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38 Percent Chance Of Euro Breakup According To Investor Survey

This article is more than 9 years old.

Quite how much weight you want to put on this result will depend upon quite how much weight you put on the idea of the wisdom of the crowds. A survey of investors tells us that 38% of them believe that the euro is going to break up. This does not, of course, mean that there is a 38% chance, it tells us only what they believe. And yet if we take Hayek seriously, that knowledge is dispersed and local, then that might actually be the correct probability to ascribe to the possible event. On the other hand it might be that the important people here are the politicians and their beliefs: in which case a survey of investor beliefs doesn't get us very far.

Here's one report:

The Sentix Euro Break-up Index (EBI) gave its highest reading since March 2013, with 38pc of respondents expecting the bloc to break-up in the next 12 months, up from 24.3pc in January.

OK, but we should note something important about this survey:

The current poll was conducted between Feb. 26-28, 2015, and surveyed 980 mainly German-based individual and institutional investors.

Greece won approval for a four-month extension to its bailout on Feb. 24, after tense negotiations between Athens and its international creditors.

So, this is after the Greek deal was announced: or rather, that the Greek deal was still possible rather than their being thrown out immediately. But do note that it's pretty much only German professional investors. And that's both a biased and rather too small group for us to take the result entirely and wholly as being true.

There's a few things we can say from the economic point of view here. The first is that we rather like the idea of revealed preferences. That is, don't think too much about what people say, rather look at what they do. And the markets as a whole certainly aren't pricing in Greek default. Greek bond prices would be very much lower than they are if people were seriously placing their money on the idea of a default. So perhaps we wouldn't take this result all that seriously.

Secondly we can agree with Hayek and that wisdom of the crowds thing. But to do that we need to survey at least a representative sample of those who might be affected. German investors might have rather different views from other investors for example, and investors might have different views from the populave in general. And I think we'd probably agree that both of those things are going to be true. From Hayek, the very locality of knowledge is going to tell us that surveying just one group isn't going to work. And the wisdom of the crowds argument, as it has been since Francis Galton first made it, is that we've got to include all views before that crowd does become wise.

Finally we can look at the views of Robert Schiller, indeed partially what he got his Nobel for. Which is that if markets are complete then we can take market prices as being pretty good reflections of future probabilities. He, of course, made the argument the other way around: the absence of speculative markets where you can bet against the prevailing wisdom leads to market prices not accurately reflecting probability. But the implication of that is of course that complete markets will lead to something akin to accuracy. And we most certainly do have complete markets for things like Greek bonds, banks stocks and so on. It's entirely possible to go short or long in just about any quantity. Thus we would expect (no, not be certain, just expect) that prices are accurately reflecting probabilities. And if not reflecting probabilities than at least the opinions of what the probabilities are, the balance of them, from all market participants. And the end result there is that, as above, Greek bond and bank stock prices do not indicate imminent Grexit, nor even a 38% chance of it.

Thus we probably should assume that this result is from a biased sample, rather than it being the best considered view of the wider market.

The really important people here are almost certainly the politicians. It's what they're prepared to do to prevent Grexit that is important. On economic grounds it's a very good idea. On political grounds, at least among those European politicians who are in control of matters, it appears to be less of a good thing. And given that those politicians are the people who will determine what will happen I myself would put the odds of a euro break up rather lower than this survey does.

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