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This Morning in Europe: Split or Steal?
Good morning. You probably heard that Greece has become the first developed country in history to default to the International Monetary Fund. (It joins Sudan, Zambia, and Peru.) But you may not have heard that about 49 seconds ago,* European stocks soared on reports that Tsipras sent the Troika a letter saying he’s basically prepared to accept all of their conditions.
Then Schäuble (the German finance minister) astonished riveted audiences throughout Europe by not only saying “No deal,” but by saying he wouldn’t even read the proposal. His language was quite striking. Nein, to sum it up.
I haven’t checked what the markets did in response, nor will I check again today, because my mood goes up and down with the euro. Every time it goes down, I think, “I got a raise!” Every time it goes back up again, I think, “I just got fired!” So I’ve got to stop watching the currency markets, because otherwise I’ll be in a mental hospital by nightfall.
All of Europe is glued to this insane psychodrama. So much column ink has been spilled on the subject that I can’t say I have much to add. But this morning’s drama got me to thinking. We keep hearing that Yanis Varoufakis wrote a book about game theory, as if this was a key to understanding all of this. I haven’t read Varoufakis’s book, and have no idea if he contributed anything new to the literature, but this seems to be the standard way of popularizing the game-theoretic aspects of this situation:
With respect to Europe’s decision on whether or not to kick Greece out of the euro, Europe has no incentive to risk the contagion to financial markets that could follow such a move that would force a default on all the remaining Greek debt, beyond what is due in Friday’s interest payment to creditors.
Keeping Greece in the euro is optimal regardless of whether Greece defaults or comes to a new bailout agreement on Friday. Game theorists would call a “Grexit” a “strictly dominated strategy.”
European finance ministers have made this clear. French finance minister Michel Sapin said last Friday that “There is no Grexit scenario” after a meeting of finance chiefs from the Group of Seven industrial nations in Dresden, Germany.
German finance minister Wolfgang Schauble has previous struck different tone in negotiations, threatening that a Greek exit would be “manageable.”
This however is what game theorists would refer to as a “non-credible threat,” since Germany, according to economic theory, will ultimately act in its own economic interest to prevent financial contagion that would spread to the rest of Europe following a “Grexit,” namely to continental Europe’s financial capital Frankfurt. …
An important part of this calculus is that the Greek government knows fully well that a “Grexit” as a repercussion is highly unlikely as it would be highly against the rest of Europe’s economic interests to do so in political spite. As a former academic game theorist himself, Greek finance minister Yanis Varoufakis very likely understands this well.
I reckon all of Twitter and everyone glued to the television immediately sensed that this morning, eyeball-to-eyeball, Tsipras blinked. Assuming we can really discuss all of this in meaningful, game-theoretic terms, how are we to understand Schäuble’s response?
What do you think — is Schäuble Sarah?
If not, how would you model it? How would you update the model in light of this morning’s events?
*It was about 49 seconds ago when I wrote that. I didn’t make a note of the exact time, so that will have to do.
Published in General
Goedel, you’re statement is not false. Alas.
Many have said in the past decade that Russia is too economically weak to be belligerent. Yet it has managed to successfully invade and hold two foreign territories.
The USSR was never fiscally viable. Its economy was a joke. Yet it managed to intimidate American leaders and influence events around the world for decades, sustained by vampiric theft of everything from its own peoples and a spectacle of lies.
Don’t mistake a poor economy for political impotence.
Yes. And never mistake a wounded animal for a dead one.
Back in 2004, I found myself in Washington chatting with a particularly smug, condescending CIA analyst. The conversation turned to world events — no surprise — and he asked me, “Iraq War aside, what would you say are the three biggest long-term threats to U.S. interests abroad?
My first two answers were conventional: WMD proliferation and containing Iran without Iraq as a regional counter-weight (how’m I doin’?). But my third answer drew dismissive chuckles from the irritating CIA know-it-all: maintaining the stability of U.S. financial institutions when the next recession reveals destabilizing fissures in the Euro.
If you’re out there, CIA analyst: ain’t so funny now, is it? Lousy jerk.
