How much humiliation can Spain cope with?

The FT’s Gillian Tett reports today on a conference presentation given by historical sociologist Dennis Smith, who’s been working on the question of how humiliation operates at the cultural / collective psychological level – and what this means for the Eurozone.

The whole article‘s worth reading, but here are a couple of highlights. First, on how humiliation works:

Psychologists believe the process of “humiliation” has specific attributes, when it arises in people. Unlike shame, humiliation is not a phenomenon which is internally driven, that is, something that a person feels when they transgress a moral norm. Instead, the hallmark of humiliation is that it is done by somebody to someone else.

Typically, it occurs in three steps: first there is a loss of autonomy, or control; then there is a demotion of status; and last, a partial or complete exclusion from the group. This three-step process usually triggers short-term coping mechanisms, such as flight, rebellion or disassociation. There are longer-term responses also, most notably “acceptance” – via “escape” or “conciliation”, to use the jargon – or “challenge” – via “revenge” and “resistance”. Or, more usually, individuals react with a blend of those responses.

So what does that mean for European politics? Well, Tett continues, the Eurozone’s periphery countries have indeed experienced “a loss of control, a demotion in relative status and exclusion from decision making processes (if not the actual euro, or not yet)” – and it’s interesting to observe how different European countries have used different coping strategies:

National stereotypes are, of course controversial and dangerous. But Prof Smith believes, for example, that Ireland already has extensive cultural coping mechanisms to deal with humiliation, having lived with British dominance in decades past. This underdog habit was briefly interrupted by the credit boom, but too briefly to let the Irish forget those habits. Thus they have responded to the latest humiliation with escape (ie emigration), pragmatic conciliation (reform) and defiant compliance (laced with humour).“This tactic parades the supposedly demeaning identity as a kind of banner, with amusement or contempt, showing that carrying this label is quite bearable,” says Prof Smith. For example, he says, Irish fans about to fly off to the European football championship in June 2012 displayed an Irish flag with the words: “Angela Merkel Thinks We’re At Work”.

However, Greece has historically been marked by a high level of national pride. “During 25 years of prosperity, many Greek citizens had been rescued by the expansion of the public sector . . . they had buried the painful past in forgetfulness and become used to the more comfortable present (now the recent past),” Prof Smith argues. Thus, the current humiliation, and squeeze on the public sector, has been a profound shock. Instead of pragmatic conciliation, “a desire for revenge is a much more prominent response than in Ireland”, he says, noting that “politicians are physically attacked in the streets. Major public buildings are set on fire. German politicians are caricatured as Nazis in the press . . . the radical right and the radical left are both resurgent.”

Prof Smith’s research has not attempted to place Spain on the coach. But I suspect the nation is nearer to Greece in its instincts than Ireland; humiliation is not something Spain has had much experience of “coping” with in the past. Whether the Spanish agree with this assessment or not, the key issue is this: if Angela Merkel or the other strong eurozone leaders want to forge a workable solution to the crisis, they need to start thinking harder about that “H” word. Otherwise, the national psychologies could yet turn more pathogical.

Is the Eurozone crisis a threat to democracy?

Here’s a piece I’ve done for Yale Global magazine on democracy under strain in Europe.

Politicians in power since the 2008 financial collapse, regardless of their political stripes, find themselves in peril. Analysis of the recent French and Greek elections followed three lines of thought: voters soundly rejecting strict austerity measures, blaming incumbents, and abandoning mainstream political parties for more extremist leadership, both right and left. The three interpretations are linked.  Read more

Eurovision Sov Contest

The European sovereign bond markets are a bit calmer today, after ECB central bank governor Jean-Claude Trichet said the ECB might continue with its bond purchasing programme, and Portugal managed to auction €500mn in T-bills. But this may only be a temporary respite.

What strikes me about this latest crisis is how incredibly slow the EU and Eurogroup is to react to bond market crises. They come out with an emergency loan package for Ireland, but the package still has to be approved at an EU Summit in a few weeks and by a Eurogroup meeting of Eurozone finance ministers. It then comes out with plans for a new bail-out mechanism called the European Stability Mechanism (ESM), to replace the existing European Financial Stability Facility  (EFSF) in 2013. The ESM will differ from the EFSF in that private creditors would be forced to take haircuts if a country is declared insolvent. Great…but who’s thinking as far ahead as 2013?

