EU policy makers should use loss-aversion based strategy

As I write this post the players in the global financial markets are glued to their monitors awaiting news on the next tranche of EUR 8 billion that needs to be received by Greece. In order to make it worthwhile politicians are putting on a show that every time resembles a cheap thriller.  As usual we will be brought to the edge of despair and then they will save the day. I have little doubt that this tranche will be paid. Not because the Greeks default is not a certainty at some point but because is not the time yet. Europe is not ready  for the blow and nor is Greece. At this point both are just preparing for the inevitable.

However, most importantly the public has not been properly prepared yet for this scenario. In the end for the EU politicians the most important partners are the ones that finance their campaigns and the voters. So far they have been shielding their sources of funds from the global crisis but that strategy is backfiring. The next step is to get your voters on your side.This is a bit more complicated and it is here where it seems to me that EU politicians are setting the problem up wrong.

The problem should be set up as a binomial choice for the voters. First there is certain loss from current status quo. Second, there are losses maybe higher but with some probability if something is done to move away from the current situation. This way policy makers take advantage of the natural loss-aversion of the public. In this set up the public will run away from the certain losses in hope that new policies would work.

Currently the policy makers are running their credibility thin. They say that current situation is bad, with certain real losses for the public but then they come and prolong it by putting cheap money in the system. The public needs to be given clear and simple choices but both focused on losses. The current strategy of buying time is about to expire.

This does not mean I am on board with EU policies to save Greece. But should the EU policy makers choose to really go that way they should make things much simpler for their voters and try to strike a connection with that irrational fear for losses. Otherwise, they might end up just transferring money from governments to the banking sector in the detriment of the real economy.



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