Summary: If one studies the European Union as if it were a dysfunctional joint family, one would know what to make of the present European mess. This article does precisely that and concludes that there will be sometime before things start looking rosy for the region and that is a bad thing for the rest of the world. 

Context Of This Article

With an intention to make sense of the world we are living in and how it is shaping our present and immediate future, I am writing this article. It is meant for folks who want to know what is happening around the word but are not keen to look at hardcore business news on the same. This is the first article in the series of 3 articles on:

• • Just what is happening in Europe?
    • It is the most tending event in the world economy right now and so a perspective on what is happening is necessary to know just why should we care?
  • What are the major themes in the world economy right now?
    • There are themes other than Europe which have a direct bearing on the future of our investments in India
  • Given all of the above, what is in store for an Indian investor

 

How This Article Will Unfold

 In this article, I am trying to explain what is happening in Europe with respect to the problems, their causes and their implications. In order to simplify the understanding, in the beginning I am narrating a small story to which all of us can relate to. Once we familiarize ourselves with the story, I will confirm how it is relevant to the European context. Finally, given this understanding I will confirm how the story may unfold over the future months.

Why is Europe Important

If Europe was a country, it will have the highest GDP in the world. It is already the most prosperous region in the world and has had a history of tiny countries colonizing bigger ones from elsewhere. One would think that if one small country in the region is in trouble, then the rest of the countries should be able to save it if they want. But that is not happening…

Why?

A Small Story 1^st

 This is a story of a family over a few generations.

 To begin with, there was a father who had sons. Father was living in a small town in Central India with his wife where as his sons were living in various parts of the country, and were working in various occupations. Each son was doing OK but the man was feeling lonely. He was getting old and wanted his sons to live with him. Also, he knew that if all the children lived together they would collectively do much better than living individually. With an idea that he would convince the children to do what he wanted, he called each of them home. He explained to them how each of them had resources that would grow at an exponential rate if all of them simply lived together. He asked them to give this idea a try for a few days. He said that the mantra was to ‘Simply stick together, no matter what’.

The children found merit in the idea, esp the elder ones. They all moved back in their parental house with their parents. After a few days, the father died. He died a satisfied man. But before he died, he told his wife that the future of the family is very bright if simply all the members stuck together. The wife, who was the new head of the family, internalized this. When the husband died, she called the sons and told them about their father’s dying wish. By this time the sons too had started enjoying each other’s company. Their children and wives too were basking in the newly obtained prosperity and were living happily together. The sons told the mother, “Don’t worry Ma… We want to live together”.

After this meeting with mother was over, the sons had their own conference. They sat and discussed how they are going to care their future together. They all knew that satisfying their parent’s wishes was one aspect, but the bigger aspect was that they were more prosperous than their earlier lives and wanted to improve their prosperity by repeating the actions that have made them prosperous in the first place. They realized that sticking together was their future and so they decided that even higher collaboration among them was the key to a better future. The elder sons had worked the hardest to make things work till now and they thought they knew the key to making effective sacrifices and reaping better benefits. They knew that if they guide their younger siblings effectively, even the younger siblings will become as prosperous as them. They asserted their point of view. The younger sons had only seen their elder brothers working till now. They have not taken complete responsibility themselves till now and still needed hand holding. They looked sideways at each other during this discussion because they were still not confident about themselves, but then accepted the idea of collaboration due to the respect for the elder brothers.

In this meeting it was formally decided that all the brothers will work together like a single giant family unit. The guiding principles of what needs to be done professionally to prosper will be the same across the family members. If any brother has any shortage of resources, then all the others will contribute to him. They will be dependent on the outside world for resources only when they have exhausted all the avenues among themselves. Trusting each other more and others less was the mantra. Driven by the success of this meeting, all of them went back to their mother and announced, “We’ve discussed MA… We will live together.”

