Paul Krugman recently wrote that, “It’s now three years since I suggested a possible route to Greek exit from the euro … Obviously, that hasn’t happened. Despite intense suffering, the Greek political elite’s commitment to the euro has proved incredibly strong. My analysis of the economics wasn’t wrong, but my political guesstimates were off.”
I have no intent to pick on Krugman—predictions are often wrong, and I too wish I hadn’t written some of the things I did. (For a rebuttal of Krugman’s view on Greece, see my post “Is Krugman Right about Greece?”) But Krugman’s admission underlines a broader intellectual failure—the failure of the economics profession (for the most part) to think seriously about politics. In effect, Krugman writes, “I underestimated how much Greeks cared about the euro.” This is an error of the first order.
The “Greek political elite’s commitment to the euro” is hardly a surprise. Support for the euro has been one of the few—I would dare say maybe the only—constant in Greek politics over the past three years. Arguably, if SYRIZA had convinced voters that it could keep Greece in the Eurozone, it would have won the June 2012 elections. Nor is support for the euro weakening. In February 2013, Public Issue estimated that 70% of the people had a positive view of the common currency, much above the 47% that held a positive view of the European Union. In March 2013, the support for the euro dipped but still held at 59%. It is hard to think of anything in Greece with an approval rating of 59%—except the euro.
What amazes me is that something so self-evident to so many Greeks seems so utterly incomprehensible to so many professional economics. And therein lies the analytical problem—so many people writing about the Eurozone crisis take no time to understand the politics and psychology under which countries are making decisions; and so they end up with an overemphasis on the economics while making “political guesstimates” or, more accurately, political “guessumptions” that are fundamentally flawed.
Perhaps the most insightful article I have read on the Eurozone crisis came from Fred Bergsten of the Peterson Institute for International Economics (available here or here). What I so enjoyed about the article is that it saw the crisis in both political as well as economic terms. And so it understood and predicted behavior in a much cogent way than economists have done. It is no accident that Bergsten has a long career in government and his PhD is not a traditional economics PhD (he went to Fletcher).
If the financial crisis forces economists to grapple with financial markets, perhaps the Eurozone crisis will force them to finally pay real attention to politics.