The human mind does not accept changes easily. We are programmed to seek safety, stay inside the box and avoiding confrontations — basically to avoid any changes of habit in our thinking and actions. This is particularly the case on a political and societal level, not just for the individual.
It’s this mentality that keeps us from engaging in a bold new course of action, even when things have clearly gone wrong.
But eventually, the pain of not changing our ways becomes so great that we have no choice but to strike out in a new direction. That is when the true point of a “crisis” has been reached.
Looking at Europe and the US, we are fast nearing that point of crisis, where the intolerable status quo will be rejected and a new mandate for change will arise.
The irony is that once the crisis point sparks us into action, we suddenly show our full potential, becoming more efficient, harder working, and more innovative as the mandate for action sweeps away all of the inefficiencies of the old ways.
At a point of crisis, we are bold and decisive and take big risks. That’s in dramatic contrast to the inability to take risk or make decisions after long periods of growth, wealth creation and personal success.
These basic principles apply to southern Europe and the predicament it currently faces as today’s crisis provide the inevitable spark for a mandate for change. Greece, Spain, and Portugal are young democracies — having been born between 1973 and 1975 straight from previous dictatorships. Now, these countries are in the transition from adolescence to adulthood, a transition that requires a new sense of responsibility.
I see these three “Club Med” democracies as a group of talented youngsters who have yet to achieve what their talent indicates they are capable of, and also a group that needs to realize that the days when they could drink all night and be fresh the next day are long gone. Youth unemployment north of 50 percent and a bloated public sector (both in numbers and in salaries) are taking away money from private sector initiative and investment.
Things were good — almost too good — since 1999, as the introduction of the Euro fed a good portion of the boom and is aggravating the pain of the post-2008 bust.
Club Med countries were riding the cheap “German credit rating” and inappropriate one-size-fits-all monetary policy from the ECB.
This meant artificially cheap funding rates for overspending governments. In the early phases of this downturn, the government could afford to create stimulus as the fiscal position appeared relatively sound (and funding was cheap) — the main funders of the new wave of public debt issuance were the banks and the pension funds, which had plenty of cash to prevent higher funding rates. That was the case until late 2009, at least, when the realization that the debt saturation point had been reached and that the ECB couldn’t monetize debt like the US Fed or Bank of England.
Now as we head into the 5th year of this global crisis, the Club Med (and most other governments) can’t expand fiscal stimulus as they have overspent in recent years. The reliance on the state and public sector will need to fade in favor of more reliance on the “micro” economy powered by the private sector — and most importantly, the SMEs: small-and-medium sized enterprises. Any country with long-term record of growth and success has been built on SME’s and their access to credit. Solve this and we are two steps in the right direction.
The world’s richest nations: Switzerland, Singapore, Denmark, Sweden, and even Germany have a strong tradition of a robust SME sector. The EU makes regular studies on SME’s in the economy and has found that, on average, the “rich northern countries” have almost two-thirds of all jobs in the SME sector.
Furthermore, an amazing 85 percent of all new jobs from 2002 to 2010 were created by small and medium sized companies.
Europe needs to embrace this and work toward reducing its heavy dependency on the state and the ever increasing size of its entitlement programs.
This is the biggest challenge, because once an entitlement has been granted, it becomes extremely difficult to take away again, no matter how undeserved it is in the first place. Balancing a reduction in entitlement with lower government input is the Club Med’s real need for change.
A crisis also involves a V-shaped recovery where growth at first dives as everything is reset, but then can spring back with even greater force because the economy is more balanced. It’s the classic metaphor of the forest fire: yes, there is some destruction of trees and undergrowth, but the fire also fertilizes the ground and resets nature to a more fertile state with more potential for future growth — all part of a natural cycle.
New beginnings are a constant in the cycles of history, and a trial-and-error approach remains the best modus operandi for moving forward. Spain as a nation has been bankrupt 13 times in its history, so it and other countries will swing from excess to austerity, from growth to crisis, from tail-wind to headwind — all part of a cycle, but how a nation reacts to these swings determines the path of development.
Any government will always start by denying there is a crisis — the denial — they will claim it’s temporary, it’s due to external factors. The policy response is to create budget deficits (like Europe from 2008-2010).
A year to two later there is some stabilization, but it’s still a crisis because the underlying dynamics have not been altered by any real structural changes. Voters are angry about their ongoing pain and have voted for “the opposition” as a kneejerk reaction to the crisis — witness Hollande’s and Rajoy’s election wins and the Berlusconi exit and over in the US, we had the 2010 Tea Party uprising. The new government has made many promises, but the reality of their assuming office proves that they are unable to bring any change, as they are still stuck in the previous paradigm, so instead of real change, we merely see ever lower interest rates, currency devaluations and massive central bank monetary easing. These have been the hallmarks of the Protest phase in Europe in 2011-2012.
What Europe really needs to emerge from the crisis is a real mandate for change — but as we have learned from history, the policy makers and the politicians will continue to move from denial to protest, back to denial in a never ending circle until the crisis is big enough to enable a mandate for change.
The last mandate given and taken by a politician I can remember happened in 1979, when Ms. Thatcher took over the UK, then called the “Sick Man of Europe” — fought the unions, fought the EU and implemented dramatic changes in the UK society that coincided with a strong change of mental attitude, which is the final positive piece of the crisis puzzle.
At least half of the effort in getting out of a crisis is a change of mind — what a behavioral economist might call overcoming the sunken cost of past ways of thinking. Once a majority of us get over the mental hurdle of admitting that real change is necessary, then the exercise of ending the crisis becomes relatively easy — and even invigorating.
Another important point is that we live in democracies (even if it doesn’t always seem that way at times), which in the end means that our policy makers are beholden to all of us as voters, and that for them to change, our attitudes will need to change as well. And that require that we are willing to see the short term sacrifices that are necessary to grant the mandate for change to our new leaders and the way forward. Are you ready for change? Then don’t fear the crisis — embrace its potential.
— Steen Jakobsen, Chief Economist of Saxo Bank.