancellor Merkel and French president Sarkozy issue a joint declaration in Deauville, France. According to the Franco-German declaration, private creditors would have to contribute to future sovereign bailouts. The joint declaration unnerves bondholders who realize that they will suffer losses on government bonds issued by weak periphery countries whose debts are deemed unsustainable. The IMF has blamed on this joint Franco-German declaration the widespread loss of confidence in the Greek economy. The 2010 Deauville Declaration and the time that elapses between the declaration and the restructuring of the Greek debt push the country into a ‘confidence destroying downward spiral.’ By December 2011 the yield on the ten-year Greek bond skyrockets to thirty-two percent, demonstrating that investor confidence is in shambles. The outflows of capital that began in 2010 reach eighty-three billion by the summer of 2012.
In November 21, 2010, Ireland formally requests financial assistance from the EU. The EU and the IMF grant an eighty-five billion loan under strict conditionality. The country has to cut public spending by ten billion and raise taxes by five billion. This steep austerity, many argue, could lead the country to a deep recession. By helping Ireland, Germany and France achieve what was hard for them to accomplish before. Ireland concedes to reconsider branding itself as a low-tax corporate jurisdiction and to participate in the discussions for the adoption of a Common Consolidated Corporate Tax Base (CCCTB) draft directive. France and Germany have resented the low corporate tax rates of Ireland, which entice foreign corporations to place their headquarters in that country.
In 2011 Portugal asks for an EU emergency loan. On May 16, 2011, the eurozone officially approves a seventy-eight billion loan for Portugal, which becomes the third eurozone country after Ireland and Greece to receive emergency loans. On June 5, 2011, the rating company Moody's cuts Portugal's credit rating to junk status. Moody’s has cut Portugal’s credit rating since the 2010 downfall of Greece, speculating that the financial meltdown is to spread to other weak European states with high public debts and budget deficits. Despite the recessionary trends worldwide, the ECB raises its interest rate, making it even harder for the periphery states to pay off their debt. On July 22, 2011, Germany and France negotiate bilaterally a deal that establishes a European Stability Mechanism and the outline for the restructuring of the Greek debt that involves the participation of the private sector. This bilateral deal, which is presented as a fait accompli to the European Council, is one of the many expressions of the reluctant bilateralism — the main tool used to address the euro crisis. On June 26, 2012, Spain requests financial assistance. An agreement (the Financial Assistance Facility Agreement — FFA) with the EU/IMF is reached on July 20, 2012 to provide funding for Spain’s banking sector. The loans will be provided to the Fondo de Reestructuración Ordenada Bancaria (FROB), the bank recapitalization fund of the Spanish government, and then channeled to the troubled financial institutions.
On July 26, 2012, Mario Draghi, the president of the ECB, declares that ‘the ECB is ready to do whatever it takes to preserve the euro.’ The subsequent program announced by the ECB of unlimited purchases of short-term sovereign debt discourages speculation about the euro break-up and the yields on Spanish government bonds stay below six percent. On December 3, 2012, the Spanish government requests the disbursement of about 39.5 billion from the FFA. In November 2012 the IMF endorses the view that in some circumstances capital controls can be beneficial for states.
On March 16, 2013, the EU and the IMF agree to grant Cyprus a ten billion loan, making it the fifth country — after Greece, Ireland, Portugal and Spain — to receive emergency financing. The loan comes under the condition of the restructuring of the Cypriot banking sector requiring bondholders and savers to incur substantial losses. This is the coup that decimates the island’s economic base. Cyprus enacts capital controls to prevent the flight of capital, instituting in this way the de facto division of the euro into the northern euro and the southern euro.
2. Debt and Guilt: the Greek Sovereign Debt Crisis
In German ‘the moral concept “Schuld” (“guilt”) descends from the very material concept of “Schulden” (“debts”).’ From time immemorial, debtors who are unable to pay off their debt are punished. Their creditors devise methods of retribution, including taking away their freedom. ‘Through the punishment of the debtor, the creditor takes part in the rights of the masters.’ He enjoys ‘the elevated feeling of being in a position to despise and maltreat someone as “inferior.”’ Greece is in debt and, therefore, guilty. It is time for the country to reform through austerity. Reform will be a kind of an ‘aide memoire’ so that the fear of repercussions of debt accumulation will prevent the country from borrowing excessively again.
In 2010 most believed that the crisis would be contained and that the EU might emerge stronger from it. The euro crisis was good for Germany as its exporters were benefitting from a weaker euro. Even better, Germany was ‘cracking the whip on the rest of the Eurozone’  to fix their finances. It was believed, though, that, because creditor states and debtor states shared the same currency, the credibility of that currency would not be risked. Eventually what had not shattered Europe yet might make it stronger.
Greece entered the eurozone in 2001. A currency swap that was facilitated by Goldman Sachs, an investment firm, which camouflaged the Greek debt, smoothed that entry. Greece and Goldman Sachs were derided in 2012 for executing this derivative deal even though the specifics of the deal were widely publicized in 2003. Moreover, these types of deals were just one of the techniques that countries used to meet the Maastricht Treaty’s debt and deficit ceilings. In fact, the EU member states had knowingly incapacitated the Eurostat from scrutinizing such deals. Up to 2009, many states including Italy, Poland, Belgium and Germany took advantage of accounting loopholes built into the eurosystem.
The eurozone member states and the ECB were at loggerheads over the handling of the Greek crisis. It took till March 25, 2010 for the European Council to agree that Greece might need external help. On April 23, 2010, the Greek government concluded that it was unable to deal with the crisis by itself. Under strict conditionality a hundred and ten billion loan was granted to Greece. The loan was funded by Germany (27.9 percent), France (21 percent) and Italy (18.4 percent). The total loans granted to Greece by eurozone states amounted to eighty billion — the so-called Greek Loan Facility. The IMF contributed thirty billion under a stand-by arrangement.  Greece had to find thirty billion in budget cuts and additional taxes to qualify for the incremental disbursement of the loan. The loan conditions, however, did not affect Greece’s military spending. Greece was to keep spending on military equipment it had ordered, before the crisis, from France and Germany — what was called the ‘informal conditionality’ of the Greek Loan Facility. Greece is a heavy spender on military equipment and it has under-reported several times its military expenditures in order to present a smaller deficit to the EU authorities.
Greece was placed under close supervision to ensure that the emergency loans would be paid off. Teams of inspectors from the European Commission, the IMF and the ECB, the so-called ‘troika’, visited Greece regularly to ensure that it met the conditionality agreed to. It was the first time that the EU was so closely involved in monitoring a state. Germany insisted on the involvement of the IMF in the Greek emergency loan as a counterweight against the European Commission, which Germany believed would not be objective enough and strict enough to monitor Greece’s implementation of conditionality. The loans to Greece were granted not by the European Union, but by eurozone states, on a bilateral basis, giving creditor countries substantial flexibility in handling their debtor (Greece). What these bilateral loans really achieved was a change in the ownership of the debt. Before the official loans were granted, Greece owed money to European banks, many of them German and French banks. Greece could use the 2010 official loans to pay off its debts — transferring the Greek debt from the balance sheet of banks to the balance sheet of European governments. The loans were granted to Greece to spare the financial system the repercussions of a Greek default estimated at two hundred billion. In 2010 the IMF officially declared that it had faith that the 2010 loans to Greece would be sufficient to stave off any further crisis. Secret documents that were leaked in 2013 have revealed, though, that there was internal dissension among the IMF members regarding the 2010 loans granted to Greece. Switzerland and many Middle Eastern, Asian and Latin American countries argued that the loans could not possibly alleviate the debt burden of Greece since they included no debt restructuring such as forgiving debt principal, reduction of the interest rate and extension of the payment schedule to make the service of the debt easier. The loans were, instead, about the transfer of the Greek debt from the private sector to the public sector. In Germany the 2010 loans to Greece were viewed as a French victory and a German defeat. In the German press, the eurozone was derogatorily referred to as a mutual bailout association, a transfer union. Because the eurozone was a transfer union the ECB obviously would lose its independence, the euro would become a soft currency and inflation would surge. Many Germans wanted to scrap the euro and switch back to the deutschmark.
Before its entry into the eurozone, the markets viewed Greece as a convergence play. The bond market demonstrated a high preference for Greek government bonds because of the high yields they offered compared with the low risk assigned to a country that was ‘converging’ to adopt the euro. When the euro was established the implicit assumption was that the eurozone partners would bail each other out in times of trouble, in other words, that the eurozone was ruled by a system of joint and several liability.
In 2011 it was evident that Greece would need more financial assistance. The Greek prime minister decided to put the loan conditionality demanded by creditor states to a public referendum. The referendum never took place after an implicit Franco-German blackmail that such a referendum would jeopardize the chances of Greece getting a new loan and even its EU membership. The Greek prime minister came under intense pressure and eventually resigned. A caretaker government was installed under the leadership of a former vice president of the ECB.
By 2012 the EU Council of Ministers officially concluded that private sector involvement (PSI), in addition to government loans, was necessary to allow for the write-off of more than fifty percent of the Greek debt. The PSI was presented as voluntary, but in essence, it was the default of Greece. The Greek press reported that the government was prepared to introduce a new law to force private creditors to accept the exchange of their bonds for new, discounted bonds. By choosing default the eurozone admitted that investors had to bear the losses for failing to differentiate between the risk profiles of the eurozone countries. Since Greece’s official creditors (the IMF, the ECB, eurozone governments) were excluded from the PSI, the remaining creditors had to incur even larger losses.
The PSI deal inflicted damage on the European sovereign debt market (a market estimated at 8.4 trillion) because it demolished the prevailing perception that the bonds of eurozone sovereigns would not default. Now a default risk was attached to them and their ultimate value was dependent on the decisions of governments, the ECB, the EU and the IMF. No wonder investors hankered after a higher return for holding bonds of the periphery countries that were labeled high risk. Furthermore, each time the official creditors provided loans to the weakened periphery the private debt holders became subordinated because the official creditors claimed a preferential status. Because private bondholders were subordinated to the official creditors, holding euro-periphery bonds became like holding ‘junior claims on troubled economies.’
Greece had a hard time implementing the conditionality demanded by its creditors. In February 2012 Greece was to receive a loan installment under the initial emergency loan, but no such installment was forthcoming unless further budget cuts were enacted. Without the emergency financing, it would have been impossible for Greece to make payments of 14.5 billion on the debt it had already incurred. The appointed prime minister Papademos, in his address to the nation, warned that failure to pass the austerity bill would lead the country to disorderly default. He warned that Greece was nearing ground zero.
The eurozone governments and the IMF wanted unambiguous commitments that Greece would abide by the strict loan conditionality no matter who was elected in the upcoming elections of April 2012. They demanded signed commitment letters from the political parties that they would support economic austerity if they won the elections. This was seen as direct interference in Greece’s politics and an undermining of Greek democracy and sovereignty. The finance minister of Germany proposed that it would be better to postpone the Greek elections altogether and set up a small technocratic cabinet to run Greece for a couple of years. Germany was willing to help, according to its finance minister, but it could not put its money into ‘a bottomless pit.’ That statement got an angry response from the Greek president who had fought against the German occupation during World War II. Eventually, after two rounds of elections, a fragile coalition was built in which the pro-austerity parties held a slim majority. The extreme right and left, however, won an unprecedented number of votes, and consequently more parliamentary seats, instituting a voluble opposition to austerity. The outcome of the 2012 Greek elections was the result of public outrage at what was conceived as foreign-implanted austerity.
