Markets are sensitive to signals. This has been demonstrated by many notable economists like Kenneth Arrow, George Akerlof and Joseph Stiglitz. Political signals have received the attention of such notable scientists as Anatol Rapoport and Thomas Schelling. The interaction between signals in the political and the economic market remains outside the radar of mainstream social science however. And it might have affected the recent Greek crisis.
Beyond the now well rehearsed arguments on the role of the byzantine state, the corrupt political class and the entrenched sectoral interests precipitating the collapse of confidence on Greece the more interesting story is why Greece and why a collapse of confidence in such unprecedented scale? Greece in 2008 was not the most indebted state within the EU. Greece today is far from being the most indebted country (adding state, household, corporate and banking debt). While the country still retains a high level of human capital education. One could counter on the negligible rates of invention, low skill levels and market distorting guilds. But these traits are not unique to Greece.
The Greek crisis can also be understood as a monumental failure in public relations. It is likely to be a failure, from a navel gazing political class, to recognise which political signals translate most substantively into economic signals. On this reading, they failed to understand that once the eyes of the markets were on the Greek debt, the productivity, innovation record and labour relations in the domestic market became immediately translated and conveyed to an international norm. Political claims, statements, self-doubt and bombastic confidence were condensed into one reference point. Credit worthiness. And Greek political disputes and economic waywardness could no longer remain a low stakes game. Domestic political actors over the last decade failed to recognise that sitting on a high stakes table they needed to change to a high stakes signalling strategy. I am not a poker player but cannot resist the analogy that only fools bluff at a high stakes table with chips they carry over from the slot machines.
And just in case I will be accused of thumping the Greek political class when it is already down, I am willing to throw a couple of punches around. First, Greek politicians are a mirror of Greek society; second, there is a generalised disregard for civic obligation; & third adhering to laws is a function of the probability of getting caught contingent on the probability of getting away with it (through political connections, bribes or the random endorsement of laws by the state).
All this does not detract from the fact that the translation of signals is both the responsibility of those that transmit them as well as those that try to decode them. Global markets and policy makers are at fault for not been able to correctly interpret signals they received. The impact of this has been dire for the Greek people. Errors in signal translation have also aggravated the world financial crisis and increased the risk of contagion from the Greek default. To that end it is fundamental to transmit positive signals about the potential of the Greek economy. I found a good example of attempting that and append it here.