Fortunately, this isn’t 2010. Major U.S. and European financial institutions have walked back their Greek exposure over the last few years so default won’t have a devastating immediate impact on private finance. But public exposure to Greek debt across Europe has risen to compensate. The result is that what in 2010 was an economic crisis with a strong political dimension has become a political crisis with a strong economic dimension.
In politics like in poker, you don’t play the odds; you play the man. This should be about money, but when you have prime ministers being publicly humbled and finance ministers refusing to read offers, you know it’s at least as much about pride as it is about pennies. And we all know what pride cometh before.
One of the reasons I read Jim Rickards despite his tendency to purple prose and a level of self-promotion with a distinct eau de used car salesman to it is that he discusses the relationship between international finance and national security. In depth. With references to other work with which I’m familiar.
To a first approximation—hell, to a second—no one else does. At all.
Yeah, I suppose I have the same satisfaction. I would probably be mildly satisfying to try to dig up some of the snotty reviews my book got round about the same time. But I don’t really feel the triumphalism. I agree with Walter Russell Mead that this is a significant setback for the West. It comes at a catastrophic time.
That’s exactly right, and I’m not sure people are grasping this. A peaceful and prosperous Europe, whatever its failings, was an extraordinary accomplishment. I’m fairly sure that the standard view is correct: the economic contagion will probably be containable; they’ve had five years to plan for this. The political contagion? I don’t know.
But I don’t know. I’m not making any predictions. I just find it worrying, and suspect people aren’t considering that prospect as carefully as they might.
So, any thoughts on Tsipras’s speech today? Seemed full on schizophrenic. Everyone thought the Greeks had blinked, then he gives that speech which seemed designed to enrage the EU.
And the speeches in the Bundestag seemed designed, I mean really designed, to enrage the Greek public. I truly don’t know how much of this is theater — designed to persuade negotiators on the other side that yes, they’re crazy, so don’t expect rational behavior — or whether both sides have just gone berserk with rage. Or if it’s just one side.
I guess I’d default to the simplest explanation: Tsipras blinked, expecting that he’d be welcomed and lauded for it. Instead, Schäuble humiliated him. So Tsipras responded as most Mediterranean men would.
A random thought as I was reading this thread. Aaron suggested the possibility of Russian meddling. My weird thought was, “What if the Saudis or another Islamic state offered to sustain Greece a bit longer for some considerations?” Is there a worse black knight than the Russians who could save the day?
I’m frankly a bit surprised we haven’t heard of an invitation from the BRICS to join their new club. At least not yet.
We haven’t?
You’d think I’d know better than to use the editorial “we” by now… thanks!
ISIS isn’t going to. Neither are the Saudis. But Turkey is of course their brother. They want Greece to be strong, you see.
(But as of this afternoon, I’d actually rule that out. We’re now looking at a high likelihood of an AKP-MHP coalition, and for various reasons that would take too long to detail, the MHP would never allow this. It actually would have been very good if the proposal had been serious, because it could have helped quite a bit with the Cyprus negotiations — and right now there’s a more plausible chance of a breakthrough there than there has been in years — but it won’t happen.)
Come on people only 6 days left….
I confess I was hoping for at least a bit of discussion here about what a vile, lying psychopath that Sarah creature is. Did any of you watch the video?
Everybody makes the claim that the EU is doomed to fail because these are separate countries with different cultures economic structures, etc. and the US is different because it is one country. However, the states in the US vary in culture and economics quite a bit – California is a world away from Mississippi.
Claire,
What a lovely girl.
Regards,
Jim
She won 100k and lost her soul. I’m pretty sure nothing good will come of that money.
True, Greece’s spectacular suffering, following the Grexit, would put the fear of God into the Eurozone, and undoubtedly cause some hardship and chaos throughout the continent. (This is great for discipline: Rome, Madrid, nota bene.)
Beyond that it would also strengthen the hand of the EU-rocrats who push for ‘ever closer union’ since Greece got into this fix in the first place because it refused to shed its national characteristics and morph into the EU approved model.
The Aesopian moral of this story is that you shouldn’t let non-gentlemen into gentlemen’s clubs, so to speak.
Where is Bismarck now that Germany really needs him?