Denial is a dangerous emotion and our future depends on tackling it head on
THROUGHOUT history financial markets and economies have experienced periods of boom followed by bust and then eventual recovery.
One way to view these events is through the human emotions of denial and acceptance. Denial, according to the psychoanalyst Sigmund Freud (1856-1939), is a defence mechanism that is triggered when a person faced with a situation they find uncomfortable to accept instead rejects it, insisting that it is not true despite evidence to the contrary.
Denial is one of the most dangerous emotions when it comes to financial markets.
What has been happening in the eurozone is a classic case of economic and political denial which is preventing officials from developing and implementing the right strategies to overcome the current crisis.
Unfortunately, the move from denial to acceptance of reality can be a long and difficult path as can be seen from recent history.
A good example of the move from denial to an acceptance of reality comes from Germany (perhaps to the surprise of readers). In November 1989 the Berlin Wall came down and this led to the reunification of Germany.
Initially, there was a great economic boom in Germany as the German government pumped money into the former East Germany.
But, in time, the new Germany developed an economic bubble, which finally burst in 1993.
The consequences were grave -- unemployment rose above 10pc, yields on German 10-year bonds rose above 9pc, and Germany entered a period of denial with the government failing to implement policies to deal with the situation.
It was only in 1998 under a new chancellor, Gerhard Schroeder, when Germany eventually moved from denial to accepting reality -- implementing harsh reforms, especially in the field of welfare payments.
The country embarked on a long road to economic recovery, but it wasn't until 2005 that Germany returned to sustainable economic growth.
The German example sets out a roadmap for Ireland in terms of where we are now and how much further we have to go.
It took Germany around 12 years from the time of its economic bubble bursting to that when it had fully recovered. Ireland too has gone through a period of denial. As the former head of the Central Bank of Ireland, John Hurley, said in November 2007: "Finally, our stress-testing of the banking system and our extensive financial stability analysis indicate that Irish banks are solidly profitable and well-capitalised.
"In this context, it is worth noting that they have one of the lowest rates of non-performing loans among banks in all EU countries."
In the years that followed Ireland went through a grave financial crisis which finally led the country to the EU/ECB/IMF bailout agreement. This was the moment when Ireland was jolted from denial into accepting reality.
Since then we have made significant economic sacrifices, but these are now beginning to bear fruit.
Recent economic data is positive for Ireland, exports have grown significantly in the past few years particularly in IT, pharma, and the food and agri sectors, and recent trends in bond markets also suggest Ireland may be able to re-enter international bond markets sooner than was expected at the time of the bailout.
Ireland has remained one of the most popular destinations for foreign companies to invest in. No doubt the favourable corporate tax regime helps, but also many other factors such as a young and well-educated population.
Even in the eurozone recent events indicate a move from denial to accepting reality which should lead to better economic times.
This shift is primarily shown by the events of the recent EU leader's summit in Brussels where it was decided that the eurozone would change its stance on the link between banking debt and sovereign debt.
This should allow countries to reduce their sovereign debt levels and therefore give them easier access to international bond markets.
Furthermore, there is now an acceptance at EU level that more growth-orientated policies need to be introduced to help build economies and, most importantly, confidence within the eurozone.
It is therefore, proposed that a fund of €120bn will be used to embark on projects throughout distressed eurozone countries to help reduce high levels of unemployment and spur on economic activity.
Confronting denial and accepting reality is something that we must try to identify in ourselves to prevent us from falling into such desperate situations again.
• Ex-governor John Hurley's quotes are from a speech he gave at the Launch of the Financial Stability Report - 14 November 2007
Mark Ridgway is the founder of Dublin-based Granite Hills Investments