The euro has not collapsed in value. The eurozone has not broken up; Greece has not left nor been kicked out. For someone like myself, a careful reader of the Financial Times and other media, this is a bit of a surprise. I remember last year an avalanche of predictions of the coming of Armageddon. Greece certainly could not survive and contagion would pull other weak economies down.
Economists are no more likely always to agree than any other experts but there was a remarkable unanimity as the crisis unfolded: Europe was on the edge of the abyss; bold and rapid action was needed from strong governments.
Against this storm stood a remarkable woman, Angela Merkel, insisting no quick fix was available. She has been proved right. Steady work and steely brinkmanship have carved out for Greece the biggest ever writedown of government debt, in a sophisticated and complex deal.
Economists warned politicians not to dither. In the New York Times Paul Krugman poured scorn over Europe’s politicians, collectively, in terms that, had he used them about say, black people, he would have been all but up for incitement to racial hatred. What was needed, it was argued, was more “firepower”, higher “firewalls” and bigger “bazookas”, with no delay.
The implication of these calls for bold action was simple: Greece was in effect bankrupt; governments, notably Germany, would one way or another have to pay up if they wanted to save the euro. Ms Merkel’s line was different. Yes, Greece was bankrupt, but the solution was that Greece would carry as much as possible of its own debt, that private bondholders would be made to write down as much as possible, with speculators punished, and that other governments and the European Central Bank would contribute as little as possible.
Had the balance of opinion among economists prevailed, private bondholders, who had lent recklessly, would have been let off scot-free at European taxpayers’ expense. Why were so many commentators so careless? I have no problem with the “chief economists”, whose job is to protect the banking sector, but what about the independent academic economists?
They fell victim to an exaggerated confidence in themselves. Most of us in the social sciences are aware of our limitations. Economists, for their sins, have worked themselves into a frenzy about being “scientific”. Overconfidence leads to hubris. The economists let their guard down.
First, they neglected careful description of the problem. There never was a sovereign debt crisis. There were two separate problems. The Greek government had more debt than it could manage and would somehow have to default. No other European government had an unmanageable debt level but some, such as Italy and Spain, did not have the trend under control and were at risk of moving to an unsustainable level. The solution to that problem was not bailouts, which would have been counterproductive and benefited lenders too much, but to pressurise these governments to get their own affairs under control. That is being achieved in Italy. The Greek problem was pivotal for Greece but not for Europe, provided private and public actors could deal with it together.
Second, they neglected the need for precise language. “Firewalls”, “firepower” and “bazookas” are not terms of analysis. Contagion? What does that mean? And third, they indulged in predictions, the economist’s ultimate vanity, but their models are no more than equations with countless unknowns.
The need to predict, a psychological urge in the economic tribe, led to the wildest warnings. Ms Merkel’s genius was to see that serious problems are solved by hard work and that what is at its core political cannot be solved by technocratic fiat. In this she was helped by an instinctive scepticism of the financial services industry, a dose of which would have served other governments well. While experts panicked, politicians kept their cool.
Europe is still in deep economic trouble, with stagnant growth and high unemployment. There may be more unmanageable government debt ahead. There is a remaining political deficit in the EU. The medicine so far has been harsh. Governments have been bullied and Greece in particular humiliated. Ms Merkel has protected German interests ruthlessly.
So what we have seen was not pretty. But it has been political craftsmanship of the highest order. Government borrowing has not been discredited but chronic borrowing to fund consumption is hopefully on its way to becoming history.
Europe’s leading politicians have performed admirably. They have done their job by staying level-headed and trusting themselves. One lesson is clear: beware the experts who come bearing advice and in particular economic experts.
The writer is a professor of sociology at Green Templeton College, Oxford
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