Sunk costs and bitter pills

As a consultant, I worked on a fascinating project back in 2012 to prepare a client for a potential Greek exit from the Eurozone. This was July 2012 and things looked bleak.

Fast forward 3 years later and we’re still in the same situation. There have been a couple of false dawns along the way but, largely, the problem hasn’t gone away. Every time I see a headline in the news about the situation (i.e. every day), I am reminded of sunk costs and bitter pills.

The sunk cost fallacy is when we weigh up all our past investment to make an investment in the future. The phrase “throwing good money after bad” sums it up. Billions of Euros have been sunk into this “relationship.” And, it feels like both sides are consistently looking back at all past investment instead of making decisions based on what lies ahead.

When you fall sick, the recovery path is rarely sweet. Yet, leaders on both sides are refusing to swallow bitter pills. Greek President Tsipras won the previous election by declaring he would be anti-austerity. There was no shred of sense in that campaign. He resigned yesterday. Glad that worked out. There’s a nice saying that says something like – “When 50,000 people believe in something wrong, they are still wrong.” The trouble with politics is that it often involves hundreds of thousands of people screaming populist bullsh*t. Someone is going to have to take the bitter pill in this situation.

Time doesn’t make difficult problems go away. The last 3 years in the Eurozone saga have demonstrated that.

0 thoughts on “Sunk costs and bitter pills

  1. The greek situation seems more complicated than that.
    As far as I know, most of the money sent to greece is sent right back as interest payment to the financial institutions which lended greece money.
    So money sent to greece is not really sunk in greece, it just moves from the european states to the european central bank (meaning from one pocket to another). due to this, greece is piling up more debt while the EZB is getting richer.
    So Europe does not sink money in greece. And greece can’t really get out of this contract, they have been pwnd.

    1. 1. Definitely more complicated

      2. By sunk, I am not referring to the recent payments but how this started in 2010 or so. The situation was always bleak but there was always a sense of – hey, we’ve invested so much in making this work. Let’s invest more

      1. Well, now the financial institutes practically own greece. And I bet they made a lot of money and will make much more.
        Do you really think they lost money there?

      2. Well, its been a cycle. Everyone made a lot of money in the first 10 years and have been losing a lot since.

        I don’t necessary think financial institutions own Greece. There’s a saying – when you owe the bank a million, the bank owns you. When you owe the bank a billion, you own the bank. :)

  2. I get what you are saying Rohan, but in your opinion what is the solution? Because this is much more a political / EU / social stability matter than a financial one. So using financial tools to make the decision is not necessarily the right tactic.

    P.s. One thing I am confident about, is that Greek people did not benefit from this whole situation! I trust me I am talking first-hand, not from what I read in the broken media.

    1. Alex! Great to see you here.

      My view is that Greece shouldn’t have been in the Euro in the first place. And, the best long term solution for Greece and the Euro Zone is to be out.

      I agree with you on the fact that Greece didn’t actually benefit much in the long run (even if they thought they did for a while). The fact remains that you can’t execute a currency union without either strong fiscal union or incredibly high accountability.

      The Euro was a fantastic idea – a classic case of the triumph of good intentions over good sense.

      Curious to how you think about it?

      1. I think we all agree on that part, as you may know Greek politician in power at the time cooked the books (with the help of our friends at Goldman) to get Greece in. Including everything else that Greece has been doing wrong since then, that is why we hold the majority of the blame. But to use your terms, these are “sunk costs” and are part of the past.

        Agree on the long-term plan (as that is probably the only way Greece will restart, rebuild and start growing again). However, this will cause years of instability, social unrest and no-one guarantees that we will return to growth (refer to Argentina, although showing signs of improvements). It will be a painful road but maybe the best one.

        Although I am a firm believer in the Euro. So the questions is now, what needs to be done to keep Greece in, the Euro strong and bring back growth. 2 high-level steps:
        1) Greece, its simply. Restructure debt, offer debt-relief and put a viable repayment process in place. Then restructure the government and put in capable, non-corrupted politician who want to help the country (here we can all laugh!). Next step fix the country’s tax system, with stricter enforcement. Shrink the public sector (re-allocate people in other jobs). Simplify the process for creating and setting up businesses (currently takes months to simply get the paperwork). For the brain-drain, finally, restructure education, start early to create the right mentality with young people and invest in higher education to make universities competitive on a European level (currently students are A-class but have no opportunities in Greece, so the flea the country).
        2) Europe – get each country in the euro to focus on their strengths and the 1-2 industries that they can support and become the best, e.g. Germany-manufacturing, Spain-automotive, Italy-fashion, Greece-shipping/agriculture. For countries that are currently struggling create the right environment i.e. tax breaks to foster new industry creation. For example what Ireland did with tax-breaks that attracted multinational tech companies.

      2. 1. The original story is pretty stunning – they removed a bunch of items from the consumer price index to lessen inflation for a day! Who the hell wapproved it?

        2. I agree with your solution. The big issue – who will take charge to do it? Germany is extra sensitive and worried about being called Nazi again. And, no one in Greece is going to take up responsibility. Therein lies the crux of the problem….

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