A few years passed. The family started reaping more benefits of the collaboration of the brothers. As the goodwill of this family grew, even the extended family members came and started collaborating with them. Slowly, some of the cousins too became part of the inner clique of the family. The children of the brothers, the children of the cousins, the wives… all became part of one big happy family.

With growing business, different people started taking different responsibilities. One brother became super specialized in operations… He knew how to set up a new manufacturing business if someone else wanted to learn. Another brother became the financial brain of the family. One brother became the go to guy for all family functions. He would contribute in the family business, but was more inclined to bring everyone together. Similarly, all the family members found their niche…

And then everyone lived happily ever after…? Hardly!

The Players and Their Present Condition

In any joint family, there are many undercurrents. These can be both political and interpersonal. If these are not managed properly, they make the family dysfunctional. This is what happened in the family above.

If one has to relate the above story to the present European condition, then this is how various players will fit in and this is how they are situated in the present scheme of things:

• The Family is the Euro: It is the concept that the brothers came up with in their meeting after their father’s death.

• Eldest Brother is called Germany:  He is the most influential elder brother who knows how to do things right. This brother knows that success is hard earned and does not tolerate any excuses from any other family member. The rest of the family sees him as autocratic, but also deeply respects him due to the kind of expertise, guidance and wealth he brings along with himself.

 

• The other most influential brother is called France: He is the other most influential brother and is the financial brains of the family. He has realized that effective deployment of resources is the key to prosperity and had invested most of his wealth into the initiatives of his younger brothers. Knowing that all the other brothers will look at Germany too for expertise, he has egged Germany to invest his resources too with other brothers.

 

• The spoilt and self obsessed younger brother is called Greece: This brother was very inexperienced when the meeting of brothers took place. From his point of view, prosperity in the family simply came by sticking together and he was unable to appreciate the hardships the elder brothers underwent. He was cajoled by France and Germany to work on activities they thought will help him, but his heart was not in it. The elder brothers too gave him a long leash. Eventually, Greece realized that it could not work like the elder brothers, but liked the prosperity and the wealthy lifestyle. It borrowed more money from the other brothers in the name of business, but ended up spending that on his lifestyle. Eventually the other brothers realized that they were being taken advantage of.

 

• The brothers that organizes the family functions, parties and do the general job of keeping the family happy are Italy and Spain: On the face of it, they do work in the family business. But in reality their hearts lie in organizing parties and playing sports. They too needed money, like Greece, to maintain their lifestyles but are not that spoilt. They have totally not given up on their responsibility in the family business, but are doing just enough to hold their heads up. In return, they borrowed a lot of money from their brothers.

1. Between these 2, Italy borrowed more money for his lifestyle. But he borrowed not from his brothers, but from his in-laws.
2. Spain borrowed from other brothers as well other relatives.

•  The cousins that were not a part of the original family but then became a part of the inner clique are Portugal and Iceland: By themselves, they have very low self esteem. There have reconciled to the fact that by themselves they cannot do anything, but if they latch themselves on to the family machine, then prosperity is in sight. Their fortunes, as a result, increase or decrease with the rest of the family. There been situations in their past when they have been absolutely out of money and the group of brothers bailed them out. They did not like keeping their heads down, but in the end reconciled to the fact that they are insignificant and so took the money. Internally, however, they are slowly resolving that life may not go on like this forever.

 

• The wives of all these brothers and cousins are the politicians of various countries: All the NANADS and JETHANIS have been living together but at the same time were observing the situation of their husbands. They had to manage the expectations of the mother, the larger family and their own children.Each wife taught their children the interpretation of the situation she saw through her eyes.

• Germany’s wife told her children that their father was going through hardships all the time but that would not have meant anything if the family did not stick together. She also told them that the hard work is the key to success.
• France’s wife too told her children about the kind of deals the father made and how investing in brothers was the wisest decision and the best risk the father took. She also told the children that nothing would’ve been the same if the family had not stuck together.
• Greece’s wife knows that her husband has been cheating. But in order to maintain his honor in front of his kids and to make sure that her children too enjoy the wealthy lifestyle like other children, she lies to them. She tells them that their father is this great businessman who learnt a lot from the elder brothers.
• Italy’s and Spain’s wives told their children that the only way they can live in the world is by keeping everyone together. Along with working hard, the children should also learn how to eat together, pray together and love together. Happiness, they said, is the key to live a good life.
• Portugal’s and Iceland’s wives, well, are like their husbands. They have brought their children up in the same way.

