# Is the crisis 'decoupling' the Greeks from Greece?

Maurizio Bovi 23 July 2012

The current crisis may be thought of as a sort of natural experiment to understand how common people are living dramatic years. For example, how do the Greeks perceive their own personal financial situation with respect to that of their country? Economically speaking, the representative citizen cannot systematically drift apart from that of the country where she lives. GDP is, after all, the sum of the individual incomes in the country. Yet, the 'psychological' stance of individuals may diverge in the course of very deep and prolonged economic crises.

A unique dataset from the European Commission helps us dig into individuals’ perceptions of their economic situations. The dataset is based monthly surveys from the Joint Harmonised EU Programme of Business and Consumer Surveys (European Commission 1997, 2007). Respondents face, among others, the following questions:

• How has the financial situation of your household changed over the last 12 months?
• How do you expect the financial position of your household to change over the next 12 months?
• How do you think the general economic situation in the country has changed over the past 12 months?
• How do you expect the general economic situation in the country to develop over the next 12 months?

Respondents may choose among six qualitative reply options:

• LB = got/get a lot better;
• B = got/get a little better;
• E = stayed/stay the same;
• W= got/get a little worse;
• LW = got/get a lot worse;
• N = don’t know.

Ignoring the 'don’t know' reply option, I analyse the data via balances computed as (LB +0,5*B -0,5*W -LW) where LB, B, W, and LW are taken as percentages. Thus, the balance varies between +100 (all respondents answer LB) and -100 (all respondents answer LW). Figure 1 shows the balance for the two retrospective questions:

Figure 1. “How do you think your country (in red) and your economic situation has changed over the past year?”

Note: January 1985-June 2012. +100 means everyone thinks “it has got a lot better”; -100 means everyone thinks “it has got a lot worse”.

Figure 1 shows that there has been some temporary misalignment but, until the summer of 2008, the Greeks thought that their economic situation was not so different from that of their country. In the aftermath of the Lehman failure in September 2008, the responses started to become quite different. While both the general and the personal economic balances fairly mirror the worsened economic data, the Greeks started thinking that Greece as a whole was suffering more than themselves. In other words, all Greeks thought they were doing better than average.

Hence, it seems the crisis has decoupled Greece from the Greeks. Yet, it’s not the case when we look at the answers to the prospective questions (Figure 2).

Figure 2. “How do you expect your country (in red) and your economic situation to develop over the next year?”

Note: January 1985-June 2012.. +100=everyone thinks “it will get a lot better”; -100=everyone thinks “it will get a lot worse”.

Focusing on the current crisis, the story told by the forward-looking answers is quite different from the one emerging from Figure 1. Though the blue line is consistently above the red one, the two balances show a markedly narrower decoupling. It seems that common people expect that, in the near future, their economic fate and Greece’s will be strictly interlinked. In fact, Greeks have been expecting this 'normalisation' for almost four years.

All in all, these are puzzling patterns. A possible explanation for the decoupling emphasised by Figure 1 is that, amid dramatic macroeconomic crises, the mass media coverage is very strong and especially focused on the worst situations. When back- or now-casting, this could lead people to think that they are not doing that bad. However, it is not straightforward to extend a similar interpretation to the smaller gap in Figure 2.

# Psychological biases?

Psychology may help decipher the asymmetric gaps as well as the consistently higher blue lines with respect to red ones (i.e. the fact that personal situations are systematically perceived to be better than the general one). As for the latter, over optimism and overconfidence are well-known psychological biases that could be magnified by extreme circumstances (Bovi 2009). One of these is the illusion of control, which suggests that people have the tendency to overestimate their ability to control events. A typical example of illusion of control is that even though plane crashes are less frequent than car accidents, many people prefer to drive than to fly as they feel impotent when flying.

As per the larger difference in the retrospective answers, cognitive dissonance may be at play. Cognitive dissonance is a discomfort caused by holding conflicting beliefs. Suppose that, due to the permanent and large gap between the two retrospective answers, the interviewee suffers from cognitive dissonance. Psychologists underline that, in a state of dissonance, people try to reduce the distress creating a congruent belief system. It could mean that respondents are induced to answer more consistently when elicited about future economic developments, and to do that by 'relatively improving' their beliefs on the general situation.

# References

Bovi, M. (2009) “Economic versus Psychological Forecasting. Evidence from Consumer Confidence Surveys”, Journal of Economic Psychology, 30, 4, pp. 563–574.

European Commission. (1997). "The joint harmonised EU programme of business and consumer surveys". User Guide, 6, D.G. Economic and Financial Affairs.

European Commission. (2007). "The joint harmonised EU programme of business and consumer surveys". User Guide, D.G. Economic and Financial Affairs.

Topics:  Europe's nations and regions

Tags:  decoupling, psychology, Greece

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