One of the ways to get on in life is to be an optimist. Inside most of the world’s corporations, to acquire the reputation of a critic, or even to be described as a bit gloomy, is to risk career death. Within banks, naysayers are kept away from all of the important jobs and are usually confined to the risk- management office, often found located in the basement. Only the permanently upbeat, forever cheerful types get near the executive suite.
All of this is very understandable: pessimism is intrinsically unattractive and gets in the way of growth. For the economy as a whole, economists have long recognised the importance of “animal spirits”: we need to be positive if we want to grow. Sometimes, expectations can be self-fulfilling: even when optimism has no basis in reality, things can be boosted if enough people have sufficiently positive beliefs. Irrational exuberance was a term coined to describe nutty stock-market behaviour but it can be applied in other contexts. Of course, on the flip side, negativity can be responsible for poor outcomes, particularly when it is overdone.
One of the drivers of the Irish banking crisis was the internal culture of the banks, one that brooked no criticism. To get on, to climb the greasy pole, everyone knew that the only answer to every question, particularly about lending, was yes.
Positivity, usually a healthy part of corporate culture, became something sinister, almost pathological in nature. Nobody was allowed to say stop. It was for good reason that one of the Caesars, when taking the adulation of the crowds, used to employ a little man to stand behind him and whisper reminders of mortality and fallibility.
When that practice was halted, the Emperor Caligula ended up making his horse a senator and nobody thought to say anything other than to praise an obviously inspired choice. I imagine bank lending decisions went along similar lines.
Groupthink
Politicians and policymakers are just as likely as bank executives to succumb to this kind of groupthink. The serious people of Brussels and Frankfurt clearly believe that the euro has been saved and nothing much, barring a few stress tests for the banks, now needs to be done. Dissenting voices that point out that we are making Caligula-style errors of judg
ment are wholly ignored. It is sufficient to repeat the mantra that things are about to get better. Say it enough times and people may start to believe it; we may even get those self- fulfilling expectations. Sadly, not this time.
Data is piling up that points to a euro- area economy that has ground to a halt. The parallels with Japan are terrifying. Basic, simple economics are ignored: we have known for decades that when governments, companies and consumers together try to rein in spending, the outcome is bad. But learned articles appear, usually written by current or former central bankers, that say it has nothing to do with the European Central Bank and it's all about competitiveness. There is nothing wrong with the European economy – or, at least, nothing that can't be cured by a little internal devaluation.
This week saw two examples of the genre. First, Philipp Hildebrand, former head of the Swiss central bank, parroted the usual line that the solution to Europe's ills lies in "structural reforms" and that the ECB doesn't deserve any criticism. This is almost funny, particularly when we look at the massive amounts of quantitative easing recently done by the Swiss central bank to weaken its currency. It is highly likely they even bought bonds from France, a country singled out, along with Italy, by Mr Hildenbrand for being particularly lacking in structural backbone.
Second, Hans-Werner Sinn, a German economics professor, president of the important IFO institute and senior government adviser, wrote an almost incoherent piece arguing that Italy’s woes – and, by extension all of Europe’s – can be cured simply by cutting wages. That’s the internal devaluation point again. Neither of these eminent gentlemen thought it relevant to point out that the ECB is completely failing to meet its own mandate. Perhaps they think it doesn’t matter.
Europe doesn’t have the luxury of turning Japanese. Decades of zero growth will not be greeted with stable politics and quiescent financial markets. The current situation is utterly unsustainable.