At the moment, the EFSF’s bail-out loans are pari passu with private creditors, so private creditors are treated the same in any eventual restructuring. That means private creditors could get a free ride on the EFSF’s largesse, much to chancellor Merkel’s disgust. So if investors think Portugal, Spain, Italy, Belgium or anyone else is going to default, best get them to do it now, before the ESM is introduced and investors might face a restructuring.

But when would a restructuring happen under the ESM? Investors would apparently be ‘encouraged’ to extend debt maturities after an ESM loan was released, but would only face an automatic restructuring if a country was officially pronounced insolvent. And that, it appears, would  happen after a unanimous vote by the Eurogroup. Sort of a geo-economic version of the Eurovision Song Contest, if you will. Ireland…null points!

So how is this mess likely to play out? Reuters’ Luke Baker sketches five possible solutions:

1) A massive programme of European sovereign debt purchasing by the ECB, perhaps to the tune of €1-2 trillion. Baker suggests from his interviews that this is the most likely solution. That will likely lead to inflation in the Eurozone, and a weakening euro.

2) The Eurogroup makes the European Financial Stability Facility bigger. It still has €650bn in it, enough perhaps to cope with Spain defaulting, though not if Spain, Italy and others default within a short amount of time. EU policy-makers are apparently considering doubling it in size.

3) The Eurozone issues Eurozone bonds, thus pooling the credit strength of the Eurozone and hiding weaker members under the umbrella of the Union. The EFSF is, in fact, preparing to issue its first bonds in January, to finance the Ireland rescue package. This could be the first step towards a wider programme of Eurozone bond issuance.

4) Beg China for help. One EU policy-maker tells Baker: ‘Think about who’s got the money to handle this. The only country is China. We need China to step up and buy EU debt.” Hu – let the dogs out!

5) Eurozone moves to fiscal union. Trichet himself said recently: “We have got a monetary federation. We need quasi-budget federation as well. Yes, we could achieve that if there is strong monitoring and supervision of what there is. Because what exists doesn’t converge with the actual situation we are facing. It is a situation where we need quasi-federation of the budget.”

Some analysts think this is where the crisis is moving the Eurozone project. When bond markets attack, the Eurozone has to move to a higher level of complexity to defend itself. But just imagine a situation where Eurozone budget checkers are sent, like Hans Blix, to Italy or Greece to check how honest their accounting is. Hiding any secret debt in underground bunkers, Silvio?

Sarkozy threat to pull France out of Euro?

Seems Nicolas Sarkozy, Global Dashboard’s favourite European leader, was in typically understated form during the recent Eurozone crisis summit:

Sarkozy demanded “a compromise from everyone to support Greece … or France would reconsider its position in the euro,” according to one source cited by El País.

“Sarkozy went as far as banging his fist on the table and threatening to leave the euro,” said one unnamed Socialist leader who was at the meeting with Zapatero. “That obliged Angela Merkel to bend and reach an agreement.”

Europe: don’t look to us when sterling collapses

UK reluctance to help with the Euro bailout has not gone down well at all:

Jean-Pierre Jouyet, the head of the French markets regulator, said sterling was bound to come under pressure on the markets given the delay in forming a UK government after last week’s inconclusive general election.

Mr Jouyet, a former Europe minister who is close to President Nicolas Sarkozy, indicated that Britain could expect no help from the eurozone.

“The British are most definitely going to be targeted given the political difficulties they have,” he told Europe1 radio. “If they don’t want solidarity with the eurozone, we will see what will happen with regard to the United Kingdom.”

Following its refusal to help its neighbours, Mr Jouyet said Britain had become a peripheral player in the bloc.

There was now a “three-speed Europe”, he said: “Europe of the euro, the Europe of countries that understand the euro, such as Poland and Sweden, and the British.”

Greece screwed – Euro next?

On Greece, Martin Wolf is bleak

Yet [despite the bailout] it is hard to believe that Greece can avoid debt restructuring. First, assume, for the moment, that all goes to plan. Assume, too, that Greece’s average interest on long-term debt turns out to be as low as 5 per cent. The country must then run a primary surplus of 4.5 per cent of GDP, with revenue equal to 7.5 per cent of GDP devoted to interest payments. Will the Greek public bear that burden year after weary year? Second, even the IMF’s new forecasts look optimistic to me. Given the huge fiscal retrenchment now planned and the absence of exchange rate or monetary policy offsets, Greece is likely to find itself in a prolonged slump.

