‘The Europeans’ Mistaken Reasoning’: Stratfor assesses what has gone wrong in the discussions about Greek debt repayments

George Friedman at Stratfor lay the difficult financial problems Europe is grappling with at the door of faulty reasoning –misunderstanding a situation, and making a poor decision based on that misapprehension which leads to a less-than-optimal outcome:

The Europeans’ Mistaken Reasoning

As the International Monetary Fund noted (while maintaining a very hard line on Greece), the Greeks cannot repay their loans or escape from their economic nightmare without a substantial restructuring of the Greek debt, including significant debt forgiveness and a willingness to create a multidecade solution. The IMF also made clear that increased austerity, apart from posing an impossible burden for the Greeks, will actually retard either a Greek recovery or debt repayment.

The Greeks knew this as well. What was obvious is that austerity without radical restructuring would inevitably lead to default, if not now, then somewhere not too far down the line. Focusing on pensions made the Europeans appear tough but was actually quite foolish. All of the austerity measures demanded would not have provided nearly enough money to repay debts without restructuring. In due course, Greece would default, or the debt would be restructured.

Since Europe’s leaders are not stupid, it is important to understand the game they were playing. They knew perfectly well the austerity measures were between irrelevant and damaging to debt repayment. They insisted on this battle at this time because they thought they would win it, and it was important for them to get Greece to capitulate for broader reasons.

No other EU country is in a condition as bad as Greece’s. However, a number of EU countries, particularly in Southern Europe, carry a debt burden they would like to renegotiate. They are doing better than Greece this year, but with persistent high unemployment — for example, 22.5 percent in Spain as of May — two things are not clear: first, what shape these countries will be in next year or the year after that, and second, what governments would come into office, and what the new governments’ positions would be. Greece accounts for less than 2 percent of the European Union’s gross domestic product. Italy and Spain are far more important. The problem of restructuring debt is once it is done for one country, others will want to restructure as well. The European Union did not want to set any precedents for future crises or anti-EU governments.

In Greece, Europe’s leaders had a crisis and a hostile government. It was the perfect place to take a stand, they thought. They became inflexible on debt restructuring, demanding prior increased austerity measures in a country where unemployment exceeded 25 percent and youth unemployment was over 50 percent. The EU strategy in the past had been psychological: spreading fear about what default might mean, spreading fear of the consequences of leaving the eurozone and arguing that it was the European Union that lacked the ability to make concessions. In the past, the EU strategy had been to make agreements that it never thought the Greeks would be able to keep in order to kick the problem down the road. Europe’s leaders demanded austerity measures but tied them to postponing repayments. They expected Greece to continue playing the game. They did not realize, for some reason, that Syriza came to power on a pledge to end the game. They thought that under pressure, the party would fold.

But Syriza couldn’t fold, and not just for political reasons. If Syriza betrayed its election pledge, as the European leadership was sure it would, the party would split and a new anti-European party would form in Greece. But on a deeper level, the Greeks simply could not give any more. With their economy in shambles and Europe insisting that the solution was not stimulus but austerity — an increasingly dubious claim — the Greeks were at the point where default, and the short-term wrenching crisis that would ensue, would be worth the price.

The European leaders miscalculated. They thought Greece could be more flexible, and they wanted to demonstrate to any other country or party that might consider a similar maneuver in the future just what the cost would be. The Europeans feared the moral risk of compromising with the Greeks. They created a more dangerous situation for themselves.

To be fair to the Europeans, this really is a no-win situation. What is happening in the Eurozone is a complete and utter disaster, at every level, the heavy costs of which will be borne for generations. And it is the result of mistaken reasoning going back 20 years to the creation of the zone. It simply, even with the best will in the world and perfect economic conditions, could never have worked. Making it work under current demographic and market conditions is beyond human capacity.

Nevertheless, finding a way out of the impass requires the courage to understand the situation as it is and to take the steps necessary to resolve it. Intellectually, the situation is not difficult to understand – even some nobody blogging away part-time in Australia ‘gets it’. But the Europeans simply cannot face the situation square-on. They therefore engage in ruses and games to pretend that everything will work out. But, as Stratfor says, the logic underlying these games was faulty – or, at least, the Europeans mis-estimated the probabilities associated with each outcome. And so we have the mess that we have, which is now coming to boiling point.

There’s a reason why I value, and seek to promote, sound reasoning and good decision-making. The Stebbing-Heuer Project can save lives. And money. And maybe, if it does that, it can save western civilisation.

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About Stebbing Heuer

A person interested in exploring human perception, reasoning, judgement and deciding, and in promoting clear, effective thinking and the making of good decisions.
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