• The children of all these couples are the citizens of the respective countries: These children have lived very happily when they were kids. They used to holiday together, dine together and celebrate together. As they gew up, differences begun to emerge. They saw the world in the ligh of what their mothers taught them and how they saw their fathers.

• Germany’s children saw their father work the hardest among the brothers. They know their father would not have been as prosperous if it was not for other family members, but they have started to believe that their father would have been relatively more successful than others anyways. As they grow up, they see an obvious difference between them and other children and are beginning to feel distanced.
• France’s children are fiercely independent like Germany’s children. While they know their father was right in investing money with other brothers, they have also learnt that their father had put too much faith into other brothers as well. They have beginning to resent the family of other brothers now.
• Greece’s children have learned that life is not always a bed of roses. It pains them that while in spirit they are ready to make amends for their parents’ wrongdoings, they have not been brought up in a way that makes them any useful. They just don’t know where to go.
• Spain’s and Italy’s children are afraid that if Greece’s children are so depressed, then that day is not far when a similar fate will fall on them. They too want to work, but they too don’t know much other than eating/praying/loving/playing.
• Iceland’s children have made sure that they lose themselves into nature. They know they won’t make much wealth in the future and so have started to trim their expenditures in the present.

• The mother, who is still alive and deeply pained, is the European Central Bank (ECB): She does not like the way the events have turned up. She knows the brothers took husband’s wishes in word but not in spirit. She wants all children to be happy, despite their shortcomings, but is also willing to take difficult decisions if the situation goes out of hand. She does not want the situation to get out of hand. She knows now there is too much to lose. She simply does not have enough years left in her to be able to start over.

 

 

What Decision The Family Takes?

It is clear that with so much history behind them and with such a high level of differences among the members, the family dysfunctional now. Each member is looking at each other with suspicion, given how he/she has viewed the world from his/her perspective. However, all of them understand that. whether they want to or not, they NEED TO stay together. If you remember, the brothers told their MA that they want to and will stay together. Now even if they want to, they simply can’t separate themselves from the rest.

This is because Germany and France have invested simply too much into their brothers. If the brothers go bankrupt, their own money and years of hard work will go down the drain. They will rue the time of their life they have given to the family. To prevent this, they know that they have to rein in Greece. If that does not happen, then the consequences will be too many to be contemplated.

Following decisions are taken by the elder brothers in consultation with their mother:

• In order to do this, they tell Greece, “We will give you money and bail you out but then you will have to let go of the millionaire’s lifestyle and bring in more discipline in your life.”

 

 

What Happens In The Family Next?

Greece initially accepts the deal. But gradually the frugal lifestyle begins to bite the children. The children don’t want to live a life that is less prosperous than their parents and begin to revolt. Due to their love, the parents go back to the family and say it is difficult for them to adhere to the terms of the bailout.

Now the family has to be more rigid. It has to decide whether they accept Greece in the family as is, in which case Greece will never pay the loan back. Alternatively, they have to see if it makes sense for them to force Greece out of the family.

Basically they have 2 scenarios:

Option 1: If Greece remains in the family but is unable to repay the loans and goes bankrupt then it will mean that Germany and France will lose simply too much to be able to recover quickly. After this bitter experience, they will not trust anyone in the family.

• Also, after this happens then Spain and Italy will begin to get pressurized. They won’t want to become the black sheep in the family but also will not be able to find out a way to get out of the debt situation.

