Mr. Geithner was there for a meeting with Wolfgang Schäuble, Germany’s finance minister, who would spend his summers at his vacation home on the tiny island.
The topic was Greece.
In the home’s library, the two men spoke about Greece’s prospects and begun discussing ways for the European Union to keep the country in the eurozone.
To Mr. Geithner’s dismay, however, Mr. Schäuble took the conversation in a different direction.
“He told me there were many in Europe who still thought kicking the Greeks out of the eurozone was a plausible — even desirable — strategy,” Mr. Geithner later recounted in his memoir, “Stress Test: Reflections on Financial Crises.” “The idea was that with Greece out, Germany would be more likely to provide the financial support the eurozone needed because the German people would no longer perceive aid to Europe as a bailout for the Greeks,” he says in the memoir.
“At the same time, a Grexit would be traumatic enough that it would help scare the rest of Europe into giving up more sovereignty to a stronger banking and fiscal union,” Mr. Geithner wrote. “The argument was that letting Greece burn would make it easier to build a stronger Europe with a more credible firewall.”
Fast-forward three years. What Mr. Schäuble articulated that summer afternoon to Mr. Geithner is finally taking shape.
Greece is in a harrowing last-minute standoff with the European Union over whether it will remain part of the eurozone, and Greek citizens are set to make the decision in a referendum vote on Sunday. That vote is happening against a backdrop of bank runs; citizens are camped outside of banks, where capital controls now restrict the amount of money that can be removed.
Politicians and investors have been trying to “war game” the outcome. Who is bluffing? The Greeks or the European Union.
The conversation between Mr. Geithner and Mr. Schäuble gives a strong indication. As Mr. Geithner said of another conversation he had with Mr. Schäuble: “He has a clear view: Greece had binged, so it needed to go on a strict diet.”
Jean-Claude Juncker, the head of the European Union’s executive branch, said on Monday that “the door is still open” and that he was hoping to bring Greece back to the negotiating table. But that was as far as he would go.
He was no doubt sincere in his hopes that Greece would agree to the latest proposed bailout arrangement. But this time, the Europeans have nothing left to give Greece, and any concession will only undermine the strength of those left in the eurozone — possibly inspiring other countries like Portugal, Spain and Italy to ask for even better loan terms.
A crucial decision made over the weekend had largely gone unremarked upon but is telling. The European Central Bank decided to halt an expansion of its emergency lending facility to Greek banks. That facility could have allowed the banks to continue operating without as much panic and helped avoid some of the capital controls by providing additional liquidity.
No central bank likes lending into a bank run in which it expects it will lose money, so the decision may make sense on the merits. But it also serves another purpose, one that is political.
By closing the cash spigot, the E.C.B. managed to instill additional fear and panic into the day-to-day lives of the Greek people, ahead of the vote on the referendum.
That panic could cut two ways. The Greeks could look at the lines around the banks as a warning of what’s about to come, which would undoubtedly be worse in the short term, and vote in favor of the latest bailout agreement.
Of course, they could also view the lines as further evidence of their subjugation to the eurozone and the continued austerity they would experience under the bailout, pushing them to vote against it.
The E.C.B.’s decision also has another important purpose outside of Greece: It might be a warning to countries like Spain and Italy, should they ever consider following Greece out of the eurozone — if that comes to pass.
It may seem counterintuitive, but rather than make a Greece exit easy and seamless to avoid dislocations in financial markets, the E.C.B. has the perverse incentive to make it messy and difficult to deter others.
None of this is to suggest that the E.C.B. is the source of Greece’s problems. They were largely self-inflicted. Regardless of whether you think that the creation of the euro was a terrible mistake, Europe has severely mishandled the situation in Greece.
“The economics behind the program that the ‘troika’ (the European Commission, the European Central Bank and the International Monetary Fund) foisted on Greece five years ago has been abysmal, resulting in a 25 percent decline in the country’s G.D.P.,” Joseph Stiglitz, an economist and professor at Columbia University, wrote on Monday. “I can think of no depression, ever, that has been so deliberate.”
In his book, Mr. Geithner reflected on his conversations with European leaders about the measures they sought to take. “The desire to impose losses on reckless borrowers and lenders is completely understandable, but it is terribly counterproductive in a financial crisis,” Mr. Geithner said.
At one point, he told Mr. Schäuble: “You know you sound a bit like Herbert Hoover in the 1930s. You need to be thinking about growth.”