All through the Greek sovereign debt crisis, the German press and politicians were painting the Greeks as the archetypical lazy southerners or rich tax evaders. According to the German popular verdict, if Greece could not pay back its debt it should sell its real estate, for instance, the Greek islands and Acropolis. Some speculated that social chaos would erupt in Greece but that an international protection force, like that sent to Bosnia and Kosovo, might not be necessary. Many claimed that the Greeks must learn lessons from the massive failure of their state and must accept the surrender of their sovereignty. This public reaction in Germany is demonstrative of the remarkable absence of solidarity among of the peoples of the states that make what has been called the European Union. Germans could not identify with their conception of slothful and tax-evading Greeks.
As long as there was such a negative media blitz on Greece any attempt to restore a sense of stability in its economy was condemned to failure. In 2010 the exit of Greece from the euro was unthinkable. In 2012 speculation about the ‘Grexit’ was rampant. The ECB and the European Commission were reportedly working on emergency scenarios in case Greece would not make it. Greece was facing one of the worst economic recessions in its history and many economists were arguing that the austerity package demanded as a sine qua non for the emergency loans would drag Greece even deeper into recession. The mood on the streets was ugly. One day protests turned violent as protesters threw Molotov bombs torching more than forty buildings. The austerity package for Greece worsened unemployment, which reached twenty-two percent. More than fifty percent of the unemployed were among the young. At the same time, Greece was experiencing a slow-motion bank run as more and more depositors pulled out their cash in anticipation of the Greek exit from the euro. In March 2012 cumulative outflows of deposits from Greek banks climbed to seventy-three billion. The ECB was financing the bank run by lending the banks enough euros to keep them in operation. By 2012 Greece was characterized as a heavily indebted poor country (HIPC). Some argued that the EU must adopt something similar to the 1996 HIPC initiative based on which lenders agreed to reduce the debt of the most heavily indebted poor countries if they implemented reforms. The debt relief could be achieved by cutting interest rates and pushing out maturities to fifty years. In June 2013 Greece became the first developed country to be downgraded to emerging-market status.  Greece had just been upgraded to developed-market status in 2001 when it entered the eurozone. This 2013 downgrade was the great downfall of a country that was growing at an annual rate of 4.2 percent between 2000 and 2007 as foreign capital swamped the country.
Many Greeks started to view their country as the protectorate of foreign powers. Anti-German sentiments were prevalent, reinforced by the fact that Greece was a victim of German occupation and atrocities during World War II. Some felt that this economic war was worse than World War II because their government, instead of resisting, was following German orders. In the 2012 elections the voters abandoned the mainstream parties and opted to vote for the extremists. It was the first time, after the restoration of democracy in 1974, that the extreme left and the extreme right got so many votes in a Greek election. This reaction was predictable, as voters perceived that the Greek mainstream political establishment was cudgeled into endorsing austerity policies. Anti-German sentiments were fueled all over Europe when Volker Kauder, a German parliamentary, epitomized the new German power by claiming: ‘Now Europe is speaking German.’ Germany was winning World War III, the money war.  Some labeled the imposition of German policies on Europe the Merkelization of Europe. The Germans did not like to be called Nazis, but the Greek newspapers continued to caricature the German chancellor Merkel as the new Adolph Hitler and the European Union as a covert operation that brought about the Fourth Reich.
In 2010 eurozone governments granted loans to Greece on a bilateral basis to enable it to fulfill its obligations to private creditors. In 2012 the new loans to Greece were to be channeled through the European Financial Stability Facility (EFSF), which started to operate in August 2010. The EFSF is a corporation in which shareholders are the eurozone countries and its special purpose is to issue bonds or other debt instruments in the capital markets. The money it raises this way it lends to Greece and other troubled eurozone countries. The EFSF is backed by guarantee commitments from all the eurozone states and has a total lending capacity of four hundred and forty billion.
Since there is no international bankruptcy law for states when a state is insolvent the power of creditors over the debtor state determines the outcomes. Greece was negotiating with sixteen hard-nosed governments and many nervous creditors. Obtaining an agreement among the creditors and between the creditors and the eurozone governments was a torturous exercise, which became even more onerous due to the lack of transparency and disclosure. In 2012 Greece ‘lay helpless on the ground, being snapped and snarled at by the other two players,’ the creditor states and the bondholders. Obviously, Greece could not transform itself overnight into a highly industrialized country like Germany. The only advantage that Greece had was that the majority of the bonds it had issued were covered by Greek law. The Greek government could pass a law, therefore, to restructure these bonds unilaterally.
The bondholders knew that they could not physically invade Greece and impound its assets. But they could freeze further lending to Greece. They could sue Greece in other countries in order to obtain judgments against it, making other lenders unwilling to grant any loans to Greece. The bondholders could threaten Europe-core by claiming that losses of the private sector on the Greek debt would lead to a strike on lending and further contagion to other countries in Europe-periphery.
The eurozone was a potent negotiator. Theoretically the ECB could create all the money needed to buy the Greek bonds. Such a move, however, was blocked by the German Central Bank, which was fearful of inflation. Furthermore, the eurozone was the only player who could guarantee some repayment of the Greek debt. The eurozone could ensure stringent control of expenditures and the collection of taxes in Greece. Even better, if Greece failed to pay, the new bonds offered for the restructuring of the Greek debt were EFSF bonds issued under foreign law and guaranteed by the eurozone states. Greece or the eurozone would have to pay up eventually.
The loans granted to Greece amounted to 164.5 billion till the end of 2014. Of this amount, the eurozone was to contribute 144.7 billion to be provided through the EFSF, while the IMF was to contribute 19.8 billion. The IMF contribution was part of a twenty-eight billion deal under the Extended Fund Facility that the IMF put in place for Greece for four years. The official sector loans were supplemented by the PSI. On February 24, 2012, Greece invited the bondholders to exchange the government bonds for new rescheduled bonds. The total eligible amount of bonds was 205.6 billion. The offer did not extend to the bonds held by the ECB and the eurozone national central banks, enabling them to be paid in full at the due date of the bonds they already held. The day before the offer, on February 23, 2012, Greece adopted a law that allowed the country to insert a collective action clause in the existing bonds governed by Greek law. Eventually, out of 205.6 billion in bonds eligible for the exchange offer, approximately one hundred ninety-seven billion, or 95.7 percent were exchanged.  The terms of the bond exchange were spelled out in a memorandum. To this memorandum were attached the commitment letters of the two major Greek political parties that they would abide by the memorandum if they were elected to government.
The bondholders were offered to exchange their old bonds for new bonds with a nominal value of 31.5 percent of the value of old bonds. In addition, fifteen percent of the old bonds’ nominal value was to be paid to the bondholders through cash-like, short-term notes issued by the EFSF (making the overall discount on the original nominal value of bonds 53.5 percent). Accrued interest on the old bonds was to be paid to the bondholders in the form of six-month EFSF notes. The coupon on the new bonds was two percent per year (till 2015); three percent per year (till 2020); and 4.3 percent per year (after 2020). An additional GDP-linked coupon capped at one percent was to be added if the Greek economy performed better than what was estimated by official projections. Greece could borrow from the EFSF twenty-three billion to compensate the Greek banks for their losses in the PSI if the funds available to the Hellenic Financial Stability Fund (HFSF)  were not sufficient to preserve financial stability.
The specifics of the PSI were crystallized in a number of multilateral agreements between the EFSF, on the one hand, and Greece and the Bank of Greece on the other. The Private Sector Involvement Liability Management Facility (PSI LM) was to provide a thirty billion loan to Greece — the value of the EFSF cash-like notes that the EFSF issued for Greece. A loan of thirty-five billion was provided to Greece through the ECB Credit Enhancement Facility to enable Greece to buy back the old bonds at the discounted value. A Bond Interest Facility of 5.5 billion was put in place to allow Greece to pay interest on its existing debt.
Furthermore, a co-financing agreement was signed between Greece, the Wilmington Trust, the EFSF and the Bank of Greece (as a common paying agent). Based on this agreement, the Wilmington Trust (a private company based in London) was to act as the trustee for the bondholders and the Bank of Greece was to function as an agent for the payments made by Greece to the bondholders and the EFSF. The Bank of Greece, as the common paying agent, was to hold in trust for the creditors the amounts paid by Greece in servicing its debt. The co-financing agreement treated Greece’s debt service to the bondholders and its debt service to the EFSF equally. In the event of shortfall in payments the common paying agent committed to distribute the amount it received from the Greek government pro rata between the EFSF and the bondholders. This way Greece could not default on its bondholders without defaulting on the EFSF at the same time.
All these agreements have a common clause according to which: the law that governs the agreements is English law and the courts of Luxembourg have exclusive jurisdiction over any issues that arise from the agreements. Furthermore, Greece and the Bank of Greece ‘irrevocably and unconditionally’ waive all immunity from legal proceedings and from execution and enforcement against their assets ‘to the extent not prohibited by mandatory law.’ According to the opinion of the legal advisor to the Greek Ministry of Finance attached to the agreements: neither Greece nor the Bank of Greece nor ‘any of their respective property is immune on the grounds of sovereignty or otherwise from jurisdiction, attachment — whether before or after judgment — or execution in respect of any action or proceeding relating to the Agreements.’ With the stroke of a pen, thus, Greece wiped out even the semblance of its sovereignty. For the Greek Central Bank, the waiver of immunity means that its foreign reserves and gold can be attached, especially if held abroad, making it more difficult for Greece to revert to the drachma, the original Greek currency, in case the country decides to leave the euro. At the time of writing, the Greek Central Bank’s foreign reserves and gold were estimated at about 7.3 billion dollars— an amount unlikely to satisfy all of Greece’s creditors.
Three Memoranda between Greece and the EU/ECB/IMF troika spell out the specific reforms that Greece must adopt, including privatization and tax reform, for receiving the installments of emergency loans granted to it. Unless the reforms adopted by Greece are deemed adequate by its creditors the emergency financing will be suspended. Greece cannot propose or implement measures that may infringe on the free movement of capital. It cannot introduce any voting or acquisition caps in assets it plans to privatize. It cannot establish ‘any disproportionate and non-justifiable veto rights or any other form of special rights in privatized companies.’ In order to comply with the privatization demands, the government had to repeal the special rights granted to the state in the process of privatization. Greece had to repeal the Law on Strategic Companies (art. 11, law 3631/ 2008) and to transfer to the Hellenic Republic Asset Development Fund (HRADF),  structured as a private company and monitored by the troika, a number of state assets including motorways, ports and public utilities. Some have described the Greek privatization program as the perfect example of privatization under duress.
The privatization of Greek state assets demanded by creditor states as a sine qua non for granting the emergency loans to Greece provides a snapshot of the geopolitical struggle behind the Greek debt crisis. By 2012 the privatization of the DEPA, the Greek gas utility, and the DEFSA, the Greek gas pipeline, were dragging. Two Russian companies, Gazprom and Sintez, came up with the highest offers. The United States and the European Union, though, voiced disapproval and the HRADF urged all the bidders to seek Western firms as collaborators. ‘European competition officials, already investigating Gazprom for breaching competition rules in eastern Europe, made it clear to the Russian energy giant that it would be closely scrutinized if it grabbed DEPA.’ The EU was uncomfortable at having a company understood to be an extension of the Russian state beefing up its holdings in an EU country.
