One of the quotes on our website comes from Charlie Munger who said and I paraphrase “The greatest motivator of human behaviour is that of perceived self-interest.”
In essence humans will agree to allow or take personal actions most readily when they believe they benefit. Altruism and self-sacrifice are admired and revered (Jesus, Gandhi, Mandela) but are rare birds indeed.
The truth of the above is a key to understanding how the current European situation will develop and play out.
If we look at the facts:
1) The Greek economic situation is beyond repair, they simply cannot repay what they owe, a default is coming and privately I am sure this has been the working reality of the European political decision makers for a considerable time.
2) Whilst a Greek default is a sure thing it has to be managed and time has had to be bought to prepare for the contagion effects.
To all those in the markets who say to the Politicians, “You are in denial, you don’t understand”. The response (if one were possible without confirming what they are not yet ready to confirm) would be.
“Of course we understand but we need time.”
3) Politics has been described as “the art of the possible”.
Politicians are regularly mocked for their lack of foresight and inability to “get ahead of the curve” but in reality the system rarely allows this.
The US are apparently haranguing European leaders to “do as we did with the Troubled Asset Relief Program (TARP)”.
They are right, this is what is needed but it must be remembered that the situation was darker and more potentially damaging in the US when the TARP bill “failed” to be passed by congress initially.
It passed only when the politicians became convinced that the electorate were so scared and so fearful, that their agreement carried less political risk than a continued rejection of proposed actions. (I believe this is called “plausible denialability” in political circles.)
This returns us to the starting hypothesis.
That of perceived “self-interest”.
In the early days of the Euro issues coming to public attention the initial reaction was one of dismissal.
The electorates of Northern Europe (France and Germany most importantly) on hearing of the PIGS (Portugal, Ireland, Greece, Spain) dilemma said, “Your fault, your mess, not our problem, sort it out yourselves”. This left politicians with little room for manoeuvre.
As the crisis worsened, markets fell and economic activity reduced, an education process began explaining that in fact the Greek problem was and is a German problem:
1) If Greece defaults, contagion will result and the economies of Spain and Italy could be imperilled and whilst in the greater scheme of things Greece does not matter these two do!
2) The resultant turmoil and damage would rebound on Germany, severely depressing its economy.
3) That if the Euro breaks up and the Deutschmark is reborn their exchange rate will soar in value, as the German economy is export driven, few will be able to afford to buy its goods.
The politicians have in reality had to wait for things to get much worse, and from this the process of education and the new understanding of self-interest to take root.
Conclusion
The Euro crisis at its genus was created the day the Maastricht Treaty was signed, the Union was flawed in its structure and the unravelling was predictable (just not when) the redesign that will over time take place will create a much more robust and solid union (again the politics of the possible, this was not possible initially as it required a ceding of Sovereignty which few, if any, were willing to accept at the start).
Another key issue to the resolution of the Euro crisis is one of financial fire power; in effect the ECB (or the created quasi construct of) has to be able to “show the markets the money”.
The good news is that they can and ultimately they will. Europe has almost unlimited financial fire power and when the markets realise that the point has been reached where the guns have been loaded they will back away.
The reality is the European Politicians can only act decisively when things are at a crisis point, to then be given the implicit mandate to “fix it”. Ultimately democracy is the process of changing the collective belief of the people so that the actions of the politicians accord with the perceived self-interest of their electorates, remember the politicians know this, it’s how they got elected in the first place.
NOTE: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. This is not a recommendation to buy any product or service including any share or fund mentioned. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.