What to do when Nobel-winning economists disagree? Create alternative scenarios, of course.
The Greek Vouli (Parliament) just approved a series of tough reform measures meant to mollify their creditors and allow it to stay in the euro zone.
This follows a referendum in which the Greek people rejected as too harsh an almost identical series of reform measures meant to mollify their creditors and allow it to stay in the euro zone.
The EU has said the parliamentary vote satisfies the requirements for injections of liquidity into Greek banks to resume.
But German Finance Minister Wolfgang Schaeuble has stated that despite all this, he wants the Greeks to get out of the euro.
Greek member of parliament and former Finance Minister Yanis Varoufakis, Schaeuble’s nemesis in these talks, wrote the other day that the Germans have wanted to force the Greeks out of the euro since his Syriza party took power.
Nobelist Paul Krugman agrees with Varoufakis that the “troika” (EU, IMF, European Central Bank) has acted in bad faith and that the deal Tsipras was forced to agree to will further strangle the Greek economy, not allowing it to get out of the tailspin that has seen GDP shrivel by more than a quarter since 2009.
The Germans refused to countenance any debt relief as part of this latest agreement with Greece. This despite the fact that the IMF’s latest Debt Sustainability Analysis, revealed the weekend of the referendum, admitted that Greece would definitely need debt forgiveness. And despite the fact that both in the 1930s and the 1950s Germany itself was forgiven large war reparations debts which were deemed unsustainable.
French economist Thomas Piketty said of this: “Germany is the country that has never repaid its debts. It has no standing to lecture other nations.”
ON THE OTHER HAND, some believe that Angela Merkel has bent over backwards to save the euro and the Greek economy. The Financial Times called it “Germany’s Conditional Surrender.”
Another Financial Times commentator says “Tsipras Has Earned His Punishment.”
And future Nobelist Michael Burda (full disclosure: college friend of mine) had called for just such a deal emphasizing “supply-side reforms” in order to put Greece on the path to prosperity.
So who’s right about how this will play out? The doomsayers who point out that austerity will make Greek economic recovery impossible? The reformers who say that the deal of this week will right the ship and begin a Greek recovery in earnest? The hardliners on BOTH sides who say that Greece is better off out of the euro and the deal simply delays the inevitable?
There is simply no way to know. And when you have this large a level of fundamental uncertainty, and you have important decisions riding on the outcome, you simply MUST sketch out multiple plausible alternative scenarios to test the robustness of your plans against all of them. One can identify some possible dimensions of the “future space” containing all of the plausible potential outcomes with respect to this crisis:
- Is Greece a “normal” European country that can reform its economy, or is it culturally idiosyncratic and doomed to remain the “fakelaki” economy it has been for a century or more?
- Will austerity necessarily doom Greece to being stuck in depression, or can Greece do what Ireland did and work its way back to a semblance of growth (if at 10% unemployment, still better than Greece’s 25%+)?
- Will Greece stay in the euro zone, or be pushed out, as mutual arch-enemies Varoufakis and Schaeuble seem to agree will happen?
If you really want to cover your bases, vary each of these extremes against one another, and create scenario worlds of complexity and elegance against which to test your strategic assumptions. There is no guarantee you will anticipate every critical eventuality that actually occurs. But if our experience is anything to go by, you will anticipate a whole lot of them, you will have stolen a march on your competition, and the sophistication of your understanding of what the future could bring will surprise even you.
And when the future happens, the one thing you can be reasonably sure of is that every one of the experts who were wrong will have excuses for why reality has seemed to contradict their prognostication. And you know what? Many of those excuses will actually probably be legitimate. Prognostication, particularly economic prognostication, is very brittle – one varied assumption, one unanticipated exogenous rogue wave, and the prediction can be “wrong” without even contradicting the logic of the predictor. They can simply move on to the next prediction – unlike you, perhaps, who actually has to make decisions based on your vision of the future.
When the experts disagree, don’t choose one of them and bet everything that that one person will be right. That’s like choosing one number at the roulette table. Hedge your bets with alternative futures.
The amazing thing about this situation is that I see no real evidence that any side in this game of high-stakes chicken is attempting to do this kind of scenario analysis. Finance and international political-economic diplomacy seem to be in thrall to a macho poker-playing ethos that demands that people pick a very detailed vision of the future and stick to it, never betraying the slightest doubt that they could be wrong. Hundreds of billions for overconfident posturing; not one euro-cent for anticipation of a broad range of possibilities. Given the amount of money at play here, the relative cost of doing this kind of responsible, rigorous but creative thinking would have been vanishingly low.
Of course, if they really wanted to do it right, they should have hired us. We’ve done this for a number of governmental and financial institutions. And some of us even speak Greek.