Would structural reform do the trick? Not unless it delivers a huge fall in nominal unit labour costs, since Greece will need a prolonged surge in net exports to offset the fiscal tightening. The alternative would be a huge expansion in the financial deficit of the Greek private sector. That seems inconceivable. Moreover, if nominal wages did fall, the debt burden would become worse than forecast.

…Felix Salmon depressing

Even if Greece were running a zero primary deficit (and I’d love to know if it’s ever managed that particular feat), a default without devaluation would still keep the country mired in its current uncompetitive state. If you’re going to go through the massive pain of a default, you might as well get the upside of devaluation at the same time, and exit the euro.

At that point, the only question is: do you default and devalue now, or do you wait a couple of years? Germany and France might well want to wait, in the hope that their banks will be better able to cope with such a thing in a couple of years’ time. But from a Greek perspective, if the pain is coming, best to go through it now and bring forward the growth rebound, rather than push off the devaluation stimulus to an indefinite point in the future.

…while most of Simon Johnson’s readers have now slit their wrists:

The Europeans will do nothing this week or for the foreseeable future.  They have not planned for these events, they never gamed this scenario, and their decision-making structures are incapable of updating quickly enough.  The incompetence at the level of top European institutions is profound and complete; do not let anyone fool you otherwise.

What we need is a new approach, at the G20 level; this can definitely include debt restructuring, but it has to be done in a systematic fashion (and even then there will be a considerable degree of total mess).  Such a change in framework for dealing with these issues will not get broad support until after further chaos in Europe, but it now needs to be put into place.

The Europeans will not lift a constructive finger.  The leading emerging markets are too busy battening down the hatches (and accumulating ever more massive chests of reserves).  And the White House still seems determined to sleep through this crisis.  Expect nothing.

What are the chances of the Euro emerging from this unscathed? Increasingly slim, it seems – surely one or more countries are going to find it almost impossible to stay inside the currency union. While the UK gazes at its navel, phase 2 of the global financial crisis has firmly taken hold.

We now have an inter-related banking and sovereign debt crisis; no procedures for an orderly bankruptcy of countries (having ignored the lessons of the East Asian financial crisis); and no legal way to allow the destitute to exit the Euro.

What a mess.

Eurozone crisis – Alistair Darling needs to get off the campaign trail

If you’re in any doubt of the seriousness of the Greek sovereign debt crisis, read Mohamed El-Erian in the FT. A banking crisis has fuelled a sovereign debt crisis, which could in turn spark another banking crisis (with the whole caboodle, as I have argued, part of a sustained episode of financial instability that stretches back to the 1990s):

A number of things have to happen very fast over the next few days to have some chance of salvaging the situation. At the very minimum, the government in Greece must come up with a credible multi-year adjustment plan that, critically, has the support of Greek society; EU members must come up with sizeable funds that can be quickly released and which are underpinned by the relevant approval of national parliaments; and the IMF must secure sufficient assurances from Greece (in the form of clear policy actions) and the EU (in the form of unambiguous financing assurances) to lead and co-ordinate the process.

This is a daunting challenge. The numbers involved are large and getting larger; the socio-political stakes are high and getting higher; and the official sector has yet to prove itself effective at crisis management.

Meanwhile, the disorderly market moves of recent days will place even greater pressure on the balance sheets of Greek banks and their counterparties in Europe and elsewhere. The already material risks of disorderly bank deposit outflows and capital flights are increasing. The bottom line is simple yet consequential: the Greek debt crisis has morphed into something that is potentially more sinister for Europe and the global economy. What started out as a public finance issue is quickly turning into a banking problem too; and, what started out as a Greek issue has become a full-blown crisis for Europe.

Election or no election, the UK simply cannot afford to sit on the sidelines while this crisis runs out of the control. Alistair Darling needs to stop giving speeches to activists in Scotland and get back to work at the Treasury.

Lord Adonis stopped campaigning as soon as Eyjafjallajökull erupted. Darling must do the same as the UK faces contagion from Eurozone turmoil.