According to documents released by Wikileaks, an anti-secrecy NGO, Germany wanted to shift the Greek privatization program to an agency that would be independent from the Greek government and on which Germany would have an influence. Eventually, the privatization was handled by the HRADF structured as a private entity under surveillance by the troika. Stratfor, an influential private consulting company, predicted a ‘scramble for Greece.’ Germany was looking to get Greek assets at fire sale prices. The Deutsch Telecom, which had already acquired a ten percent stake in the Hellenic Telecommunications company, was interested in Greek assets. For China, Greece was a strategic point of entry into Central and Eastern Europe and it could use the Greek ports of Piraeus and Thessaloniki to bring its goods to the Balkans. China’s Ocean Shipping (COSCO) made an investment in Piraeus in June 2010, leasing two container terminals for thirty-five years at the price of five billion dollars. COSCO was interested when the Greek government announced plans to privatize its entire seventy-five percent stake in the Piraeus port authority. Russia was interested in Greek energy assets. The question was whether Germany would stand in the way of China and Russia.
Finland, in order to participate in the 2012 Greek bailout, asked for collateral from the Greek government over the objections of other eurozone members. Obviously, if every state asked for collateral the whole deal would collapse. The banks of Greece agreed to provide collateral to Finland in the form of cash and high-rated assets. The details of the collateral deal remained secret until mid-2013 when the Finnish supreme administrative court asked the government to release them to the public. In April 2013 Finland received the first installment of collateral payments. Finland was paid three hundred and eleven million by Greece. The total payments to Finland are nine hundred twenty-five million to be paid gradually as Greece gets financing from the EFSF. In other words, Greece has been receiving loans from the EFSF, and its successor the European Stability Mechanism, some of which are used to pay for the Finnish collateral. The Finnish insistence on collateral was instrumental in appeasing the domestic political establishment that was hostile to the idea of assisting Greece. The real economic advantages to Finland from the collateral arrangement are questionable.
The Greek debt restructuring was facilitated by the creditors’ committee, which acted as the negotiating representative of bondholders. This committee was put together by a private association, the Institute of International Finance (IIF). The creditor committee was self-appointed and derived its legitimacy from the fact that it was accepted by the creditor states, Greece and the bondholders. The 2012 default of Greece has been the biggest sovereign default in modern times. It involved a developed country and the second largest currency in the world, making it a milestone in financial history. The Greek sovereign debt was about four hundred billion. By comparison, Argentina’s debt was a tiny eighty-one billion dollars. It has been estimated that the 2012 Greek debt restructuring provided debt relief for Greece in the amount of ninety-eight billion to a hundred and six billion, or about fifty-one to fifty-five percent of the 2012 Greek GDP.
After the 2012 debt restructuring, the economic surveillance of Greece by the troika became draconian. The European Commission strengthened the task force for Greece, which had to have a ‘permanent presence on the ground’ in Greece. The head of the task force was a German national, Horst Reichenbach, whom the media called ‘German Governor of Greece.’ Greece was to isolate its debt service payments into a segregated account and to ensure that a legal framework was in place so that the debt servicing payments had priority over any other payments. A provision to this effect was to be incorporated into the Greek Constitution.
In 2013 Germany declared that the loans given by Germany to Greece for the bailout must be paid in full with interest. The Greek government, on the other hand, has been asking Germany to pay for the damage inflicted on Greece by Germany during World War II. The Greek finance ministry has been examining the possibilities of asking Germany to pay for the infrastructure damage perpetuated by the German army during the period of German occupation of Greece and for a loan that Germany demanded from Greece in support of Germany’s World War II effort. Despite the passage of time, the memories of World War II are fresh in Greece as there are still survivors who fought in that war. Greece joined Italy in the International Court of Justice in an effort to empower its citizens to obtain some reparations from Germany for the German atrocities committed in Greece during World War II.
In May 2013 the IMF released an assessment of its own and the EU handling of the Greek financial crisis. The IMF noted that the restructuring of the Greek debt encountered ‘notable failures,’ including the loss of market confidence, a thirty percent reduction in bank deposits and a severe recession. The IMF recommended that the troika must find a way to streamline its process and criticized the eurozone leaders for not tackling the Greek debt decisively at the outset of the crisis and for sending inconsistent signals to the markets, creating uncertainty about the eurozone’s capacity to resolve the crisis. The delayed debt restructuring, according to the IMF, ‘provided a window for private creditors to reduce exposures and shift debt into official hands.’ The IMF criticized the European Commission for putting too much emphasis on compliance with the EU regulations rather than on the growth of the periphery states. The ECB lacked experience in bank supervision. Furthermore, there were ‘marked differences of view within the Troika.’ The program documentation was subject to ‘varying degrees of secrecy’ and this aggravated coordination problems. According to the IMF, the Greek debt crisis brought to the fore the shortcomings of the euro area architecture. Without exchange rate flexibility and without an independent monetary policy, the eurozone left its member states vulnerable to debt crises that spread to the banking system and then to the real economy.
In 2013 the Greek current account deficit was shrinking, but this was happening mainly because of the severe recession, the contraction of the economy and the increase in unemployment. The political situation seemed stable but it remained fragile because political and social tensions were high due to the deep recession and high levels of unemployment especially among the young. Since the Greek banks were preoccupied with paying back the loans granted to them by the ECB, they were reducing the credit available to the economy, intensifying the recession. In short, the Greek debt burden was unsustainable without additional debt relief.
While the periphery was facing a severe recession and unemployment, many core states were benefitting from the euro crisis. Germany, as a big stakeholder in the euro, was bearing substantial risks in case the euro collapsed. As long as the euro remained the currency of the eurozone, however, Germany reaped many benefits. The predicament of Europe-periphery spurred capital flight from the debtor states to the creditor states. All through the crisis, the banks of creditor states were perceived as safe havens for capital. As the debtor states deteriorated, German government bonds became safe havens forcing German bond yields into negative territory. The ten-year German bond was offering rates less than the rate of inflation. Investors were willing to incur costs to keep their money safe in Germany.
3. Attack on Offshore Finance: the Cyprus Case
The ECB statement of March 21, 2013 was a bombshell for Cyprus. The ECB set for Cyprus March 25, 2013 as the deadline for agreeing with the EU/IMF on the conditionality attached to an emergency loan granted to it. The ECB threatened to cut off financing to the Cypriot banks if such an agreement was not reached. The warning came after Cyprus rejected the first EU/IMF proposal for the restructuring of its banking sector that demanded, as a condition for granting emergency financing, the decimation of the deposits of even insured savers. With Cyprus sovereign bonds ineligible as collateral for ECB financing, due to their low credit rating, the Cypriot Central Bank was providing commercial banks with ECB emergency liquidity assistance (ELA). The Cypriot banks, which faced severe losses after participating in the PSI that reduced Greece’s debt, were reliant on this ELA. By the end of January 2013, they had used around 9.1 billion of ELA financing.
The Cypriot banking crisis reached an acute stage in 2013. Creditor countries threatened to expel Cyprus from the eurozone given the bad condition of its finances. Under the threats of ejection and financial isolation, an agreement was eventually reached that was historic for the evolution of the euro. The agreement, in effect, broke up the euro into the northern euro and the southern euro. The northern euro can be moved anywhere across the world while the southern euro is confined within the borders of a small island.
The agreement ‘bailed in’ the creditors of Cyprus two biggest banks, but spared, unlike the proposed first agreement, insured depositors. The terms of the agreement were:
To avert capital flight, Cyprus had imposed capital controls since March 16, 2013. By July 2013 the capital controls were still in place and it was already an open secret that Cyprus had made a ‘hidden, silent exit’ from the euro. If the euro held in Cypriot banks were de facto less useful than the euro held in other banks, these two types of euro would be priced differently.
In 2013 the ECB sent an ultimatum to the Cypriot Central Bank, which manages 13.9 metric tons of gold, warning that any sale of the gold must cover first the emergency assistance granted by the ECB to the Cypriot banks. The Dutch finance minister mentioned that selling gold reserves was an option for the Cypriot authorities, but that this was a decision to be made independently by the Cypriot Central Bank. On April 9, 2013, an assessment by the European Commission mentioned that Cyprus was committed to selling four hundred thousand of ‘excess’ gold reserves. The question was whether the Cypriot gold would be sold to Russia, China, Germany or the ECB, which was asking for the sale (at the depressed prices that were prevalent in mid-2013).
Creditor countries were gloating for achieving the ‘bail-in’ of failed banks by uninsured depositors and bondholders and fending off the bailout by governments and, hence, taxpayers. The Eurogroup, the group of eurozone finance ministers, instead of depicting the Cyprus deal as a special case, claimed that the bail-in of creditors, including uninsured depositors, was to become the template for the recapitalization of failed banks. The Eurogroup stated in public what, since the beginning of the euro crisis, creditor nations had been whispering in private: they were fed up with lending money to peripheral countries and their banks.
The Cyprus crisis erupted on June 25, 2012 when Cyprus requested an EU/IMF loan. At that time, however, Cyprus decided not to be tangled in the EU/IMF conditionality by getting a loan from Russia, betting correctly that Russia would be willing to help given that some of Cyprus banks’ biggest depositors were of Russian nationality. In 2013 Russia decided not to provide additional help to Cyprus, as Cyprus was not worth the risk of jeopardizing relationships with Germany. It took two years from the moment Cyprus was cut off from the capital markets to conclude the EU/IMF deal.
Cyprus was vilified in the media for being a tax shelter for Russian mafia money. The recapitalization of the banking system by the depositors of Cypriot banks was viewed, therefore, as a way to penalize Russian corruption. Some of the money deposited in Cyprus might have been the result of corruption. Most of the money, though, was deposited there by the Russian capitalist class. That class feels uncomfortable with depositing its money at home because of the unpredictability of the Russian leadership. Therefore, it tends to amass its fortune abroad and many Russian businesses are registered as British, Dutch, Swiss, or, till 2013, Cypriot. For instance, Russia’s steel oligarchs controlled their companies through Cypriot holding companies. Many state-owned companies, which are the pillars of the Russian economy and are traded in the global stock markets, had Cyprus accounts including the oil company Rosneft, and the banks Sberbank and VTB. The Russian elite deposited its money in Cyprus because Cyprus is an EU country with rules and regulations and, therefore, not only a tax haven but also a legal paradise where confiscation of private assets by the state was unthinkable.
After the EU ‘raid on their Cypriot accounts’ Russians moved their money to other European havens including the Dutch Antilles, British Virgin Islands, Malta and Luxembourg. At the same time the uninsured depositors, who would have to swap their blocked deposits for shares in the bank of Cyprus, would end up owning that bank. According to some estimates, about sixty percent of the shares of that bank would eventually be held by foreigners, primarily Russians.
According to the troika, bank deposits in Cyprus were inflating the banking sector to unsustainable levels — deposits about eight times the GDP of the island. The figure, however, was much smaller than that of Luxembourg and quite close to that of Malta and Ireland. The troika was telling Cyprus that its growth model was unsustainable. Their recommendation was that Cyprus’ banks should shrink by fifty to sixty percent in the next five years. While Cyprus was getting a dressing down by the EU/IMF, Frankfurt in Germany, Zurich in Switzerland, Delaware in the United States, Austria and the United Kingdom are still active offshore financial centers. Cyprus made a political decision to become an offshore financial center following in the steps of many developed states. Business services and tourism development make sense for a small island economy with no manufacturing tradition. Because of the ‘bail-in’ of creditors most of the capital that sought Cyprus as an offshore financial center flew to other offshores.
