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By Peter Atwater
The recent near-majority victory of Alex Tsipras and the leftist Syriza has been largely attributed to Greek voters' unified opposition to the continued austerity efforts of northern Europe. High unemployment, over-indebtedness, and falling GDP are blamed.
As Bill Clinton used to say during the 1992 American presidential campaign, “It’s the economy, stupid.”
Despite this argument's wide acceptance, however, Greece’s economic malaise and its political and social crises--including eroding popularity of established parties and rise of populism on both the left and right--are actually symptoms of a much larger problem: a severe decline in confidence. This decline is the cause, and not the effect, of events that are now unfolding in Greece, as well as the rest of Europe.
At its core, confidence is about understanding. It is how we perceive ourselves faring in the future and whether we really trust what is ahead. Accordingly, our level of confidence determines our preferences, decisions, and actions. It is a critical input, not just output, as most economists emphasize, to our behavior. Given the same choice, a highly confident person is likely to make a much different selection than an individual lacking confidence.
When our confidence is low, our actions reflect high self-interest and a preference for near-term time horizons, as well as close geographic and ethnic proximity and simplicity—or what I call “me, here, now” choices.
Low confidence occurs when there is confusion and apprehension about future social and economic conditions. To reduce that confusion, our brain tries to simplify things by narrowing what we focus on. The more severe our lack of confidence, the narrower our focus and the more pronounced our “me, here, now” preferences, decisions, and actions become.
Fortunately, the reverse is also true. As our confidence rises, we become more generous, both financially and socially. We trust others more and are more empathetic, particularly to those who may look and act differently from us. We also plan farther ahead and perceive greater certainty in the future. Finally, we are innovative and eagerly accept complexity and interconnectedness believing that they are beneficial. With high confidence, we exhibit “us, everywhere, forever” behaviors.
Since 2000, European confidence has been on a decline and with that decline have come more significant demonstrations of “me, here, now” behaviors. Economically, this can be seen in weak business demand for credit and investment as well as high long-term unemployment. Likewise, European banks have been retrenching from their global ambitions while foreign transnational corporations have come under greater scrutiny.
Politically, it is evident in the demise of centrists and the unwillingness of leaders to compromise. Incumbents have been ousted and nationalist candidates have risen in popularity, while the spectrum of candidates from far left to far right has broadened.
Socially, weak confidence is on display in the rise of anti-immigration movements and other exclusionary “anti” efforts, as societies seek to redefine who “we” really are. When our confidence falls, we adopt zero-sum thinking, believing that others have somehow benefitted from our worsening plight.
What we witnessed this past weekend in Greece was a clear mobilization of a fearful society. Like all societies at major bottoms in confidence, Greeks not only want to rid themselves of their uncertain future, but they are finally willing to act on it despite major implications for the rest of Europe. Given the very weak Greek social mood, Mr. Tsipras will be highly incentivized to take a very hard line with the "troika" of the European Commission, the IMF, and the ECB. Those who believe that Mr. Tsipras will follow the conciliatory path of his predecessors in negotiating with the troika fail to appreciate the current social mood backdrop. A deliberate default would not be at all surprising.
But it won’t be just the weak Greek social mood that will challenge negotiations. German confidence is declining, too and likewise, German “anti” groups of all kinds are gaining political and social standing. The political and financial generosity shown by Berlin and other northern European capitals in 2012 won’t be available in 2015. Consequently Grexit, which was seen as impossible just three years ago, could easily occur given the current social mood across Europe.
The region’s biggest challenge, however, is the risk of contagion. Without a sharp rise in confidence, Greece could be the Tunisia of a European Spring that brings secession, further political extremism, social unrest, sovereign debt defaults, and additional euro exits across the southern periphery. Rather than being the only country to collapse, Greece may just be the first.
Mounting social unrest across southern Europe will seriously challenge northern political leaders, particularly the Europeanists. The European Central Bank, which just announced a large sovereign debt purchase program last week, may quickly find itself unable to execute its plan as northern policymakers rebel. With sharp declines in confidence, the once strong suffer from “lifeguard fatigue.” Should social unrest spread across the periphery, even an outright Germany/Netherlands/Finland exit from euro could occur.
Yet the EU’s challenges ahead won’t just be from within. Russian social mood is also extremely low as of late. Last spring’s Russian expansionist efforts into Crimea came at a major bottom in social mood. With Russian social mood now even more depressed, policymakers there may become even more aggressive with their political, economic, and military actions.
European and NATO leaders will be hard-pressed, though, to respond cohesively. When mood is low, voters want domestic economic issues solved first. Eastern Europe could be on its own.
Given the high potential for an accelerating vicious cycle of further falling confidence across Europe today, policymakers need to quickly shift their focus from economic and monetary policies and target morale front and center. If policymakers can improve confidence, they will restore hope, and in turn, economic growth. Programs which policymakers believe will restore long-term economic growth but which bring adverse short-term consequences for confidence must be reconsidered.
As was witnessed this past weekend, Greece united as societies in Europe have reached a breaking point. A sovereign revolution has begun. Unless policymakers do something to boost confidence across Europe, other nations will soon follow.
Peter Atwater is President of Financial Insyghts LLC., a consulting firm to money managers, corporations, and policymakers on how social mood affects decision making. He is the author of Moods and Markets, to be published in August by the FT Press as well as a regular contributor to Minyanville.com.