Why the euro went nuclear

Will 2012 be the year of financial “meltdown” in Europe? Could bad policy decisions create a “chain reaction” as investors panic about banks’ “toxic assets”? If so, will Europe’s banks turn “radioactive”, spreading “fallout” across global markets? Or will the problem be “contained” as “explosions” are “defused”?

These questions are weighing on investors’ minds right now. But amid all the arguments about economics, it is worth thinking not just about the raw numbers – but also the language being used. After months of rolling crises, I (like most people) have become almost inured to the words being bandied about; in the wake of 2011, disaster headlines have lost their shock appeal.

I recently attended an interdisciplinary conference to discuss systemic risk in different fields of 21st-century life. I chatted with some engineers and nuclear physicists, they pointed out to me – with a wry chuckle – that it is fascinating to see the degree to which finance is now being discussed using phrases drawn from the nuclear world and the science of atoms. “It’s like nobody can talk about finance any more without borrowing words [from the nuclear industry],” one physics professor laughed, admitting that he was unsure about whether to feel flattered or dismayed by this linguistic twist.

If you check on the Factiva database of press sources, for example, you will see that the words “meltdown” and “fallout” have been used more than 2,000 times in relation to articles about the eurozone. “Toxic” has cropped up as much in articles about banks, and phrases such as “chain reaction”, “explosion”, “overheating” and “radioactive” also come up regularly. This dwarfs most analogies from the natural world or other branches of science (such as medicine); the only other phrase which is comparably popular is “storm”.

Why? One explanation might simply be that journalists – or traders and politicians – are trying to be dramatic. After all, it is rarely easy to construct a punchy story about money: finance now operates in cyberspace, with numbers and concepts that are often achingly esoteric. Little surprise, then, that people hunt for images from science or the natural world to communicate financial ideas: without these – ironically – finance does not feel “real”.

But in the case of the nuclear imports, I cannot help wondering if there is not something more subtle going on. After all – as the scientists at that risk conference observed – the two, seemingly disparate, worlds of finance and nuclear energy are linked by some fascinating echoes today. Think about it. In its most basic form, finance – like the nuclear industry – is basically a utility. As cash or energy moves around the economy, it enables economic activity to occur. But in both sectors, the quantity of power that can be generated by this utility has increased exponentially in recent years. So has the complexity of the technical details. And that has a crucial consequence: though the “power” of credit or electricity generation has increased dramatically, the ability of ordinary mortals to understand these processes has not. On the contrary, finance and nuclear science are now controlled by a tiny coterie of technical experts, on whom everyone else depends. Most of the time, voters do not worry about this. But whenever accidents occur, ordinary mortals are reminded afresh of their loss of control – and their vulnerability to sudden shocks, if those technical experts get it wrong. Disasters in finance, after all, are mostly man-made, not heaven sent; just as they usually are in nuclear power.

Of course, it is also worth pointing out that there is at least one crucial difference. In the nuclear industry, the scientists who design and run power plants are generally not paid bonuses on the basis of how much energy they produce. Finance, by contrast, creates incentives to maximise output, in the form of deal-making and trading, irrespective of whether anyone needs that monetary “energy” (aka credit), or whether safety codes are being breached. It is no surprise, then, that banking accidents are so common. If nuclear power stations had ever been run with a Wall Street-style bonus scheme, there probably would have been far more nuclear scandals in recent decades (and, indeed, some nuclear scientists tell me that certain Scandinavian government officials did flirt with the idea of introducing bonus pay at nuclear power plants, but dropped it when they saw safety standards slip). Or, to put it another way, if we wanted to build a safer finance system, we might do well to take a hard look at the world of engineering and nuclear power for tips about how to operate a more efficient reward system and better safety checks.

For the moment, there is still little sign of this occurring. While the language of nuclear physics might have moved across into finance, the incentive structures have – sadly – not. And I suspect that the world will need to see an even bigger convulsion before that cultural shift occurs; or a really enormous finance “meltdown”, if you like.

gillian.tett@ft.com