At the forefront of the battle against the alleged tainted Russian deposits in Cyprus was the German finance ministry, which had received a confidential report by the German foreign intelligence agency. That agency claimed that the island was a haven for money laundering. The battle against alleged money laundering in Cyprus was bizarrely shouldered by a state that has yet to put its own house in order. In 2013 the Tax Justice Network, a non-governmental organization, rated Germany in the top ten of countries that turn a blind eye to financial secrecy. The Financial Action Task Force (FATF), an intergovernmental institution, in a 2010 report stated that many indicators suggest that Germany is susceptible to money laundering. Substantial proceeds of crime are generated in Germany estimated at forty to sixty billion per year. Lawyers, accountants, tax agents and company service providers are subject to ‘strict professional secrecy obligations which contribute to a low level of reporting of suspicious transactions and complicate cooperation with investigative authorities.’ Trust arrangements (‘treuhand’) are common legal arrangements in Germany, but the disclosure obligations that are in place for trusts are insufficient to ensure transparency about the real owner who benefits from them. Germany does not have comprehensive public statistics about the number of money laundering convictions in the country. The government usually delegates the supervision of implementation of anti-money laundering rules to private auditing firms that may have conflicts of interest. In 2013 Germany effectively blocked EU efforts to require transparency of beneficial ownership of companies across Europe. Germany has been criticized for signing a tax deal with Switzerland according to which German holders of Swiss accounts could preserve their anonymity and their secret Swiss accounts provided that Switzerland would be able to withhold a tax to be submitted to Germany. But it is not only Germany that tries to entice capital. As the growth model of Cyprus is being demolished, Switzerland and the UK remain enormous, secretive financial jurisdictions in which many dictators have chosen to safeguard stolen assets. In fact, the UK’s financial sector success is based on the willingness of the state ‘to host an opaque, tax evading capital market.’ Given the permissive circumstances of financial secrecy in these developed EU economies, it is not surprising that Cyprus viewed the effective shutdown of its financial sector as the coercive elimination of its competitive advantage for the benefit of other EU countries.
Given the capital controls imposed in 2013, it is hard to imagine that the banks of Cyprus would soon attract new depositors. This is harmful not only to the banks, but also to the Cypriot law firms, accountants and other service providers. The service sector of the Cypriot economy accounted for twenty percent of the GDP and it was the trade surplus in services that partially offset the increasing trade deficit in goods. Finance, insurance and other businesses closely related to the financial sector accounted for fifty percent of the economy and employment throughout 2012. Since the financial sector has been shut down by the EU/IMF decision, the country’s prospects look dim. It was unclear at the time of writing whether investment in the energy sector was to materialize or whether tourism could be revamped. The economic adjustment for Cyprus devised by the EU/IMF has been based on the shaky assumption that the island’s proper place in the world is that of a tourism magnet or potentially an energy hub. As a result, the financial sector, the bread and butter of the island, was wiped out.
The Cyprus debt crisis has shed the illusions of many political romantics. The crisis has provided a useful reminder of how a big country can force a small one to change its development model overnight from a model focused on financial services to a scheme centered on yet-to-be-proven energy resources and tourism. Cypriot depositors were entrapped in that asymmetric economic conflict and were dealt with as the unfortunate collateral damage. The ECB and the European Commission have concluded:
The bail-in of uninsured depositors will cause a loss of wealth, which will reduce private consumption and business investment. This, compounded by the impact of fiscal consolidation already undertaken and new measures agreed, will result in a sharp fall in domestic demand. Little reprieve can be expected from exports amid uncertain external conditions and a shrinking financial service sector.
4. No Exit — No Voice
4.1.EU Legitimacy: A Citizen’s Perspective
We view institutions as legitimate if one or two conditions are satisfied: control and/or like. We view an institution as legitimate if we have some control over it or like it (because of its utility). Control has to do with how much say we have on how the institution is run. If we do not control an institution, we tend to view it as legitimate only if we like it. There are many gradients between like and dislike. In old times, people did not control their queen, but, at least in some cases, they did not dislike her.
Figure 1 depicts the legitimacy of institutions based on the two variables of ‘control’ and ‘like’ and gives examples of institutions expressing legitimate/illegitimate options. When we control and like an institution that institution enjoys a high level of legitimacy. In those cases, the institution is more like a club where we socialize with like-minded equals.
When we control an institution, but we dislike it, the institution can enjoy legitimacy because we still have control over it and we perceive that we can possibly change it to our liking. However, there are cases that even if we have control over an institution, we cannot change it significantly either because there is not enough consensus for change or because a consensus exists that the institution is the best of all possible worlds. Today, some people feel this way about Western representative democracy. Some do not like representative democracy and prefer more direct democratic models that make possible active citizen participation in political affairs. At the same time, most agree that, due to increasing populations and unenviable alternatives, representative democracy with some tweaks is the optimum. When we dislike an institution but maintain some control over it, we have two options: to exit or to exercise our control to try to change the institution to our liking. A minimum amount of control can be exercised through dialogue and voting or even loud protests and threats. In Western democratic states, exit is rarely contemplated by the citizenry as it leads to forfeiting significant rights and benefits. In principle, however, citizens are not afraid to exercise control by voting governments out of power, protesting and striking.
When we do not control an institution and we dislike it, an obvious case being that of a bad queen, the institution is illegitimate. We cannot leave without risking serious repercussions and we cannot voice our dissatisfaction. Revolution, with the ensuing social chaos, is available when the situation becomes unbearable.
Finally, there are institutions that we like but we cannot control. An example is that of a good queen, who uses her power for the benefit of her constituents. These are the queens who are effective at bringing peace and prosperity and they are liked even if they lack democratic credentials. The legitimacy of the European Union, like that of a good queen, was not based on its democratic credentials. On the contrary, Europeans liked the EU because it was useful to them. The EU was effective at bringing peace and prosperity in a divided continent that had suffered many wars. Greece joined the European Union shortly after it restored democracy, as it saw in the EU membership the bulwark against foreign-engineered dictatorship. Eastern European countries joined the Union to shield themselves against Russian imperialism. Most Europeans accepted the euro because it seemed to bring clear benefits or, at least, do no harm. Once things started to go wrong Europeans started to protest. Only their protests had the wrong audience. They could throw out their governments (and they did so) based on the democratic principles of the nation state, but they could not disband European institutions or sack the governments of other eurozone countries. Yet it was the European institutions and creditor states that dictated the economic conditions in the periphery. Vis-à-vis these core Eurozone governments, the citizens of the periphery were disenfranchised.
Because of the coercive relationship between creditors and debtors, the EU has been deformed into an illegitimate establishment. Europeans had willy-nilly convinced themselves that their delegation of powers to the European Union, through their national government, was enough to satisfy their appetite for democracy in the Union. Now that they are confronted by an entity they neither control nor like, they regret the surrender of control. The discontent is palpable in debtor countries. In creditor countries also, despite the fact that they have won, there is backlash against the ‘reckless periphery’ and intra-European migration.
4.2. EU Legitimacy: Creditor States versus Debtor States
An institution is unlikely to listen to those who cannot convincingly articulate a threat of countermeasures if their voices are not heard. During the euro crisis when Europe-periphery was voicing dissatisfaction, it did not have any threats at its disposal to make that dissatisfaction heard in the circles of Europe-core. The relationship between creditors and debtors is a power-relationship —by definition asymmetrical as creditors have the upper hand. The peripheral/debtor states have invested their financial and political future in the euro membership and the penalties for exiting the euro are tremendous. In organizations where entry is expensive or requires severe initiation, like the eurozone, threats of exit sound hollow.  If exit is accompanied by further sanctions, such as financial isolation, the very idea of exit is unthinkable. Organizations that deprive their members of both exit and voice are like dictators or the bad queen. Exit from such organizations, if ever attempted, is equivalent to suicide-bombing.
Monetary policy is a public good because it regulates the economic breathing space for citizens and states. Today the global monetary policy is set by the United States Federal Reserve, which prints the reserve currency of the world. States that challenge the United States monetary supremacy must find some way to exist in a self-sufficient manner running their own economy isolated from the world. Not many states can achieve that. Today Germany is an informal empire because nothing really can be accomplished in Europe without its consent and the periphery states have become third world countries indebted in a currency they do not control. States of the European South have no control over the currency and the printing press the way emerging states do not have such control when they issue debt denominated in a foreign currency. Moreover, the loss of sovereignty over monetary policy has led to the loss of sovereignty over fiscal policy. The PIIGS (Portugal, Ireland, Italty, Greece, Spain) are now the exemplification of the periphery but they do not have the advantages of the classic periphery: they cannot devalue their currency, they cannot impose capital controls — unless they are told to do so — they do not control fiscal policy.
In the eurozone, the ECB, in which the German Central Bank holds an effective veto, dictates monetary conditions. The rest of the states can keep nagging or exit at their peril. Certainly constant nagging can irk some officials, but it is not effective voice. Core states knew well that the debt and deficits of the periphery were not the cause of the crisis. Europe-core was willing to overlook these problems of the periphery before the crisis because supposedly the political priority of European Unity was more important than economic disparities. When the crisis erupted, Germany understood quite well that the repayment of debt could not be guaranteed given the condition of the periphery. It insisted, however, on unmitigated conditionality in the midst of a recession as it pursued single-mindedly the export of its economic policies.
It has been said that if one strikes us on the right cheek, we must turn to offer her the left. Today the name of the game is to stop the first strike preemptively, by blowing off the hand that is about to inflict it. If that is not feasible, one must be able to effectively administer a second strike. Certainly we must not convince ourselves that we are in a Union with states that are relentless at inflicting strikes. The primordial understanding of ‘who’s the enemy’ is the cornerstone for the survival of states. When an economic war is taking place, sovereign is the state that can insulate itself as much as possible from economic crises. By surrendering monetary sovereignty, the peripheral states have deprived themselves of the little independence they had. Now the citizens of these states are at the mercy of the governments of other states. These governments, by definition, cannot be enamored with the well-being of citizens who do not vote for them.
Assuming that exit is excluded as an option, the European Union is faced with the following choice:
(1) Political union; or
(2) an abiding German hegemony.
Only a real political union (like that of the United States or Switzerland) would make it unnecessary for a single member state to remain a hegemon. For Germany and many other states the idea of a real political union is the founding myth of the European Union. It is a distant myth that has absolutely no bearing on the experienced reality.
The European identity is a pretend identity. Europeans endorsed this manufactured identity, believing that it would grant them powers they have never had before. The idea of the European Union was based on the equality of sovereign member states that emerged equally scarred from many wars.  As these states grew and diverged in policies and growth paths, the European identity kept them together, even if clearly some of them grew more powerful and more prosperous than others did. After the euro crisis turned into economic conflict, which divided Europe into creditor states and debtor states, the European identity has crumbled. The trumpeted equality of member states, the foundation of European integration, has been unmasked as a sham. The EU can punish weak states, like Greece and Cyprus, but it is powerless against the dominant member states that define the rules and the exceptions to the rules — the real sovereigns. The periphery, as a result, has been grabbed by old fashioned nationalists who believe they have a duty to defend it. Good luck — they need it. The Leviathan is being ‘Made in Germany.’
*Elli Louka is the founder of Alphabetics (www.alphabetics.info), a consulting company based in Princeton, New Jersey, and has worked with countries and companies on international law issues. Louka has been a Marie Curie Fellow, a Ford Foundation Fellow and Senior Fellow at Orville H. Schell, Jr. Center for International Human Rights at Yale Law School. Publications include: Nuclear Weapons, Justice and the Law; Water Law and Policy: Governance Without Frontiers and International Environmental Law: Fairness, Effectiveness and World Order. Email: firstname.lastname@example.org
 Goethe’s Elective Affinities: with an Introduction by Victoria C. Woodhull 18 (1872).
