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.
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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."( http://en.wikipedia.org/wiki/Greek_government-debt_crisis). 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.” (http://www.nytimes.com/2012/10/18/business/global/greek-negotiations-hit-snags-from-inside-and-out.html?pagewanted=2&ref=todayspaper). 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.” (http://www.fsmitha.com/h2/ch37-greece.htm. 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. (http://www.quora.com/Greece/Why-was-Greece-allowed-into-the-EU.)
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.