Wednesday, June 13, 2012

Europe's Leaders Should Learn From Game of Thrones

Europe's leaders keep taking steps that get them halfway (or maybe a third of the way, or a tenth of the way) to resolving the region's ongoing crisis. But actual resolution still seems awfully far away. In fact, it's probably getting farther away.
That's the way financial crises tend to work: Once markets lose confidence, partial solutions — although they sometimes calm markets temporarily — eventually have the disturbing effect of reducing confidence even further, worsening the crisis. That's because market participants begin to doubt the ability and/or commitment of the would-be crisis-enders in government or financial circles, and either run for the hills or make bigger and bigger bets on collapse.
Read it at Harvard Business Review
Going Backwards in Europe, a Half-Step at a Time
By Justin Fox

In the second season of Game of Thrones (on HBO), various different kingdoms contemplate going to battle against one another. The leaders of each kingdom must judge their chances, in part, based on the size of the opposing castle and each group’s number of men. An obvious lesson for trying to defend one’s kingdom is therefore to build the most imposing castle wall and protect it with the largest number of men. The idea is to present a strong enough front that other groups are deterred from even trying to wage war.

European leaders have clearly not been watching Game of Thrones, or if they have, failed to learn this simple lesson. The most recent action is far too small to ensure solvency in the Spanish banking system, let alone stem the ongoing peripheral bank runs or rectify the structural problems inherent in the EMU. Since the crisis broke out in Greece, three years ago, Europe’s leaders have proposed and passed dozens of half-measures. Despite these efforts by politicians and central bankers to repeatedly shoot themselves in the foot, markets continue to find temporary exuberance with each announcement. That confidence has not yet deteriorated further is, in my view, astonishing.

Although each effort has generally been a step in the right direction and bought Europe’s leaders more time, one can’t help but feel that the light at the end of the tunnel is drifting further and further away. Confidence is a funny thing, in that it’s far easier to lose than to gain back. The resilience of market confidence, to date, remains highly beneficial to Europe. Time, however, may be running out.       

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