 See Carl Schmitt, Political Romanticism (translation Guy Oakes, 1986).
 See, e.g., Elli Louka: Water Law and Policy: Governance Without Frontiers (2008) (analyzing how water policy has been oriented towards building a Europe without frontiers).
 See Elli Louka, Conflicting Integration:the Environmental Law of the European Union 5 (2004).
 See Treaty Establishing the European Economic Community (EEC Treaty or Treaty of Rome), Mar. 25, 1957, reprinted in 298 U.T.S. 3. The EEC Treaty was followed by the Single European Act, Feb. 17, 1986; the Treaty on European Union (Maastricht Treaty), Feb. 7, 1992; the Treaty of Amsterdam, Oct. 2, 1997; the Treaty of Nice, Feb. 26, 2001; the Treaty of Lisbon, Dec. 13, 2007. These treaties have been consolidated. See Consolidated Versions of the Treaty on European Union (EU Treaty) and the Treaty on the Functioning of the European Union (TFEU), OJ C 326/1, 26.10.2012.
 On the coercive use of economic power, see Myres S. McDougal, The Impact of International Law upon National Law: A Policy-Oriented Perspective, 4 South Dakota Law Review 25, at 47-48 (1959).
 See, e.g., W. Michael Reisman, Coercion and Self-Determination: Construing Article 2(4), 78 American Journal of International Law 642 (1984).
 Barry Eichengreen, The European Economy since 1945: Coordinated Capitalism and Beyond 9 (2007).
 See Treaty Establishing the European Coal and Steel Community (ECSC), Apr. 18, 1951, reprinted in 261 U.N.T.S. 140.
 Eichengreen, supra note 8, at 164.
 See supra note 5.
 The Man Who Broke the Bank of England, BBC, Dec. 6, 1998 http://news.bbc.co.uk/2/hi/229012.stm.
 See Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance of economic policies, OJ L 209/1, 2.8.97 (the preventive arm of the Stability Pact); Council Regulation (EC) 1467/97 on speeding up and clarifying the implementation of the Excessive Deficit Procedure , OJ L 209/6, 2.8.1997 (the corrective arm of the Stability Pact).
 See Commission Opinion on the existence of an excessive deficit in Portugal – Application of Article 104(5) of the Treaty Establishing the European Community, SEC(2002) 1117 final. See also Council Recommendation for a Council Recommendation to Portugal with a view to bringing an end to the situation of an excessive government deficit – Application of Article 104(7) of the Treaty, SEC(2002) 1110 final.
 For the excessive deficit procedures taken against Germany see http://ec.europa.eu/economy_finance/economic_governance/sgp/deficit/countries/germany_en.htm.
 See, e.g., Recommendation for a Council Recommendation to France with a view to bringing an end to the situation of an excessive government deficit, Application of Article 104(7) of the Treaty, SEC (2003) 516 final. For the excessive deficit procedures taken against France see http://ec.europa.eu/economy_finance/economic_governance/sgp/deficit/countries/france_en.htm.
 See Council of the European Union, 2546th Council meeting, Economic and Financial Affairs, Press Release, Nov. 15, 2003 http://ec.europa.eu/economy_finance/economic_governance/sgp/pdf/11_council_press_releases/2003-11-25_council_press_release_en.pdf; Council of the European Union, 2634th Council meeting, Economic and Financial Affairs, Press Release, Jan. 18, 2005 http://ec.europa.eu/economy_finance/economic_governance/sgp/pdf/11_council_press_releases/2005-01-18_council_press_release_en.pdf.
 Céline Allard, et al., Toward a Fiscal Union for the Euro Area, IMF Staff Discussion Note, at 8 (2013) http://www.imf.org/external/pubs/ft/sdn/2013/sdn1309.pdf.
 It was amended to allow states latitude in addressing ‘economic bad times.’ Compare article 5 of Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance of economic policies, OJ L 209/1, 2.8.97 with article 5 Council Regulation No 1055/2005 of 27 June 2005 amending Regulation (EC) No 1466/97 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies, OJ L 174/1, 7.7.2005.
 See, e.g., Jürgen von Hagen et al., What do Deficits Tell us about Debt? Empirical Evidence on Creative Accounting with Fiscal Rules in the EU, 30(12) Journal of Banking & Finance 3259 (2006). See also Timothy C. Irwin, Accounting Devices and Fiscal Illusions, IMF Staff Discussion Note SDN/12/02, Mar. 28, 2012 http://www.imf.org/external/pubs/ft/sdn/2012/sdn1202.pdf.
 Treaty establishing a Constitution for Europe (TCE), OJ C 310/1 (2004).
 For the events mentioned in this section the following sources have been used: Mauro F. Guillén, Global Economic and Financial Crisis: A Timeline http://globalizationstudies.sas.upenn.edu/node/636; Christophe Gouardo, Euro Crisis Timeline http://www.bruegel.org/fileadmin/bruegel_files/Blog_pictures/Eurocrisis_timeline/121130_Eurocrisis_Timeline.pdf; Greek Crisis Timeline from Maastricht Treaty to ECB Bond Buying http://www.bloomberg.com/news/2012-09-05/greek-crisis-timeline-from-maastricht-treaty-to-ecb-bond-buying.html.
 All numbers are in euros unless otherwise specified.
 The international dispute, known as the Icesave dispute, started when the UK used anti-terrorism legislation against Iceland to freeze the UK-based assets of Kaupthing, Iceland's biggest bank. Eventually the EFTA (European Free Trade Association) Court cleared Iceland of all the charges against it. See Case E-16/11, EFTA Surveillance Authority v. Iceland, Jan. 28, 2013 http://www.eftacourt.int/uploads/tx_nvcases/16_11_Judgment_EN.pdf.
 A stand-by arrangement is a lending instrument of the IMF through which it provides financial assistance to countries based on the condition that they adopt IMF-designated reforms.
 Declaration on a Concerted European Action Plan of Euro Area Countries, Summit of the Euro Area Countries, para. 8, Oct. 12, 2008 http://ec.europa.eu/economy_finance/publications/publication13260_en.pdf.
 Marcus Walker, On the Secret Committee to Save the Euro, a Dangerous Divide, Wall Street Journal, Sept. 24, 2010 http://online.wsj.com/news/articles/SB10001424052748703467004575464113605731560.
 Stephen Castle, Europe Asks France to Rethink Fiscal Plan, NY Times, Nov. 4, 2008 http://www.nytimes.com/2008/11/05/business/worldbusiness/05euro.html?_r=0.
 European Commission, Commission Assesses Stability and Convergence Programmes of Ireland, Greece, Spain, France, Latvia and Malta; Presents Reports Under Excessive Deficit Procedure, Press Release, IP/09/274, Feb. 18, 2009 http://europa.eu/rapid/press-release_IP-09-274_en.htm?locale=en.
 European Bank of Reconstruction and Development (EBRD), IFI Initiative: EBRD, EIB and World Bank Group Join Forces to Support Central and Eastern Europe, Press Release, Feb. 27, 2009 http://www.ebrd.com/pages/news/press/2009/090227.shtml.
 See G-20 Communiqué, Meeting of Finance Ministers and Central Bank Governors, London, Sept. 4-5, 2009 http://www.treasury.gov/resource-center/international/g7-g20/Documents/London%20FM__CBG_Comm_-_Final%204-5%20Sept%202009.pdf.
 OECD, Unemployment in OECD Countries to Approach 10% in 2010, Says OECD, Press Release, June 23, 2009 http://www.oecd.org/els/emp/unemploymentinoecdcountriestoapproach10in2010saysoecd.htm.
 OECD, OECD Unemployment Rate Stable at 8.8% in December 2009, Press Release, at 3, Feb. 8, 2010 http://www.oecd.org/employment/labour-stats/44563975.pdf.
 Greece: 2009 Article IV Consultation—IMF Country Report No. 09/244, Aug. 2009 http://www.imf.org/external/pubs/ft/scr/2009/cr09244.pdf [hereinafter IMF 2009 Report].
 Id. at 16.
 Id. at 33.
 See European Commission, Report on Greek Government Deficit and Debt Statistics, at 3, COM(2010) 1 final.
 See Report by Eurostat on the Revision of the Greek Government Deficit and Debt Figures, Nov. 22, 2004 (in this report the Eurostat revised the Greek debt and deficit numbers from 1997 to 2003) http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/GREECE/EN/GREECE-EN.PDF [hereinafter Eurostat Greek Revision].
 IMF, Greece: Report on Observance of Standards and Codes— Fiscal Transparency Module, IMF Country Report No. 06/49, Feb. 2006 http://www.imf.org/external/pubs/ft/scr/2006/cr0649.pdf.
 Franco-German Declaration, Statement for the France-Germany-Russia Summit, Deauville, Oct. 18, 2010 http://www.euo.dk/upload/application/pdf/1371f221/Franco-german_declaration.pdf%3Fdownload%3D1.
 Arturo C. Porzecanski, Borrowing and Debt: How Do Sovereigns Get into Trouble? in Sovereign Debt Management 309, at 320 (Lee C. Buchheit et al., eds., 2014).
 IMF, Greece: 2013 Article IV Consultation, IMF Country Report No. 13/154, at 6, June 2013 http://www.imf.org/external/pubs/ft/scr/2013/cr13154.pdf [hereinafter IMF Report 13/154].
 See Porzecanski, supra note 41, at 321. See also European Commission, The Economic Adjustment Programme for Greece, Fifth Review, Occasional Paper 87, at 16-18, Oct. 2011 [hereinafter European Commission Fifth Review].
 IMF Report 13/154, supra note 42, at 10.
 For the details of the program, see European Commission, Economic Adjustment Programme for Ireland http://ec.europa.eu/economy_finance/assistance_eu_ms/ireland/index_en.htm.
 See Ireland’s Department of Finance, The National Recovery Plan 2011-2014, at 5-6 (2010) http://www.budget.gov.ie/The%20National%20Recovery%20Plan%202011-2014.pdf.
 See European Commission Fifth Review, supra note 43, at 8.
 See European Commission, Economic Adjustment Programme for Portugal http://ec.europa.eu/economy_finance/assistance_eu_ms/portugal/index_en.htm.
 See Annalyn Censky, ECB Hikes Interest Rates, CNNMoney, July 7, 2011 http://money.cnn.com/2011/07/07/news/international/ecb_interest_rates/; See also Paul Carrel, ECB Hikes Rates, Ready to Move Again if Necessary, Reuters, Apr. 7, 2011 http://www.reuters.com/article/2011/04/07/us-ecb-rates-idUSTRE73600M20110407.
 Carsten Volkery, Saving the Euro: Sarkozy Gets his European Monetary Fund, Spiegel, July 22, 2011 http://www.spiegel.de/international/europe/saving-the-euro-sarkozy-gets-his-european-monetary-fund-a-775892.html.
 See European Commission, Financial assistance for the recapitalisation of financial institutions in Spain http://ec.europa.eu/economy_finance/assistance_eu_ms/spain/.
 ECB, Speech by Mario Draghi, President of the European Central Bank at the Global Investment Conference in London, Press Release, July 26, 2012 http://www.ecb.europa.eu/press/key/date/2012/html/sp120726.en.html.
