Don't Dismiss Greece's Baser Instincts
There are two things worth noting about the current situation in Greece. First, the country would almost certainly be better off with whatever deal the rest of the euro-area members choose to offer. And second, this doesn't necessarily mean that Greece will take that deal.
This is not the first time I have observed this about some country's economic policy. Zimbabwe's hyperinflation? Obviously a bad idea. Venezuela diverting funds into social spending from the investment funds needed to keep pumping the oil to pay for the social spending? Why, yes, also a bad idea. Argentina's determination to force creditors into very large haircuts, even at the expense of (temporarily) defaulting on its International Monetary Fund loans? I'm pretty sure all these countries were wearing their bad idea jeans. And now Greece really seems to be flirting with exiting the euro, even though this would not be a good idea.
Why does this sort of thing happen? Because market logic is often not competitive with more primal instincts about outsiders, not to mention fairness.
Look at things from the Greeks' point of view: They owe a bunch of money to foreigners who spent a lot of time calling them tax-cheating spendthrifts. Those foreigners are mostly richer than they are. Greeks are being asked to cut and cut again while pensioners suffer, the sick go without needed medicine, the unemployed struggle to eat and keep a roof over their heads. No German is going to miss a meal if they cut Greece more generous terms, while many Greeks will genuinely suffer if they do their creditors' bidding.
Related: Greece Default Watch
You can point out that the Greek government was wildly overspending the country's actual resources; that default will bring more suffering, not less; that the country's inability to collect the taxes it is owed is a big part of its fiscal trouble. Many of these things are true. But emotionally, they are very much beside the point.
Humans have a lot of deep-seated instincts about fairness, sharing and loyalty, which helped us to survive in the small groups we lived in for most of our history. We instinctively feel that it is wrong for some to suffer while others enjoy a surplus -- and we instinctively care much more about the suffering of people close to us than those far away. (If we didn't, wealthy industrial nations would have no social programs at all and would instead be sending all that money to much poorer people in much poorer countries.) The market-exchange norms that the rich world relies on came much later, and because they seem to be used primarily for outsiders until pretty late in economic development, they are not quite so deep-seated.
So when rich creditors start making demands on poorer nations, those deeper instincts often win out over the "obvious" and "sensible" market logic of the international financial community. The leadership may well recognize that the "sensible" plan is, in fact, the most sensible option -- but political realities may prevent them from acting on this recognition.
In other words, nations can become what behavioral scientists call "altruistic punishers": people who are willing to cost themselves a great deal in order to punish others whom they believe to have behaved unfairly. The colloquial term is "cutting off your nose to spite your face." You've seen it plenty of times yourself: the angry youth who risks his own life to avenge a friend or family member, the spiteful spouse who will see the couple's joint resources drained away on divorce attorneys before they will come to a settlement, the aggrieved customer who will spend hours of their valuable time demanding a company right some small wrong, the rich nation that will spend many years and many billions fighting a war to avenge the death of a few thousand people in a terrorist attack. Altruistic punishment is evolutionarily useful, as is the often-maligned tendency to strike back against outsiders who bully you; these punishments deter unfair behavior by promising the perpetrator that it will be very costly to cross you or your group.
You can see altruistic-punisher emotion activated -- at least the threat of it -- on both sides of the debate. It will be better for Greece to stay in the euro and do a little more austerity than it will be to exit and trigger a domestic financial crisis -- but if the latter is costly to Greece, it will also be costly to the creditors who are widely perceived as unfairly pushing around a nation that is already in dire straits. By the same token, you can probably argue that it's cheaper for creditors to give Greece somewhat better terms than to let it leave. But the creditor nations are simultaneously outraged at the notion that they should have to pay for Greece's inability to manage its finances and fearful of sending a message to markets that you can get them to pay your bills indefinitely if you will only make dire enough threats.
Where this ends for Greece and the euro area is hard to tell. On the one hand, reaching a deal remains the sensible course for both sides. On the other hand, the desire for altruistic punishment can overtake rational calculation -- it has to, in order to be a credible threat. Which means that until the moment of truth arrives, it's always hard to tell whether arithmetic or instinct will win.
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