Monday, 26 November 2012

Greece and Spain's Debt Death-Spiral Is a Lethal Game of Peek-a-Boo

Through the summer, the plight of Greece and then Spain had all the hallmarks of a catastrophe, ending in a Euro-exit and massive currency devaluation, but after that the hope of redemption.
Things have gone quiet through the Autumn, at least in the press, but chatting this week to psychiatrist Richard Peterson at Marketpsychdata, a specialist in tracking market sentiment, I began to sense the problem worsening. Why?
There’s the very obvious reason – the European economy has worsened (see this brief review of France’s position), leaving just Germany as a substantial economy capable of supporting its neighbors.

That would be fine if we were looking at a positive upward trend, say in competitiveness. But as these countries argue for more money for the EU, their own positions are deteriorating, and giving the EU more money looks a little like somebody is pouring oil onto a fire.
The problem, as Richard points it out, is object permanence.  This is Richard explaining object permanence in children:
Object permanence describes an infant’s growing recognition from birth to age 2 that objects he or she cannot see, hear, or touch are still existing. The concept of object permanence explains why peek-a-boo is such a hilarious game for infants. When you disappear behind a couch, they truly feel, Oh, how disappointing!” And then you suddenly jump up and reappear, prompting a happy revelation: “He’s back, what a thrill!” And giggling ensues.
Adults have a similar problem with inconceivable outcomes – if a potential outcome is too complex or unprecedented, we ignore it (and don’t prepare for it) because it is impossible. As an adult might say, “It is impossible for countries to leave the Euro because the consequences are unfathomable.” This statement is a bit like a child playing peek-a-boo – if I can’t conceive it, then it doesn’t exist in the realm of possibility.”
While I am sure there is a lot of truth in this, here is a different take. Because crisis manifests itself intermittently, we treat it as an impermanent or transient phenomenon. And then we act as if the attributes of crisis – extreme debt and low productivity – are not a permanent, fixed or absolute state of these economies.
The reality becomes the press coverage and market reaction to the conditions, a fact acknowledged by European Central Banker Mario Draghi in the summer.
The actual conditions themselves play second fiddle.
I’ve seen this in the UK where unemployment became chronic in the 1970s and from then until today some urban areas simply suffered long term decline that ceased to be a national political reality with a potential solution attached.
Much of that decline, in the absence of real action, became instantiated by young people into new lifestyles, for example teen pregnancies that secure them a state benefit, or gang violence. That is a crisis but not one that surfaces in the litany of crises that politicians open up at solution-time.
Leaders tend to talk about problems that the last leaders focused on – it’s a feature of politics that elections are fought on  a small number of issues that an outgoing Government tries to defend and an incoming Government successfully argues for a chance to correct.
That means acute negative features of an economy can persist for decades, once they slip off the main agenda. Having just come back from Madrid, my fear for Spain is that its extreme problems will become background noise as young people adapt to life without work, enlivened by occasional protest.
There is absolutely nothing in the political landscape to solve young people’s problems or to liberate young people to become more self-sufficient. Spanish politicians have as their priority working out how to remain in the club of European leaders, by appeasing the IMF and the EU, while also appeasing citizens who do not want the national disgrace of a bailout.
There is no leadership in this position, just a waiting game while debt problems get worse. In reality both Greece and Spain have only one decision to make. Leave the Euro and regain autonomy. Everything else is a non-decision based on the game of peek-a-boo with the markets. 

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