 See Matthieu Darracq-Paries et al., A Non-Standard Monetary Policy Shock: The ECB’s 3-year LTROs and the Shift in Credit Supply, ECB Working Paper No 1508 (2013) http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1508.pdf.
 See supra note 51.
 IMF, The Liberalization and Management of Capital Flows: An Institutional View (2012) http://www.imf.org/external/np/pp/eng/2012/111412.pdf.
 Friedrich Nietzsche, On the Genealogy of Morality 37 (Keith Ansell-Pearson, ed., 2006) [emphasis in the original].
 Id. at 41.
 On punishment and reform, see id. at 54. See also The Other Moral Hazard, Economist, Sept. 29, 2012, at 61 (Mario Monti, Italy’s prime minister in 2012, stated that ‘for Germany, “economics is a branch of moral philosophy”. Countries must pay for sins of commission (budget deficits) and omission (poor bank supervision). Only then can there perhaps be more European integration to avert problems in the future.’).
 Thomas Meaney, Greece’s Crisis, Germany’s Gain, Los Angeles Times, Mar. 15, 2010 http://articles.latimes.com/2010/mar/15/opinion/la-oe-meaney15-2010mar15.
 Nicholas Dunbar, Goldman Secret Greece Loan Shows Two Sinners as Client Unravels, Bloomberg, Mar. 5, 2012 http://www.bloomberg.com/news/2012-03-06/goldman-secret-greece-loan-shows-two-sinners-as-client-unravels.html.
 See Nick Dunbar, Revealed: Goldman Sachs’ Mega Deal for Greece, Risk Magazine, July 1, 2003 http://www.risk.net/risk-magazine/feature/1498135/revealed-goldman-sachs-mega-deal-greece.
 See European Parliament, Committee of Economic and Monetary Affairs, MEPs Hear Views of Leading Figures on the Greek Fiscal Crisis, Press Release, Apr. 14, 2010 http://www.europarl.europa.eu/sides/getDoc.do?type=IM-PRESS&reference=20100412IPR72554&language=LT [hereinafter European Parliament].
 See Dunbar, supra note 63. The ESA95 is the EU manual on government deficit and debt published by the European Commission and the Eurostat. The 2002 version of the manual was subject to fierce arguments between government debt managers and statisticians. The published version of the ESA95 in 2002 reflected the victory of government debt managers who insisted on having the freedom to use derivatives to adjust deficit ratios. See also European Commission and Eurostat, ESA95 Manual on Government Deficit and Debt, at 202 (2002).
 European Parliament, supra note 64.
 See Council of the European Union, Statement by the Heads of State and Government of the Euro Area, Press Release, Mar. 25, 2010 http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/113563.pdf.
 See European Commission, Financial assistance to Greece http://ec.europa.eu/economy_finance/assistance_eu_ms/greek_loan_facility/.
 Christopher Rhoads, The Submarine Deals that Helped Sink Greece, Wall Street Journal, July 10, 2010 http://online.wsj.com/news/articles/SB10001424052748703636404575352991108208712.
 Eurostat Greek Revision, supra note 38, at 3.
 Kevin Featherstone, The Greek Sovereign Debt Crisis and EMU: A Failing State in a Skewed Regime, 49 Journal of Common Market Studies 193, at 205 (2011).
 ‘French and German banks were particularly exposed to the residents of Greece, Ireland, Portugal and Spain. At the end of 2009, they had $958 billion of combined exposures ($493 billion and $465 billion, respectively) to the residents of these countries.’ See Stefan Avdjiev et al., Highlights of International Banking and Financial Market Activity, BIS Quarterly Review, at 19, June 2010. Furthermore, the joint foreign claims of banks headquartered in the eurozone on the public sectors of Greece, Ireland, Portugal and Spain were 254 billion dollars. ‘Once again, most of those claims belonged to French ($106 billion) and German ($68 billion) banks. These two banking systems had sizeable exposures to the public sectors of Spain ($48 billion and $33 billion, respectively), Greece ($31 billion and $23 billion, respectively) and Portugal ($21 billion and $10 billion, respectively).’ Id. at 21.
 Ronald Janssen, Greece and the IMF: Who Exactly is Being Saved? Center for Economic and Policy Research, at 6, July 2010 http://www.cepr.net/documents/publications/greece-imf-2010-07.pdf.
 Thomas Catan, Past Rifts over Greece Cloud Talks on Rescue, Wall Street Journal, Oct. 7, 2013 http://online.wsj.com/news/articles/SB10001424052702304441404579119180237594344.
 Wolfgang Proissl, Why Germany Fell Out of Love with Europe, at 32, Bruegel Essay and Lecture Series, July 1, 2010 http://www.bruegel.org/publications/publication-detail/publication/417-why-germany-fell-out-of-love-with-europe/.
 The European Commission publishes reports called convergence reports on whether a country meets the requirements to join the euro. In 2000 the European Commission concluded that Greece met the convergence criteria to join the euro. It is worth noting that on December 17, 1999, the Council had just abrogated its previous decision on the existence of an excessive deficit in Greece. See European Commission, Proposal for a Council Decision in accordance with article 122(2) of the Treaty for the adoption by Greece of the single currency on 1.1.2001, COM(2000) 274 final.
 Jean Tirole, The Euro Crisis, Some Reflexions on Institutional Reform, Banque de France Financial Stability Review, No. 16, at 225, Apr. 2012 http://www.imf.org/external/np/seminars/eng/2013/macro2/pdf/tirole1.pdf.
 See Draft Greece Debt Sustainability Analysis, Oct. 21, 2011 (leaked to the media) http://www.scribd.com/doc/69823041/2011-10-21-Greece-Debt-Sustainability-Analysis.
 According to revelations by the former French finance minister, François Baroin, the blackmail was rather explicit during the 2011 Cannes summit of G-20. During that meeting the French president told the Greek prime minister: '"On te le dit clairement, si tu fais ce référendum, il n'y aura pas de plan de sauvetage.’ Papandréou fait mine de ne pas comprendre. Avec un regard d'acier, Merkel lui redit la même chose de façon très ferme. C'est une guerre psychologique.” (translation: “‘We’re telling you straight out, if you do the referendum there will be no salvation plan.’ Papandreou pretends not to understand. With a cold look Merkel reiterates the same thing very firmly. It is a psychological war.“ ) See Eric Mandonnet, "Black Swan," le secret d'Etat révélé par François Baroin, L'Expansion, Oct. 30, 2012 http://lexpansion.lexpress.fr/economie/baroin-devoile-son-journal-de-bord-a-bercy_355329.html.
 Peter Boone et al., The European Crisis Deepens, Peterson Institute for International Economics, Policy Brief 12-4, at 3, 2012 http://piie.com/publications/pb/pb12-4.pdf.
 Greece Bailout: PM Lucas Papademos Gives Final Warning, BBC News, Feb. 11, 2012 http://www.bbc.co.uk/news/world-europe-16998157.
 Greece and the Euro: Flaming February, Economist, Feb. 18, 2012, at 53.
 Greek Protesters Fight with Police as Parliament Agrees Cuts Deal, Guardian, Feb. 12, 2012 http://www.theguardian.com/world/2012/feb/12/greek-protesters-clash-parliament-austerity.
 The World from Berlin: Greek President's ‘Wrath is Exaggerated but Ominous,’ Spiegel, Feb. 17, 2012 http://www.spiegel.de/international/the-world-from-berlin-greek-president-s-wrath-is-exaggerated-but-ominous-a-815973.html.
 Nicole Itano, Germans to Debt-Ridden Greeks: Sell the Acropolis. And a Few Islands, Christian Science Monitor, Mar. 4, 2010 http://www.csmonitor.com/Business/2010/0304/Germans-to-debt-ridden-Greeks-Sell-the-Acropolis.-And-a-few-islands.
 Melissa Eddy, A War of Words over the Euro Crisis, NY Times, May 18, 2012 http://www.nytimes.com/2012/05/19/world/europe/a-war-of-words-between-greece-and-germany-over-euro-crisis.html?_r=0.
 The World from Berlin: Germany’s Power ‘is Causing Fear’ in Europe, Spiegel, Feb. 1, 2012 http://www.spiegel.de/international/europe/the-world-from-berlin-germany-s-power-is-causing-fear-in-europe-a-812715.html.
 Andreas Antoniades, At the Eye of the Cyclone: The Greek Crisis in Global Media, Athens Centre for International Political Economy (2012) http://www.lse.ac.uk/europeanInstitute/research/hellenicObservatory/CMS%20pdf/Research/Greek_Econ_Crisis_in_the_International_Press%5Ben%5D.pdf.
 Anthony Faiola, In Greece, Fears that Austerity is Killing the Economy, Washington Post, Jan. 10, 2012 http://articles.washingtonpost.com/2012-01-10/world/35439195_1_greek-crisis-euro-zone-european-debt-crisis.
 Harry Papachristou, Greek Lawmakers Approve Austerity Bill as Athens Burns, Reuters, Feb. 12, 2012 http://www.reuters.com/article/2012/02/12/us-greece-idUSTRE8120HI20120212.
 Delphine Cavalier, Focus 2: Greek Banks Holding their Breath, BNP Paribas Economic Research, June 1, 2012 http://economic-research.bnpparibas.com/Views/DisplayPublication.aspx?type=document&IdPdf=19649.
 Greece’s Debt Burden: How to End the Agony, Economist, Nov. 10, 2012, at 12.
 Tom Stoukas, Greece First Developed Market Cut to Emerging at MSCI, Bloomberg, June 12, 2013 http://www.bloomberg.com/news/2013-06-11/greece-first-developed-market-cut-to-emerging-as-uae-upgraded.html.
 Greek Parliament Passes Austerity Plan after Riots Rage, NY Times, Feb. 12, 2012 http://www.nytimes.com/2012/02/13/world/europe/greeks-pessimistic-in-anti-austerity-protests.html?pagewanted=all.
 'Now Europe is Speaking German:' Merkel Ally Demands that Britain 'Contribute' to EU Success, Spiegel, Nov. 15, 2011 http://www.spiegel.de/international/europe/now-europe-is-speaking-german-merkel-ally-demands-that-britain-contribute-to-eu-success-a-798009.html.
 See, e.g., SA Aiyar, Is Germany Trying to Win World War III?, Times of India, Feb. 12, 2012 http://blogs.timesofindia.indiatimes.com/Swaminomics/entry/is-germany-trying-to-win-world-war-iii.
 Paul Hockenos, The Merkelization of Europe, Foreign Policy, May 14, 2012 http://www.foreignpolicy.com/articles/2011/12/09/_merkelization_of_europe.
 EFSF Framework Agreement between Belgium, Germany, Estonia, Ireland, Greece, Spain, France, Italy, Cyprus, Luxembourg, Malta, Netherlands, Austria, Portugal, Slovenia, Slovakia, Finland and the European Financial Stability Facility, July 7, 2010 http://www.efsf.europa.eu/attachments/20111019_efsf_framework_agreement_en.pdf.
 How the Greek Debt Reorganisation of 2012 Changed the Rules of Sovereign Insolvency, Allen & Overy – Global Law Intelligence Unit, at 20, Sept. 2012 http://www.allenovery.com/SiteCollectionDocuments/AO%20-%20Greek%20debt%20reorganisation%20of%202012.pdf.
 Id. at 11.
 European Commission, Financial assistance to Greece http://ec.europa.eu/economy_finance/assistance_eu_ms/greek_loan_facility/ [hereinafter Financial Assistance to Greece].
 A collective action clause allows a supermajority of bondholders to agree to a debt restructuring that is legally binding on all bondholders, even those who vote against the restructuring.
