Thursday, October 18, 2012

The Euro Crisis and Feelings of Solidarity

The financial crisis in Europe raises an important question about the emotional basis for solidarity between groups. Over the past six months, as bond-holders downgraded Greek government debt, there was the danger that Greece would default, leave the Eurozone, and reintroduce a devalued drachma as the unit of its currency. Anticipating such a default, the depositors who held Euros in Greek banks worried that they would be forced to take drachmas instead of Euros. The result: A run on the banks and widespread business bankruptcies. In short, a financial Armageddon.

It appears that for the moment this threat has passed, though political paralysis in Greece could upend any agreements. As the New York Times Reports, “The visit last week to Greece by Chancellor Angela Merkel of Germany was an important moment, a conclusion to the long internal German debate about whether Greece should “Grexit,” or leave the euro. Her visit, and accompanying statements, made it clear that Germany was committed to Greek membership. Financial experts and officials say that implies that Berlin will also allow Athens more time, as it has asked (supported by the International Monetary Fund), to meet the terms of its bailout as its economy continues to shrink in a deep recession.”

I think this story is as much a morality play, with all the emotions such stories stimulate, as it is a tale of monetary maneuvers. The main characters of the play are Greek profligacy and chicanery, and German harshness and brutality. Germany’s seeming brutishness is why some Greeks feel self-righteous in opposing all demands for sacrifice and austerity. Greece’s seeming profligacy is why the German electorate is reluctant to help Greece by supporting the purchase of Greek government debt. It is also why Germany, and other Eurozone members, insists that Greece restructure its economy as a precondition for receiving aid.

There is little doubt that Greece’s leaders need a restructuring program and that it will prove painful. As the following chart shows, Greek government debt as a percentage of the country’s Gross National Product (GNP) has been an outlier, even before the financial crisis. Moreover, Greece’s labor productivity near the peak of the financial bubble, in 2006, was considerably lower than in other European countries 

In addition, as the chart below shows, Greece’s employment ratio, the ratio of the number of employees to the total population, was significantly lower than some of its peers. This was at the peak of the financial bubble and before the financial crisis.  


These three charts suggest that Greece’s public sector was indeed too large relative to the economy’s productivity, and its population was not as hardworking. The question is why?

One hypothesis, offered by a conservative Greek newspaper, is that after the military was removed from power in 1974, subsequent governments sought to integrate the “left leaning portions of the populations by spending on pensions, public sector jobs and social benefits."( As one New York Times reporter writes, “The three governments that have run Greece in the past three years have been loath to fire any of the nation’s 700,000 public workers, an influential voting bloc. And now, with unemployment at 25 percent, it is considered anathema to accede to the troika’s demands to fire at least 15,000 government employees. Although those jobless would get unemployment benefits for about a year, they would face almost impossible odds against being rehired — a situation that politicians fear would lead to further unrest.” ( But as analysts have also pointed out, tax-evasion is a Greek national sport, benefiting the wealthy far more than average taxpayer. “The Greek government in 2009 collected revenues that were only 36.9 percent of GDP, far below the average of 43.9 percent for members of the European Union.” ( Deficits after all are the difference between revenues and expenses.

There is also the oft told and true story that Greece lied in its application to join the Eurozone, by hiding some of its government debt through the use of credit derivatives and swaps. But, runs a counter-narrative, other countries have violated basic EU rules on debts and deficits, including Germany and France. Moreover, this counter-narrative continues, the Eurozone countries could have readily detected Greece’s cheating, but chose instead to accept Greece for moral and political reasons, in particular to ensure that a military junta would never again rule Greece. (    

People also argue that Greece benefited “unfairly” when it joined the Eurozone since banks, businesses and governments could borrow money at rates that were too low relative to the overall performance of the Greek economy. Cheap capital fueled a bubble, which in turn set the stage for the Greek economy’s downward spiral. But, goes the counter-narrative, had there been no Eurozone, the German deutschmark would have been higher and its exports lower than turned out to be the case. The Euro, as the common currency, stimulated German exports and the German banks invested the resulting surplus in…. Greek debt!

These dueling narratives are about accountability. But they also highlight the difficulty of parsing accountability in a system with so much interdependence. This ambiguity has psychological effects. One common response is to reduce ambiguity by thinking in extremes. The Greeks are not simply hamstrung by a partially developed economy, too dependent on shipping and tourism. Rather, they are lazy. The Germans are not simply asking Greek citizens to make appropriate sacrifices. Rather, they are Nazis who are once again “invading” Greece and punishing its citizens.

Consider the opposite case. People the world over are generous toward victims of earthquakes. It is hard to blame victims for a natural disaster, though their governments might be blamed for failing to enforce building codes. People feel solidarity with such victims based on their shared human vulnerabilities in the face of disaster. But when questions of accountability arise, people may suppress feelings of solidarity with those who are suffering, by thinking in extremes and stereotypes. This is why the conflict between Germany and Greece has been so difficult to stage with rational arguments alone. For example, how much austerity is sensible before Greece digs itself in a hole, unable to pay off its debt because incomes are so low. 

One question this suggests is how and under what conditions might people have feelings of solidarity that are strong enough to stave off stereotyping.  This question goes to the heart of the emotional meaning of the European Union. Many economists looked askance at the monetary union, arguing presciently that with out a fiscal union, where taxing and spending are centrally controlled, the common currency would create trouble rather than opportunity. This is indeed where we are now. Germany needs to support Greek debt but its citizens have no vote on how Greece taxes its citizens and spend its money. Greece cannot devalue its currency, the drachma no longer exists, in order to stimulate exports and increase employment.

One hypothesis is that monetary union represented a technocratic achievement, the result of elite planning and forethought, without resting on an emotional conviction about why the idea of a United Europe was important to Europeans. What was the meaning of a European identity?  Indeed just as European elites were invoking integration, we have seen movements of local “devolution,” -- the assertion of regional identities --for example, Catalonia in Spain and Scotland in Great Britain. Indeed, one theory of economic development holds that in a global economy the City-state, rather than the nation-state becomes humanity’s economic engine. Economic elites already live globally, owning homes and apartments in several world cities, such as London, Paris, Tokyo, Moscow and New York.  

Perhaps one way of explaining the gap between technocratic plans and felt identity is to note that the emotional meaning of Europe has not been simply an economic one. After the war the idea of a United Europe was a bulwark against Communism and the Soviet Union, and was also a way of ensuring that Germany would never again launch a war. From 1960 to 1990 it represented Europe’s recovery from the war. and its hope to achieve United States levels of productivity and scale. Europe would at long last become modern. Moreover, it would be the equal of the United States, while more effective in providing for the health and welfare of its citizens. It represented the alternative between socialism and capitalism.  After the fall of the Soviet Union, Europe meant pulling countries with totalitarian pasts into a common market, thus assuring that they would remain democracies. But what is it now? Perhaps the idea of the monetary union was too “economistic.” Elites had not done the hard work of linking the monetary union to issues of identity. Absent this work, a monetary union cannot draw on feelings of solidarity when people are called upon to make sacrifices.

Behavioral economics has changed the theory of finance by linking psychology to how people make financial decisions. Perhaps we need a methodology for linking psychoanalysis to political economy. In the face of conflicting interests, and the tension between immediate needs and longer-term outcomes, we should expect intergroup dynamics to play a critical role. The challenges elites face are not simply political. Instead, political dynamics are based not simply on interests, but on the emotions that bring people together and drive them apart.