German Fibbers, Greek Cheaters Sowed Seeds of Euro Drama

We like to think of ourselves as honest. Yet in reality we all cheat, says behavioral economist Dan Ariely in his new book, “The (Honest) Truth About Dishonesty.”

No wonder the euro is falling apart.

Ariely is the Duke University professor who wrote “Predictably Irrational,” a look at how irrational behavior bends our lives in predictable ways. Though his new book doesn’t discuss the euro debacle, it does document a human trait that has warped the single currency from the beginning.

Our behavior reflects two conflicting motives, Ariely posits: We want to feel good when we look in the mirror, yet we also hope to benefit from cheating, he says, drawing on experiments with thousands of people. The upshot: We cheat just a little, not enough to dent our self-image, he says.

Picture a job seeker padding a resume. Or a Wall Street banker tweaking valuations on an Excel spreadsheet. We’re all capable of fudging and telling ourselves stories about why our actions are nonetheless acceptable.

“Very few people steal to a maximal degree,” Ariely writes. “But many good people cheat just a little here and there by rounding up their billable hours, claiming higher losses on their insurance claims, recommending unnecessary treatments.”

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Source: HarperCollins via Bloomberg

"The (Honest) Truth About Dishonesty: How We Lie to Everyone -- Especially Ourselves" by Dan Ariely.

Euro Cheats

What does this have to do with the euro? Plenty. The single-currency project has always entailed fiscal sleights of hand, political self-deception and outright cheating.

European leaders knew, for example, that their countries lacked elements deemed vital for an optimal currency area, such as flexible labor markets and similar business cycles. Yet they pressed on, convinced that all would be well if they could get their public debts and deficits under control.

In a pan-European show of Teutonic chest-thumping, they decreed that each nation using the euro should limit its public debt to 60 percent of gross domestic product and its budget deficit to 3 percent of GDP. But even as they enshrined these criteria in the 1992 Maastricht Treaty, European leaders were busy fudging the requirements.

At the time, only a handful of countries destined to become founding euro members met the strict criteria, according to data from the European Union’s statistics office, Eurostat. So treaty language made the euro available to nations that were merely approaching the 60-percent ceiling “at a satisfactory pace.”

Fiscal Gimmicks

This maneuver allowed Belgium and Italy -- which still had debt-to-GDP ratios exceeding 110 percent -- to participate when the euro was born on Jan. 1, 1999.

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Dan Ariely is the author of "The (Honest) Truth About Dishonesty: How We Lie to Everyone -- Especially Ourselves."

By then, even Germany had breached the 60 percent mark, according to Eurostat data. Many countries, unsurprisingly, concluded that it was sufficient to hit the 3-percent deficit target.

Even that proved challenging, prompting another round of self-deception. Italy, for one, deployed a refundable “Eurotax” to squeeze below the deficit ceiling in 1997.

The Italians were hardly alone: Tax amnesties, privatizations and windfalls from selling mobile-phone licenses helped countries meet the mark, according to “Fiscal Gimmickry in Europe,” a paper from the Organization for Economic Cooperation and Development.

German Hospitals

Germany, which views itself as a paragon of fiscal restraint, went so far as to reclassify public hospitals as quasi corporations, the paper says. The Europeans were kidding themselves from the start.

Amid the dot-com bust and downturn in the early 2000s, Germany and France breached the deficit limit, yet escaped serious censure. As Germany slid toward a balance-sheet recession, the European Central Bank pushed its benchmark interest rate down to 2 percent, aiding German exports and feeding housing bubbles on the EU’s periphery.

The most egregious cheater was unmasked only later, of course. In 2004, the Greek government of Kostas Karamanlis disclosed that its socialist predecessor had sneaked into the euro with phony data. And who could forget the currency swap that Goldman Sachs Group Inc. (GS) arranged for the Greeks? We all know how that ended.

Ariely has filled his book with amusing examples of how the cheating psychology plays out in everyday life. Office workers who wouldn’t dream of taking $3.50 from petty cash will help themselves to paper for their home printer.

Conflicted Dentists

Golfers who hesitate to pick up and move a ball from a bad lie feel less compunction about nudging it with a club. Even your family dentist may be tempted to recommend a treatment that happens to require that fancy equipment he just bought.

Ariely and his colleagues explored these behaviors in experiments that offered students a chance to earn cash by filling out a mathematical worksheet. The more problems they solved, the more money they got. Though the experimenters did encounter some aggressive cheaters, it was the little chiselers who cost the most.

“Because there were so many of them, we lost thousands and thousands of dollars to them -- much, much more than we lost to the aggressive cheaters,” he writes.

Seen from that perspective, Greece may be the least of Europe’s worries.

“The (Honest) Truth About Dishonesty: How We Lie to Everyone -- Especially Ourselves” is published by Harper in the U.S. and HarperCollins in the U.K. (285 pages, $26.99, 16.99 pounds). To buy this book in North America, click here.

(James Pressley writes for Muse, the arts and leisure section of Bloomberg News. The opinions expressed are his own.)

Muse highlights include Ryan Sutton on dining.

To contact the writer on the story: James Pressley in Brussels at jpressley@bloomberg.net.

To contact the editor responsible for this story: Manuela Hoelterhoff at mhoelterhoff@bloomberg.net.

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