Crises will always surprise us. But what surprises most is undoubtedly the similar behaviour patterns at their root. They are repeated at such a frequency that popular wisdom has crystallised the process in the form of fables and tales. If we reread, through today’s lens, the famous [Three Little Pigs] tale, we would find the whys and wherefores of the euro crisis. It is, in short, the euro crisis explained to children.
The tale contains an obvious metaphor for the crisis – the big bad wolf – and its causes, the behaviour of the three little PIGS [the acronym used by financial markets to refer to Portugal, Ireland, Greece and Spain, the Euro Zone bad boys]. But the tale is filled with nuance and the moral is not self-evident.
First there are the various apparitions of lack of foresight – the house of straw, the house of wood – which demonstrate that the weakening of social and economic construction can be achieved in multiple fashions. It then teaches that it isn’t enough to be overly cautious or farsighted: the house of bricks is not sufficient to protect from the wolf if he is able to get in through the chimney. Finally the moral is that, without cunning and foresight – the pot waiting for the wolf in the hearth – even the most solid social constructs are unprotected.
Represented by the house of straw, the most fragile societies are those that lack competitiveness, growth and social cohesion. Since the introduction of the euro in 2002, Italy, Portugal and Spain are posting a loss of competitiveness compared to Germany of 9%, 12% and 19% respectively. The privileges of corporations special interests – well represented in the parliaments and governments of these three countries – impede the implementation of reforms that would, for the collective good, battle some entitlements.
Who is the big bad wolf?
Where these entitlements have prospered, competitiveness, the productive infrastructure and the balance of payments have paid the price. Maintaining this level of well-being required increased divestment of wealth and a rise in social inequalities.
Like the house of wood in the tale, the countries that let their public and private debt spiral out of control are also fragile. The cases of Italy and Belgium are exemplary. In 1999, both countries had, at 113%, the highest ratio of public debt to gross domestic product (GDP).
The considerable fall in interest rates made possible by the adoption of the euro allowed substantial savings in terms of debt servicing which Belgium – unlike Italy – used to reduce its debt rather finance operational spending. Walt Disney version of The Three Little Pigs has a happy ending – the pigs that built their house of straw or of wood escape from the jaws of the big bad wolf thanks to the hospitality of their brother, more cunning and farsighted than they.
We have seen the forms that foresight and lack of foresight can take but who is the big bad wolf? What spurs his appetite? And what tricks can be used to neutralise him? The wolf in the tale demonstrates what results from the denial of a manifest danger. It takes on an external appearance – in our case, that of speculation – but in reality it is the consequence of a refusal to accept reality – of denial.
Cunning must be the fuel
If this state of denial lasts a long time, it leads to the accumulation of imbalances that are increasingly difficult to control. Thus, the longer a society, or its politicians, continue in denial, the more the wolf – speculation, – is dangerous.
It is this succession of events that makes the tale an enlightening one. It reminds us that, when the lack of foresight of the short-sighted has stirred the appetite of the wolf – speculation, – foresight alone is no longer sufficient to protect anyone, including the far-sighted. The proof is in the signs, seen in recent days, of contagion spreading to the virtuous countries of Northern Europe and that the latter are unable to contain.
This is where cunning comes in. It is the ability to recognize that the commitment of the strongest cannot be limited to a civic duty of assistance, but on the contrary, it must take on the character of an emergency mobilization. The civic duty of German, Finnish or Austrian tax payers cannot be the main criterion to set the size of the European Financial Stability Facility or the responsibilities of the European Central Bank regarding financial stability.
Cunning must be the fuel for exceptional actions capable of posing a credible threat to speculation – able to scald it, to return to the metaphor of the story – and to force it to flee. It is only if the short-sighted become foresighted and if the foresighted become more cunning, the tale teaches us, that the countries of Europe will achieve a happy ending, living, with the euro, happily ever after.