The negative forecast for Italy has played a major role in the emergence of the opinion that the Eurozone might break up.

The first banknotes of the European common currency, the Euro, began to circulate on June 1, 2002. The shift to the new currency, in fact, had started in 1999. You might remember, back then all of the countries in the Eurozone used to attach tags that showed the price in both their national currency and Euro. Say you had coffee in a shop in Belgium. You would receive a bill that showed the price in both Belgium franks and in Euro. In 2002, the Euro ceased to be virtual and became tangible. Today, no one in celebrating the tenth anniversary of Euro’s tangible life. Back then, however, everyone had high hopes for the Euro. No one had foreseen that we would end up at this point. Even at the beginning of 2011, there was no strong belief that the Eurozone might collapse. By the second half of the year, however, that belief was strengthened. Everyone was like, “What the hell is this now?”

Of course, this belief did not come out of the blue. People first saw the recent financial problems of European countries. Then, they realized the slow-moving decision-making process of the European politicians. The opinion that held that the Eurozone will eventually collapse spread only in the second half of the year. This revalidated the theory that economics is or must be associated with psychology. In this mess, Euro celebrations that could have shaken the world agenda on the eve of 2012 fell through. Among all of the comments and assessments about 2011, those by IMF Chief Economist Olivier Blanchard are of the greatest interest to me. According to him, experiences in 2011 proved several times that what matters is not what the policymakers do, but how markets perceive it.

Today, taking departure from this finding, let me talk about the Central Bank of Turkey. The negative forecast for Italy has played a major role in the emergence of the opinion that the Eurozone might break up. Take the negative perceptions about Italy that gained ground in the second half of 2011. You might remember, that perception appeared out of the blue. Even some of the ministers of Turkey said, “We can come there and show you how the economy should perform.” Meanwhile, we have completely lost sight of Turkey’s performance compared to that of Italy, for instance. Here is what we have forgotten: First, we have forgotten that Italy was the eighth biggest economy in the world. Also, we have forgotten that productivity per worker in Italy is three times that of Turkey. Second, we have lost sight of the fact that an average Italian has a high school diploma, compared to the average of around seven years education for the average Turk. Third, the fact that the share of high-technology exports in Italy was two times that of Turkey has slipped our mind. By the way, meanwhile, not only Turkey, but the whole world has neglected the fact that Italy used to compete with Germany in non-construction fixed capital stock. Fifth, the entire world as well as Turkey has forgotten that Italy’s performance in structural reforms since 2008 could compete with those of Germany.

Then, what is the moral of the story concerning the Central Bank of Turkey? When it comes to the markets, it is not what you do, but how you are perceived that matters. If you cannot explain their purpose, the “right” decisions you make have no meaning even if they work miracles. In this environment, there is no sense in getting up on the stage and trying to explain why market actors are “wrong” either. What matters is to be able to convince the market actors. It is to be able to convince those who are “wrong” that they are wrong without telling them so. It is to make effort to change the final grade.

In a nutshell, by the second half of 2011, the markets started to see Italy in a distorting mirror related to the key importance of perception. There had always been a risk for Italy and the Eurozone. At that moment, however, that risk gained importance. That moment was the “We need a new story” moment. It can happen to anyone. When it does, what you have to do is to offer market actors the possibility of a new story. I am monitoring the recent efforts across Europe from this angle.

This commentary was published in Radikal daily on 03.01.2012