 See Financial Assistance to Greece, supra note 105.
 Memorandum of Understanding Between the European Commission Acting on Behalf of the Euro Area Member States, and the Hellenic Republic, Mar. 1, 2012 http://ec.europa.eu/economy_finance/eu_borrower/mou/2012-03-01-greece-mou_en.pdf [hereinafter Memorandum on Greek Bond Exchange] .
 The Hellenic Financial Stability Fund (HFSF) is a bank rescue fund. It was founded in July 2010 as a private legal entity. It has administrative and financial autonomy from the state. It was created by the Greek government to recapitalize the Greek banking sector and resolve unsound banks. See Greek Law 3864/2010 (adopted July 21, 2010) as amended by Greek Law 4051/2012 (adopted Feb. 29, 2012). The 2012 EU/IMF loan to Greece injected fifty billion into the HFSF through the EFSF. By 2013 the HFSF owned majority stakes in Greece's top four banks – National, Piraeus, Alpha and Eurobank. See Hellenic Financial Stability Fund, Annual Financial Report for the period from 01/01/2012 to 31/12/2012, Aug. 2013. In 2013, under pressure by the troika, the chairman of the HFSF was of Dutch nationality. However, he resigned soon thereafter.
 See Memorandum on Greek Bond Exchange, supra note 108. See also Financial Assistance Facility Agreement between EFSF, the Hellenic Republic and the Bank of Greece – Private Sector Involvement Liability Management Facility Agreement, Mar. 1, 2012 http://www.efsf.europa.eu/attachments/efsf_financial_assistance_facility_agreement_greece_psi_lm.pdf [hereinafter PSI LM].
 See Memorandum on Greek Bond Exchange, id. See also Financial Assistance Facility Agreement between the EFSF, the Hellenic Republic and the Bank of Greece, Mar. 1, 2012 http://crisisobs.gr/wp-content/uploads/2012/02/8-bridge-loan.pdf [hereinafter ECB Credit Enhancement Facility Agreement].
 See Memorandum on Greek Bond Exchange, id. See also Financial Assistance Facility Agreement between the EFSF, the Hellenic Republic and the Bank of Greece (Bond Interest Facility), Mar. 1, 2012 http://www.efsf.europa.eu/attachments/efsf_financial_assistance_facility_agreement_greece_bond_interest.pdf [hereinafter Bond Interest Facility].
 See Co-financing Agreement between the Hellenic Republic, the Bank of Greece (acting as Bond Paying Agent), the EFSF, the Wilmington Trust London Limited (acting as Bond Trustee) and the Bank of Greece (acting as Common Paying Agent), Mar. 1, 2012 http://crisisobs.gr/wp-content/uploads/2012/02/7-co-financing-agreement.pdf.
 Art. 7.4, id.
 Art. 6, id.
 See supra notes 115-118.
 See, e.g., art. 13, PSI LM, supra note 115.
 See, e.g., Annex 4: Form of Legal Opinion, ECB Credit Enhancement Facility, supra note 116.
 For an article critical of waiving the sovereign immunity of central banks, see Note, Too Sovereign to Be Sued: Immunity of Central Banks in Times of Financial Crisis, 124 Harvard Law Review 550, at 567 (2010) (arguing that the international reserves of central banks that are beyond the reach of creditors could allow a country to deal with default more successfully). The Bank of International Settlements (BIS) – the central bank of central banks – presents itself as the type of bank whose extensive immunities make it possible to ‘protect bank assets held with the BIS from measures of compulsory execution and sequestration.’ See BIS as a Bank for Central banks http://www.bis.org/banking/bisbank.htm.
 See United States Central Intelligence Agency (CIA), The World Factbook https://www.cia.gov/library/publications/the-world-factbook/rankorder/2188rank.htm.
 The 2010 Memoranda have been amended periodically to reflect the progress made by Greece in implementing the loan conditionality. They include: the Memorandum of Economic and Financial Policies (MEFP), the Memorandum of Understanding on Specific Economic Policy Conditionality (MOU) and the Technical Memorandum of Understanding (TMU). The Memoranda as amended are reprinted in European Commission, The Second Economic Adjustment Programme for Greece, First Review, Occasional Paper 123, Annex 3, Dec. 2012 http://ec.europa.eu/economy_finance/publications/occasional_paper/2012/pdf/ocp94_en.pdf [hereinafter Economic Adjustment Programme for Greece].
 Id. at 75.
 Id. In 2008 Greece changed the rules on investment in Greek strategic companies to ensure state control on companies that were to be privatized, the so-called Public Benefit State Companies (i.e., certain public utilities). While Greece was willing to let private investors acquire shares of such companies it was reluctant to allow private shareholders to increase their stake to an extent that they would control such companies. See Thomas Papadopoulos, Greek Legislation on Strategic Investments: the Next ‘Golden Share’ Case before the European Court of Justice?, 6 European Company Law 264 (2009). See also Case C-244/11, Action under Article 258 TFEU for failure to fulfill obligations, European Commission v. Hellenic Republic, Nov. 8, 2012 http://curia.europa.eu/juris/document/document.jsf?text=&docid=129465&pageIndex=0&doclang=en&mode=req&dir=&occ=first&part=1&cid=253074. The European Court of Justice struck down Greece’s restrictions on the privatization of public utilities because they lacked precision and granted too much discretion to the state. A more precise Belgian law on strategic companies was upheld by the Court.
 The Fund is a ‘société anonyme’ (public limited liability corporation) in which the Hellenic Republic is the sole shareholder with a share capital of thirty million. Any asset transferred to the fund by the state is to be sold, developed or liquidated. The return of any asset back to the state is not allowed. The decisions of the board of directors take into account the opinions of the council of experts, which are not binding. The council of experts is composed of seven persons. Four persons are appointed by the board of directors and three by the troika. The first three experts appointed by the troika were from Germany, Spain and Slovakia. See http://www.hradf.com/en/the-fund.
 See Memorandum of Understanding on Specific Economic Policy Conditionality, in Economic Adjustment Programme for Greece, supra note 126, at 189.
 Jared A. Blacker, Privatization under Duress: The Privatization of the Greek Economy, in 30 Perspectives on Business and Economics – Greece: The Epic Battle for Economic Recovery 3 (2012).
 Greece: Is the Grexit off the Table? Economist, Feb. 9, 2013, at 53.
 Renewed Greek Troubles: Darkness at Midnight, Economist, June 15, 2013, at 74.
 Re: Analysis for Edit – Russia/Greece/Germany/Eurozone – Greece: Why Privatization Matters?, email id-5262440, Wikileaks: The Global Intelligence Files, released Mar. 2, 2013 http://wikileaks.cabledrum.net/gifiles/docs/5262440_re-analysis-for-edit-russia-greece-germany-eurozone-greece.html [hereinafter Greek Privatization].
 See supra note 130.
 Greek Privatization, supra note 136.
 Greek Banks to Satisfy Finnish Collateral Demand Resources, Reuters, Feb. 15, 2012 http://www.reuters.com/article/2012/02/15/greece-banks-bailout-idUSA8E7N503Q20120215.
 See website of Finnish Ministry of Finance https://www.vm.fi/vm/fi/04_julkaisut_ja_asiakirjat/03_muut_asiakirjat/20130514Kreika/name.jsp.
 The sovereign debt crisis was seen as a moral crisis in Finland. The media often used terms ‘countries that lived carelessly on borrowed money,’ ‘moral decay,’ ‘countries that handled their accounts badly.’ See Paul Jonker-Hoffrén, Finland: a Tough Nordic Accountant that is Caught up by Reality, LSE Blog Euro Crisis in the Press, June 22, 2013 http://blogs.lse.ac.uk/eurocrisispress/2013/06/22/finland-a-tough-nordic-accountant-that-is-caught-up-by-reality/.
 See [OS] FINLAND/GREECE/EU/ECON – Finland Hails Collateral Deal but Experts Call it a 'Farce,' email id- 4962177, Wikileaks, Global Intelligence Files, released Mar. 18 2013, http://search.wikileaks.org/gifiles/?viewemailid=4962177.
 The Steering Committee members included the following companies: Allianz (Germany); Commerzbank (Germany); Deutsch Bank (Germany); LBB BW (Germany); BNP Paribas (France); CNP Assurances (France); ING (France); National Bank of Greece; and Alpha Eurobank (Greece). See Private Creditor-Investor Group on Greece Forms Steering Committee to Pursue Bond Negotiations, IIF Press Release, Nov. 28, 2011 http://www.iif.com/press/press+219.php.
 Jeromin Zettelmeyer et al., The Greek Debt Restructuring: An Autopsy, at 24, Working Paper 13-8, Peterson Institute for International Economics, 2013 http://www.piie.com/publications/wp/wp13-8.pdf.
 European Commission, Q&A on the Task Force for Greece and Its Second Quarterly Report, Press Release, MEMO/12/184, Mar. 15, 2012 http://europa.eu/rapid/press-release_MEMO-12-184_en.htm.
 Council of the European Union, Eurogroup Statement, Press Release, Feb. 21, 2012 http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/128075.pdf.
 Phillip Inman, Greece is Right to Expose German Loans Hypocrisy, Guardian, Apr. 26, 2013 http://www.theguardian.com/world/blog/2013/apr/26/greece-expose-german-loans-hypocrisy.
 For an assessment of the damages incurred by Greece during the World War II German occupation, see Apostolos Vetsopoulos, The Economic Dimensions of the Marshall Plan in Greece, 1947-1952: The Origins of the Greek Economic Miracle (Doctoral Thesis, University of London, 2002) http://discovery.ucl.ac.uk/1317677/1/270158.pdf .
 See Suzanne Daley, As Germans Push Austerity, Greeks Press Nazi-Era Claims, NY Times, Oct. 5, 2013 http://www.nytimes.com/2013/10/06/world/europe/as-germans-push-austerity-greeks-press-back.html?_r=0.
 See Jurisdictional Immunities of the State, Germany v. Italy: Greece Intervening, Judgment, Feb. 3, 2012 http://www.icj-cij.org/docket/files/143/16883.pdf (Germany claimed that because it enjoyed sovereign immunity it could not be sued in Italian courts. The ICJ agreed with Germany).
 IMF, Greece: Ex Post Evaluation of Exceptional Access under the 2010 Stand-by Arrangement, IMF Country Report No. 13/156, at 1, June 2013 http://www.imf.org/external/pubs/ft/scr/2013/cr13156.pdf.
 Id. at 28.
 Id. at 31.
 Id. at 34.
 IMF, Greece: Third Review under the Extended Arrangement under the Extended Fund Facility, at 5, IMF Country Report No. 13/153, June 2013 http://www.imf.org/external/pubs/ft/scr/2013/cr13153.pdf [hereinafter IMF Third Review]. According to the IMF, the recession has been one of the deepest peacetime recessions in industrialized economies. The economy contracted by twenty-two percent between 2008 and 2012 and unemployment rose by twenty-seven percent. Youth unemployment exceeded sixty percent.
 By April 2013 the banks had repaid forty billion of ECB financing, see id. at 7.
 Id. at 23.
 ECB, Governing Council Decision on Emergency Liquidity Assistance Requested by the Central Bank of Cyprus, Press Release, Mar. 21, 2012 http://www.ecb.int/press/pr/date/2013/html/pr130321.en.html.
 Cyprus Rejects Eurogroup’s Savings Levy and Bailout Deal, Euronews, Mar. 19, 2013 http://www.euronews.com/2013/03/19/cyprus-rejects-eurogroup-s-savings-levy-and-bailout-deal/.
