The placebo effect and the economy

By Nikos Konstandaras

Among the greatest mistakes made in the years of Greece’s hard landing is that citizens did not get the chance to sense that aside from austerity and pain the economic adjustment program also brought some benefits. The many sacrifices and injustices could have been softened to some extent by the targeted improvement of state and social services which became ever more necessary as the economy worsened. Instead of reforms being seen as something good that would offset some of the difficulties that citizens faced, they were presented as further punishment.

The governments of the past four years were incapable of arguing that there was anything positive in the reform package, while the other parties were free to present every change as a catastrophe, thus contributing to a climate of uncertainty and pessimism. Our partners added to this with statements and actions that left open the possibility of Greece finding itself exiled from the common European currency. As was to be expected, this discouraged investments by Greeks and foreigners and caused a drop in consumption, leading to even worse consequences for the economy and society. Austerity on its own caused serious damage, which is measured in terms of lost revenues and high unemployment; pessimism worsened the negative effects of the crisis by reducing the flow of money even further and by encouraging opposition to every reform.

In the past few days we have witnessed an effort to change the climate, to make it appear the crisis has ended and that Greece is making a leap toward normality. The primary surplus and the five-year bond sold to international investors raise the hope that our creditors’ harsh grip will loosen, money will flow into the real economy and the country will recover. These developments, along with words of encouragement from foreign officials and some publications, play a positive role in improving the climate. It is the light at the end of the tunnel for which we have yearned – and sometimes even the illusion of light leads us toward it.

It is acknowledged in medical research that a pharmaceutically inactive substance can have a positive effect when it raises hope in the patient’s heart. Perhaps the single most effective use of this “placebo effect” on the European debt crisis was European Central Bank Governor Mario Draghi’s vague declaration that the bank would do “whatever it takes” to support heavily indebted eurozone members. Without saying anything specific that would overstep his mandate, he calmed the markets and allowed troubled countries, like Italy, to keep borrowing.

Studies into the Greek crisis and the adjustment program will have to look carefully at the consequences of the opposite of the placebo effect – when a nation drinks the poison of punishment, alienation and pessimism. To reach the end of the crisis and to avoid greater pessimism, however, vague hope is not enough. We have to see real economic growth, improvements in our daily lives, good state services and reliable public transportation. And we must feel that justice will prevail.