• Italy had borrowed most of his money from his in-laws. It can simply turn its back on them. (In the context of real life, Italy’s in-laws are various firms doing business in Italy and governed by Italians). In laws may accept this, after all Italy is their beloved DAMAAD, but will not like it and the word will spread to the outer world. There after rest of the world will lend to Italy at very high rates, or will not lend at all, and so life will become still tougher for Italy.
• Spain will be under the screw next. Once Italy falls, it knows it is next. it is even a more significant part of the family and there is no way the family can see it go down.

After this experience, no one will trust anyone in the family and looking at this the rest of the world will not trust family itself. All the name and fame and wealth and happiness will be gone…

Option 2: If Greece is banished from the family, then Greece will take revenge. Greece knows family secrets. He will partner with rivals in the world and make sure that its products are relatively cheaper than the products made by the elder brothers. That ways he will earn money and then repay the loan to the brothers.

• Once he manages his way out of the debt, Spain and Italy will say if Greece can do it, then we definitely can! They will follow the same model.
• Once Spain and Italy go out, Portugal and Iceland will go out too. After all they know now that prosperity can be obtained elsewhere too.
• Germany and France will suffer heavy losses.
• Once happens then the rest of the world, who lent to the family purely on the basis of the name and fame of the elder brothers, will suffer losses too.

The consequence will not only happen at a family level but at the world level. It will be a contagion scenario when no one will trust anyone despite any reputation.

Based on above, we see that there is no way the family will chuck Greece out of family. It has to bail Greece out. But at the same time the children of the rest of the family are getting angry on why they are suffering due to Greece and the wives are unable to convince them. Children, being children, see the world in their own way and think that they will create a big empire all by themselves. That is making implementing any decision extremely difficult and increasingly impossible.

As a bottom-line, the family knows that they need to stick together, but they don’t know how!

 

Verdict: What Will Happen Next?

I am not expert, but I am mentioning this on the basis of my understanding of human psychology and emotions. I believe that the family will not break up. Euro will remain. However, it may not continue in the present form. Following changes will be necessary and will be implemented:

Change 1: All the brothers will tighten their belts and implement high amount of personal and fiscal discipline in their families. This would mean cuts on family expenditures (called austerity measures) and improved focus on productive activities.

• Greece will accept and will start behaving better.

 

Change 2: Due to the increased concentration on bringing the house in order, the family will interact lesser with the wider world. It will exercise a huge amount of restraint in its interactions and since the family is so big and important, it will have an impact on the economy of the rest of the world and on the other families that had earlier looked up to this one for inspiration.

• Euro will suffer a period of recession and the rest of the world will suffer a period of sluggish growth.

Change 3: If the situation of the family is better but Greece is still not up to the mark, then it will be phased out of the family. Or it will voluntarily withdraw. In any case, this separation will be orderly (i.e. as per a defined plan) and scheduled (so that the world knows about it).

• If Greece is still unproductive after 3-4 years, then it will be phased out. Euro, in this case, will suffer even more prolonged period of recession of now till 7-8 years hence.
• All the problems mentioned above with the rest of the world will persist for a longer time.

 

IN ANY CASE, WE ARE LOOKING A SIGNIFICANT PERIOD OF RECESSION/VERY LOW GROWTH IN EURO. IF GREECE DOES NOT BEHAVE, THE PROBLEMS WILL BE LONGER AND MORE PRONOUNCED.

 

What Do The Experts Say

Above is how I have interpreted the situation based on my understanding of economics and human psychology and emotions. Is it really that simple, really that silly and really that grave as I have documented above? The answers, sadly, are Yes, Yes and Yes.

If one is interested to learn how experts have decoded the whole issue, then a series of articles here is a good place to start. The links and references on various articles can help you enhance your knowledge better.

As it stands, already the focus is squarely on Italy now and the chief of IMF is talking about Europe having the possibility of a lost decade.

 

One Quote To Sum Up The Situation

Europe, esp. Greece, is known for its beaches. It just so happened that when the tide turned, all of us learnt that everyone else was swimming naked! 🙂