 The ELA consists of loans granted by national central banks to troubled commercial banks against adequate collateral.
 European Commission, The Economic Adjustment Programme for Cyprus, Occasional Paper 149, May 2012, at 15, 31 http://ec.europa.eu/economy_finance/publications/occasional_paper/2013/pdf/ocp149_en.pdf [hereinafter Economic Adjustment Programme for Cyprus]. In September 2012 Cypriot banks’ direct loans to the Greek economy amounted to nineteen billion, which was the equivalent of about one hundred and eleven percent of Cypriot GDP. The Greek government debt held by Cypriot banks reached 4.7 billion in June 2011. Following their participation in the Greek PSI, three domestic banks had to apply a seventy-four percent discount to the nominal value of the Greek government bonds they held.
 The country’s banks were able to draw only three hundred and seventy-six million from the regular ECB liquidity operations because the ECB had stopped accepting Cypriot sovereign bonds as collateral starting June 2012. See Paul Carrell, ECB Sets Monday Deadline for Cyprus Bailout Deal, Reuters, Mar. 21, 2013 http://www.reuters.com/article/2013/03/21/us-ecb-cyprus-funding-idUSBRE92K09Z20130321.
 Graeme Wearden, German Politicians Threaten to Block Cyprus Bailout, Guardian, Jan. 9, 2013 http://www.theguardian.com/world/2013/jan/09/german-politicians-threaten-cyprus-bailout.
 Economic Adjustment Programme for Cyprus, supra note 168, at 42.
 The loan was provided through the European Stability Mechanism, see Financial Assistance Facility Agreement between European Stability Mechanism and the Republic of Cyprus and Central Bank of Cyprus, May 8, 2013 http://www.esm.europa.eu/pdf/ESM%20FFA%20Cyprus%20publication%20version%20final.pdf.
 See Memorandum of Understanding on Specific Economic Policy Conditionality, in Economic Adjustment Programme for Cyprus, supra note 168, at 66.
 Id. at 43.
 Andrew Higgins, Currency Controls in Cyprus Increase Worry about Euro System, NY Times, July 9, 2013 http://www.nytimes.com/2013/07/10/world/europe/currency-controls-in-cyprus-increase-worry-about-euro-system.html?_r=0.
 Draghi Says Any Cyprus Gold Sale Must Cover Emergency-Loan Loss, Bloomberg, Apr. 12, 2013 http://www.bloomberg.com/news/2013-04-12/draghi-says-any-cyprus-gold-sale-must-cover-emergency-loan-loss.html. The foreign reserves and gold of Cyprus are minimal — estimated at 1.3 billion dollars in 2011. See CIA, The World Factbook https://www.cia.gov/library/publications/the-world-factbook/rankorder/2188rank.htm.
 Economic Adjustment Programme for Cyprus, supra note 168, at 37.
 Cyprus has been shut out of the financial markets since mid-2011 as yields on its bonds skyrocketed. In 2011 Cyprus was able to secure a 2.5 billion loan from Russia at 4.5 percent interest rate. Id. at 35.
 Jim Armitage: Need to Keep Germany Sweet Pulls the Plug on Russia's Cyprus Rescue, Independent, Mar. 23, 2013 http://www.independent.co.uk/news/business/comment/jim-armitage-need-to-keep-germany-sweet-pulls-the-plug-on-russias-cyprus-rescue-8546736.html.
 In 2011 Cyprus suffered a triple-point downgrade by Fitch and one-point downgrade by S&P on the grounds of the large exposure of Cypriot banks to Greek government bonds. See Economic Adjustment Programme for Cyprus, supra note 168, at 37.
 Putin, the president of Russia, sees the oligarchs who control the oil and gas industry in Russia as opportunists who took advantage of the chaos, which followed the collapse of the state in the 1990s, to get rich. He has strived to transform them into mere managers of his ascending empire. See Alena V. Ledeneva, Can Russia Modernise? Sistema, Power Networks and Informal Governance (2013).
 See Ben Judah, Did Putin Sink Cyprus? NY Times, Apr. 2, 2012 http://www.nytimes.com/2013/04/03/opinion/putins-role-in-cypruss-collapse.html?_r=0.
 Andrew Higgins, Cyprus Bank’s Bailout Hands Ownership to Russian Plutocrats, NY Times, Aug. 21, 2013 http://www.nytimes.com/2013/08/22/world/europe/russians-still-ride-high-in-cyprus-after-bailout.html.
 Economic Adjustment Programme for Cyprus, supra note 168, at 11-12. The assets of the banking sector amounted to seven hundred and eighteen percent of Cyprus’ 2012 GDP. By comparison, Luxembourg’s banking sector is two thousand one hundred and fifteen percent of Luxembourg’s 2012 GDP.
 Christopher Pissarides, Cyprus Finds not all Nations are Equal, Financial Times, Mar. 27, 2013 http://www.ft.com/intl/cms/s/0/e109906e-9718-11e2-8950-00144feabdc0.html#axzz2nAjmfmht.
 German Intelligence Report: Aid to Cyprus Could Benefit Russian Oligarchs, Spiegel, Nov. 5, 2012 http://www.spiegel.de/international/europe/german-spy-agency-says-cyprus-bailout-would-help-russian-oligarchs-a-865291.html.
 The financial secrecy index produced by the Tax Justice Network is based on fifteen indicators that include transparency of company ownership and a country’s offshore financial sector. Switzerland is rated as the number one secrecy jurisdiction while the United States takes sixth place. See http://www.financialsecrecyindex.com/introduction/fsi-2013-results.
 See FATF/OECD and IMF, Anti-Money Laundering and Combating the Financing of Terrorism, Mutual Evaluation Report of Germany, at 9 (2010) http://www.fatf-gafi.org/media/fatf/documents/reports/mer/MER%20Germany%20full.pdf.
 Id. at 13.
 Id. at 14.
 See Financial Secrecy Index: Narrative Report on Germany, Tax Justice Network, Nov. 7, 2013 http://www.financialsecrecyindex.com/PDF/Germany.pdf.
 Tanguy Verhoosel, Total Impasse on Savings Taxation, Europolitics, May 15, 2012 http://www.europolitics.info/total-impasse-on-savings-taxation-art334295.html.
 The UK, Germany and Austria have signed the so-called ‘Rubik’ bilateral tax agreements with Switzerland. According to Project Rubik devised by the Swiss Bankers Association, a flat-rate tax on a client's assets in Swiss banks will be applied but the client’s name is not to be revealed to others, honoring the Swiss tradition of banking secrecy. See Project RUBIK http://www.swisstreasurer.ch/index.php?option=com_content&view=article&id=60:banking&catid=17:researchpaper&Itemid=40. The German-Swiss agreement was not eventually ratified but it could be revived.
 The UK and Switzerland have refused requests for assistance in locating assets of former dictators. See Recovering Stolen Assets: Making a Hash of Finding the Cash, Economist, May 11, 2013, at 63.
 International Finance: Money Will Find a Way, Economist, July 6, 2013, at 14.
 Economic Adjustment Programme for Cyprus, supra note 168, at 10.
 Id. at 14.
 Id. at 40, 53.
 See id. at 42.
 The Memorandum of Understanding on Specific Economic Policy Conditionality adopted in 2013 has no provisions on how Cyprus could revitalize its financial services sector so that it remains an international finance center. See Memorandum of Understanding on Specific Economic Policy Conditionality, id. at 66.
 See Peter Coy, A Cypriot Nobelist is ‘Appalled’ by the Proposed Bailout Bank Tax, Bloomberg Business Week, Mar. 19, 2013 http://mobile.businessweek.com/articles/2013-03-19/a-cypriot-nobelist-appalled-by-the-bailout-bank-tax.
 Assessment of the Public Debt Sustainability of Cyprus by ECB and the European Commission, in Economic Adjustment Programme for Cyprus, supra note 168, at 114.
 See Albert O. Hirschman, Exit, Voice and Loyalty: Responses to Decline in Firms, Organizations and States 4-5 (1970).
 See Elli Louka, Water Law and Policy: Governance Without Frontiers 205-43 (2008) (analyzing models of participatory democracy).
 See, e.g., Hirschman, supra note 209, at 66.
 See Lawrence LeDuc et al., The Electoral Impact of the 2008 Economic Crisis in Europe 87, in Economic Crisis in Europe: What It Means for the EU and Russia (Joan DeBardeleben et al., eds., 2013).
 See supra note 99.
 See Anna Myunghee Kim , Foreign Labour Migration and the Economic Crisis in the EU: Ongoing and Remaining Issues of the Migrant Workforce in Germany, IZA Discussion Paper No. 5134, Forschungsinstitut zur Zukunft der Arbeit (Institute for the Study of Labor) (2010) http://ftp.iza.org/dp5134.pdf.
 Hirschman, supra note 209, at 96.
 For example, Iran, Syria, North Korea. See Elli Louka, Nuclear Weapons, Justice and the Law (2011) (on the economic isolation of states that are allegedly manufacturing nuclear weapons and are not the internationally recognized nuclear powers).
 Paul De Grauwe, Governance of a Fragile Eurozone, at 3, CEPS Working Document, No. 346, Centre for European Policy Studies, 2011. See also Barry Eichengreen et al., The Pain of Original Sin 13, in Other People’s Money: Debt Denomination and Financial Instability in Emerging Market Economies (Barry Eichengreen et al., eds. 2005).
 See generally Sebastian Dullien et al., The Long Shadow of Ordoliberalism: Germany’s Approach to the Euro Crisis, European Council of Foreign Relations Policy Brief No. 49 (2012) http://ecfr.eu/page/-/ECFR49_GERMANY_BRIEF.pdf.
 See Elli Louka, Precautionary Self-Defense and the Future of Preemption in International Law 951, in Looking to the Future: Essays on International Law in Honor of W. Michael Reisman (M. H. Arsanjani et al., eds., 2011).
 See generally Carl Schmitt, The Concept of the Political 26 (foreword by Tracy B. Strong, 2007).
 States that have had the most successful ammunition against economic crises include Switzerland and China.
 See, e.g., Henri Cartier-Bresson, Europeans (1955).
 This type of economic conflict is not new. Before World War II, the League of Nations emphasized the importance of economic disarmament. See Herbert Samuel, The World Economic Conference, 12 International Affairs 439 (1933). For the economic foreign policy of the United States before World War II, see Jeff Frieden, Sectoral Conflict and Foreign Economic Policy 1914-1940, 42 International Organization 59 (1988).
 See Carl Schmitt, Political Theology: Four Chapters on the Concept of Sovereignty 5-6 (translation George Schwab, 1985). See also Bodin, On Sovereignty 1 (defining sovereignty as the ‘absolute and perpetual power,’ what the Greeks call akra exousia) (Julian H. Franklin ed., 1992). According to Bodin, the sovereign can never become the underdog. The sovereign ‘cannot tie his hands even if he wished to do so.’ See id. at 13.
 See Timothy Garton Ash, 2014 is not 1914, but Europe is Getting Increasingly Angry and Nationalist, Guardian, Nov.17, 2013 http://www.theguardian.com/commentisfree/2013/nov/18/europe-angry-nationalist-eu-elections.
 Thomas Hobbes, Leviathan or The Matter, Forme and Power of a Common Wealth Ecclesiastical and Civil 251-61 (C.B. Macpherson, ed., 1971) (analyzing the commonwealth by acquisition).