Political risk assessment is a nasty
business in that the future has a stubborn habit of not wanting to be too
predictable. Even though tomorrow displays a remarkable tendency to be similar
to the world of today—the status quo enjoying the right of default—forecasting future
events is notoriously difficult. To use statistics to nail down probabilities
may actually involve considerable luck. Not even the stature of the person making
the predictions may be decisive, after all. I have in mind the predictions of
Alexei Kudrin, the former Russian finance minister, on the European debt crisis
and the euro.
Map of the European Union: a political union and economy.
Prime facie, Kudrin is just the sort of
person whom corporations should listen to regarding political risk around the
world. After all, he was named finance minister of the year by various
publications on four separate occasions during his tenure. Keeping Greece in
the euro zone? "Already impossible," he says in an interview. Spain
and Italy next out? "The probability is very high." He sees both
Greece and Spain defaulting on their sovereign debt, though as in a Hollywood
script the euro survives (and even gets the girl, brilliantly played by Angela
Merkel). "Everything should be done to avoid it, but I don't feel that the
process is under control," says the finance minister who according to the Wall Street Journal “shepherded Russia
from default to financial stability.” Who better situated and constituted to
opine on the future outcome of the European debt crisis? He undoubtedly knows
more of the “stubborn facts” known only to the insiders than you or me. He
might have access to the “by the way” comments being made by E.U. and state
leaders in Europe, as well as the bankers at the “hot spots.”
However, what if that which is required
in order to grasp the eventual outcome surpasses even such a competent insider
as Kudrin? Even well-justified respect
can easily be surpassed by the sheer indeterminacy of a multitude of factors
and human nature itself. Greek and Spanish finances are very risky, at least as
of the final quarter of 2012. To move from this assessment of high risk to a particular event requires a leap of faith given all the variables
in human organization. It is not as though we could predict Greece or Spain as
though we were testing a chemical equation by running an experiment in a lab.
Indeed, social science itself,
including economics and political “science,” may gild the lily in appropriating
the certainty that is possible in the natural sciences. Not even a very
competent and respected man like the former Russian finance minister can give
us the sort of certainty that can be found in a chemistry lab. He may well turn
out to be correct; my point is simply that we over-reach in reaching this
conclusion beforehand on the basis of his person.
To take a related example, Kudrin also
predicts that the E.U.’s economic problems could turn into political ones. More
than mere possibility is implied here. The Wall
Street Journal reports his reminder for us that “democracies do not always
survive when their citizens are asked to make the kinds of economic sacrifices”
that Europe was facing in 2012. Furthermore, he was thinking “that citizens of
the Western countries aren't ready to accept the steep drop in living standards
they face, but that if governments fail to cut spending they will get even
deeper collapses.” Kudrin points out that Russia faced such a crisis in the
1990s, but thanks to Russian President Boris Yeltsin the country “passed it
peacefully,” whereas Western Europeans may not be able to pass through such
painful hardships without tossing democracy over-board (as if Russia had
retained it). Through my sarcasm, I am
suggesting that even a man like Kudrin has his subjective biases that come into
play in assessing future events.
Particularly when phenomena of one
domain (i.e., politics) are mixed in with another (i.e., economics), future
events can be especially difficult to nail down in advance; there are so many
variables, and they differ qualitatively. It is a mistake, therefore, to put
political risk analysis to quantification
because exact numbers, even as probabilities, overstate the certitude goes with such prediction. In the case of
Europe, we can add the invariability of two different though related systems of
government being involved—that of the E.U. and that of its states. How far will
the E.U. go to keep Greece using the euro? How much pressure would be exacted
against “radical parties” even though they are duly elected at the state level.
The case of the right in Austria that was effectively blacklisted by the E.U.
is a case in point.
To be sure, Kudrin might be right,
particularly on Greece defaulting, though it could be piecemeal via continued
percentage write-offs rather than “default” per se. The Council’s admittedly
incremental action in October 2012 on a banking supervisor at the ECB could be
fast enough for the Spanish banks to receive bailout funds before they have to
default. As in the case of the TARP legislation in the U.S. Congress, the E.U.
legislative infrastructure would likely swing into swift motion if really up against a cliff. In fact,
the history of European integration has proceeded from such circumstances,
including the debt crisis.
When France vetoed the accession of
Britain in the EC in the 1970s, for example, there must surely were cries that
the enterprise was at a crisis point, and yet the E.U. came out of the EC and
other entities in 1993 and the euro itself some years later. This historical perspective I am offering
effectively regularizes the Greek and
Spanish debt crisis from the standpoint of the E.U., which can be viewed as a nonlinear work in process. From his
vantage-point, Kudrin may not have weighed this less-exciting perspective
against his more dire yet ultimately happy scenario that is admittedly more
dramatic. The eventual results may be with him, or less dramatic. My point is
simply that human nature does not get us as close to an answer beforehand as we
might tend to suppose. The opera isn’t over till the fat lady sings (or gets the euro in the end).
Source:
Alexander Kolyandr, “Kudrin’s
Outlook for Euro Zone Is Grim,” The
Wall Street Journal, October 22, 2012.
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