The fable of German ants - and Club Med crickets

By Reuven Brenner

During the long days of summer, the ants were working hard.
But the crickets were singing -from daybreak till dark.
When winter came, the ants had food stored away.

The crickets begged them for mercy, but the ants turned them away. Aesop’s fable about the hard-working ants and the singing crickets could be an almost perfect allegory for today’s Europe, given the fable’s moral: you’d better save for rainy days, and don’t count on those who are not members of your tribe. It appears though that Europe forgot these simple teachings.

The issue isn’t the "euro" but the long-forgotten expectations that came with it: namely, that this currency would be backed by principles that guided the management of the deutschemark, rather than the principles of devaluation/inflation prone French, Italian, Greek and other currencies. Politicians in those countries believed that the strong German currency would force regulatory and fiscal changes in the weak-currency countries, changes they were not able to achieve through elections. They then put the blame for the painful adjustments on the rigid Germans and "speculators".

Knowing European history, and the European tribes’ wishes to avoid major local wars, investors advanced large loans to the "crickety" (Greece, Italy, Spanish) governments on terms similar to those advanced to the governments of the hard working "ants". Although they knew that the crickets continued singing, and did not work harder, the creditors just expected the government of the ants to bail them out.

It appears that they made the wrong bet. For the moment, in spite of increasing pressures on Germany to cough up the money, its government stays firm - as it should, much fear-mongering notwithstanding. Transferring wealth from the ants to the crickets weakens the ants: just a hint that Germany would succumb to picking up the bill and the yields on German bonds will increase.

Those in favor of transfers believe that it buys time for the Club Med countries’ to change their ways, bringing about a situation where they would stop singing so much and start working. But since these countries did not carry out any changes in this direction the past few decades, why would they do so now when they get more money?

Indeed, can crickets be transformed into ants? Obviously people are not as genetically rigidly programmed as crickets, but it is not true either that people, cultures and traditions change quickly.

People and societies change when "necessity" comes into the picture: As the old saying goes - "necessity is the mother of invention". And what does "necessity" mean? My observations and experience, be it in business, at a personal level, or examining societies throughout history, led me to conclude that bankruptcy or fear of being leapfrogged define the "necessities" that bring about "innovations" in individual behavior, in business, and in political institutions.

True, innovations can turn out to be either beneficial or criminal in nature. What closer examination of a wide range of experience also led me to conclude that giving people a stake in the future after going bankrupt or being leapfrogged ensures that more innovative bets are channeled in beneficial, rather than criminal, directions.

The presently debated transfers of money from Europe’s disciplined, prudent societies to the imprudent ones will not achieve such outcomes because there is nothing concrete being attached to the transfers about creating a variety of new institutions to ensure that the singing tribes do not continue with their happy-go-lucky predisposition.

Briefly: the euro is Europe’s problem only in the sense that it prevents the Club Med countries from unexpectedly inflating and devaluing their currencies. The alternative is the drastic changes they have to introduce to their fiscal and regulatory policies. At first, both policies would make the Club Med populations - and their creditors - poorer; they vary in that different groups would get hurt depending on which option is followed.

Behind the layers of jargon, this is the crux of the matter: the groups who would lose wealth under an exit from the euro by Greece and/or Spain would be different from the groups who would lose out under a prudent Europe coughing up more money and maintaining the euro as it is - for a while, anyway. The different groups all have an incentive to exaggerate the difficulties with the alternative option, and they are all very good at rationalizing their views by bringing gullible media and academics - economists prominent among them - to cover the real interests with academic, moral, tribal or utopian cloaks.

Don’t take any of them at face value. Aesop’s simple fable and its message captures Europe’s present problem far better than anything else written on the euro crisis.

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Reuven Brenner holds the Repap Chair at McGill University’s Desautels Faculty of Management. The article draws on his History - the Human Gamble (1983) and Force of Finance (2002).

(Copyright 2012 Reuven Brenner)