By Tim Worstall, Forbes
As we all know, or at least as we all should know, Yanis Varoufakis, the Greek finance minister, is a long term student of game theory. We should perhaps therefore be looking at the Greek debt negotiations as exercises in such game theory.
I will admit that I have my doubts over this: I think that mutual incomprehension is a possibly more reasonable explanation for what’s going on than a Machiavellian manipulation of said expectations. However, having said that it’s still useful to look at what has been happening through that lens of game theory.
Which is what this article does. And there’s one fascinating piece of the analysis that hadn’t really occurred to me:
Second, the Greek government is driving up the costs of Plan B for the other side, by allowing capital flight by its citizens. If it so chose, the government could contain this trend with a more conciliatory approach, or stop it outright with the introduction of capital controls. But doing so would weaken its negotiating position, and that is not an option.
That’s the bit that is new to me.
So, what’s being said is that OK, there’s Plan A. That is that the Eurogroup (or if you prefer, the troika of that group, the ECB and the IMF ) are going to pressure Greece to run a higher primary budget surplus than Syriza will be happy with, further, limit their ability to increase pensions and wages. OK: so, Syriza argues back that these are all bad ideas and that they should be able to get on with what they were elected to do. Also OK. But there’s no obvious pressure on either side there to insist that they come around to the other side’s way of thinking.
Plan B of course is leave the euro and default on the debt. But that obviously imposes costs on both sides: and it’s not obvious that the troika would bear heavier costs than Greece (I have my opinions on that but let’s stick with this analysis for the moment). So, from the Syriza/Greece side, the aim is to push up to the troika the costs of Plan B: in order to encourage them to compromise on Plan A. And the method of doing that is:
Other eurozone central banks are thus forced to create new money to fulfill the payment orders for the Greek citizens, effectively giving the Greek central bank an overdraft credit, as measured by the so-called TARGET liabilities. In January and February, Greece’s TARGET debts increased by almost €1 billion ($1.1 billion) per day, owing to capital flight by Greek citizens and foreign investors. At the end of April, those debts amounted to €99 billion.
This is all slightly complicated: but when euros move around Europe they end up as balances at the central banks of the respective countries. As euros move out of Greece then they become those target balances at those other central banks. And if Greece leaves the euro then those balances will simply be empty debt that is owed to those other central banks. So, by allowing that slow bank run of Greek held euros outside Greece Syriza has created another 100 billion or so of debt. Debt that’s going to be lost if Greece does leave.
So, 100 billion reasons to push the troika into accepting some moderation of Plan A instead of forcing Plan B upon a recalcitrant Greece.
It’s an interesting analysis but I’m really not sure myself. I think we’re more likely to be in that world where people really do not understand what the other people are thinking. That’s a world in which game theory doesn’t really work: because in game theory you’ve got to understand the potential reactions of the opponent to a gambit. And at least some of the northerners (say, the Finns and the Germans) really are just on the verge of saying “No more of our taxpayers money, whatever” while the Greek side does have some rationality to its point that more austerity in a bombed out economy like that of Greece today just isn’t sensible. This is made worse by my deep suspicion that the Bundesbank just really isn’t up to speed on modern macroeconomics. It’s not just that they’re deeply suspicious of the basic Keyneisan ideas about austerity and stimulus, they don’t seem to have grasped Friedman’s point that it really was the Federal Reserve and monetary policy that caused the Great Depression (although not the crash that preceded it).
I think I’d prefer to believe in the good game theory explanation but I’m really not sure that I do.
