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A blog by Leon Oudejans

The Game Theory and EU/Greek negotiations (to be continued)

17 February 2015

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Yesterday the negotiations regarding the extension – and its conditions – of the EU bail-out loans to Greece collapsed. That was not a surprise. However, a surprise did emerge: a united eurozone. The entire eurozone is of the opinion that Greece should honour its obligations albeit that the conditions might be relaxed. Greece’s proposal for a huge haircut on the bail-out loans is not an option.

A united eurozone is not in the interest of Greece but it is the result of the game theory that they are applying. Divide & Conquer has probably been the most successful strategy for thousands of years. The Game Theory seems to achieve the opposite of the Divide & Conquer strategy: Unite & Lose.

I have been contemplating about the reasons why the Game Theory does not work in this situation and have come up with some ideas below.

Politicians are used to power games like Divide & Conquer. Yet these games are not publicly played because it is in nobody’s interest to publicly humiliate the other politician. Revenge is sweet. Public humiliation will cause more public humiliation which – again – is in nobody’s interest. Consequently, politicians do not like to enter into the Game Theory in order to avoid public humiliation.

Finance Ministers are like bankers who hate second haircuts to existing files. Greece has already received a favourable treatment after the first round of bail-out loans appeared to be inadequate. The second round of Greek bail-out loans caused a lot of voter – and thus parliamentary – disapproval. A third round of even more relaxed Greek bail-out loans may cause too much disapproval. Politicians like to stay in power and thus prefer avoiding early elections especially on these topics.

Greece wants to be treated like an equal party. Yet they are not. Playing the Game Theory with your back against the wall and your hands and feet tied does not provide realistic bluff to the game.

Greece would set a precedent to others and such a precedent is likely to accelerate EU disintegration.

The Greek Syriza led government plays an unconvincing victim role. The Syriza government claims Greece has been placed under a German jackboot. It makes no difference that fellow eurozone debtors such as Spain, Portugal and Ireland are more adamant than Berlin that Athens must play by the rules of the single currency club. We must put aside the long history of clientelistic and corrupt governance in Athens. Greece was invaded by Adolf Hitler’s Germany; ergo Angela Merkel, the German chancellor, must be held responsible for all today’s ills. Source: FT, 16 Feb. 2015

The Greeks are biting the hand that feeds. The logical human counter response is a slap on the wrist or – worse – a slap in the face.

Despite all the valid arguments above, the Game Theory does not apply in this situation as you need at least 2 actors to play a game like in Tom (Cat) and Jerry (Mouse). If one of the actors refuses to play then the game is dead. Greece wants to play but the EU is stonewalling them into submission. It is either bend (into submission) or break (out of the eurozone). I still expect that Greece will opt for a breakout of the eurozone.

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