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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
Greece is not a standard game theory scenario. This is the Kobayashi Maru and none of the players look like cadet James T. Kirk.
Renzi is claiming there is a third way for Greece between what he calls “irresponsibility” and austerity. I think he is grasping at straws.
Not really. For journalists it’s fun, because they can ‘interview’ each other and just reprint press-releases and press conference reports as ‘breaking news’ but I doubt if the European in the street really cares, any more than they care about Wimbledon or what some Z-list celebrity is wearing, and much less than what the temperature will be tomorrow.
I’m not sure it’s a full-on Kobayashi Maru, but I agree that this is a bit tricky, and that perhaps journalists have become excessively enamored with the allusions to Varoufakis as the master game-theoretician. But let’s see, perhaps someone else has an insight I’m missing.
Greece is now living the IBEDAYBD scenario. That’s when politicians decide to entrench themselves and their party into long-term power by borrowing and spending wildly. Everyone but the gullible voters knows it’s an unsustainable endeavor. They’ve been convinced that the government isn’t buying votes it’s only “serving the people.”
And the political class winks at one another and shrugs. When the bill comes due, I’ll be dead and you’ll be dead but we bought several generations of power.
Definitely everyone in France cares more about what the temperature will be, but that’s because it’s wiltingly hot — we’re having a full-on canicule, which will be an interesting test of whether France is better prepared this time than it was in 2003.
That said, while I haven’t conducted a formal poll, this does seem very much on everyone’s minds. As I said in another comment here (somewhere) everyone seems to be making a lot of unfunny, uneasy jokes about it. Comes up in even the most casual conversation — everyone manning a cash register must be sick of hearing the same thing, “I hope my credit card will work. If not, it’s the Greeks’ fault,” and “Do you take drachmas,” etc.
But I spoke to a friend in London this morning who told me that no one there was really talking about it — so, as I said, I didn’t conduct a formal poll. For what it’s worth, which may not be much, I’ve been hearing the same jokes everywhere in my neighborhood in Paris. Of course, France is more exposed to contagion and everyone knows it. (The other thing people keep saying is, “Every time Hollande tells us we’re not exposed, I get more worried.” Nervous laughter ensues. Everyone kind of means that, I suspect.)
I don’t think Greece is a developed country. In fact, I know that it isn’t according to MSCI
Claire,
One problem with game theory in this case, it assumes that each of the players agree on what the results of any particular action would be. A lot of non-Greek European finance folks seem to be operating under the idea that there is not a contagion risk to a Greek exit. In fact, there seems to be an idea that forcing an exit, followed by economic upheaval in Greece might provide a good example por les autres.
This game theoretic analysis seems to completely ignore domestic political considerations. Grexit may be strictly dominated game-theoretically, but it’s a very safe bet the German taxpayer doesn’t care, and Merkel and Schäuble know it.
If you could arrange for the heatwave to abate by Friday afternoon when I arrive in Paris I’d be grateful.
Have the pages of Le Monde been filled with essays by philosophers about how Grexit means fundamental change to ontology/epistemology/phenomenology/psychiatry? Then I’ll know it’s being taken seriously…
I dealt with a number of Greeks a few decades ago in shipping circles. With the odd exception or two, they cannot tell the truth even if the truth achieves their goal and a lie denies it.
Depends whose definition you use, but it was ranked 0.853 in 2014 on the UN’s Human Development Index. Over .8 and you’re classified as having “a very high human development.” The IMF considers it an “advanced economy.” But yes, I think the term’s used pretty loosely.
Don’t count on it. It’s going to stay really hot for a while, it looks like.
Here you go.
Yes, exactly.
Yes, among other problems.
It may be, or it may not be: The point David raised above seems pretty relevant to me.
And here we have to ask whether they’re motivated entirely by the goal of satisfying the German taxpayer. No way really to know.
I’m inclined to say, “Chuck the game theory talk. It’s of no use here, and the people who keep talking about it aren’t thinking straight.” I was actually hoping you’d provide the counter-argument. Just to keep it interesting.
I think that is a major real reason the eurocrats don’t want the Greeks to default. The voting public might actual start to take notice when they see what happens to first world nations when they default on their debt from reckless spending.
Honestly it’s all sort of a farce to me because I see two forces at work here:
1) a bureaucracy that will do absolutely anything to increase and maintain control over Europe in the EU
2) a country that is dead set against fiscal restraint
As long as the IMF and ECB have the money, or can make people think they have the money, they’ll bailout Greece because to do otherwise would be to admit that the EU is a bad idea.
And really it’s another example of the provincial thinking of the Left in Europe that has gotten the world into more trouble than any other force: they cannot conceive that people don’t think like them.
The idea that Greece, which has an enormous black economy and more layabouts draining the body politic dry than the Kennedys, could be in a fiscal union with Germany is so laughable that everyone who wasn’t blinded by the dream of reclaiming fiscal supremacy from the U.S. or China or India or whatever other upstart comes along, was ridiculous on its face. The Romans thought the Greeks were degenerates for Heaven’s sake!
Well, the other theory is that they do want them to default (and then suffer spectacularly) so that the example scares other members into toeing the line. Honestly, I don’t know what they want. It’s quite hard to tell.
I remember a class I took in college on currency crises. We had a project on judging whether a country would default based on data. Basically, it was impossible to know if a country would default without knowing anything about its politics.
I instinctively feel that must be right. I’d be willing to revise that opinion if the data showed otherwise, but you’re telling me it doesn’t. If so, I’m unsurprised.
Tsipras to Europe:
This is the inevitable course taken by all fiat currencies.
There is a permanent solution. Namely, Bitcoin.
But there will be years of painful transition until we get there.
Not BitCoin. BitCoin is not anonymous. Zerocoin, maybe.
Right now, we still have hundreds of millions of people sleepwalking around insisting that $16T of debt is A-OK and monetizing that debt (“quantitative easing”—Orwell is blushing in his grave) is just spiffy. So yeah, we have a tough row to hoe.
This makes sense for two reasons.
First, it prevents Greece from playing the game we see with the Iran nuke deals. Germany would be caught in an endless game of cat-and-mouse, where Greece always pretends to be close to agreement and then pulls the rug at the last moment; rinse, repeat. As long as Greece pretends to be open to reason, they could continue to suck at the German teat.
Second, the Germans must realize by now that Greek politicians will not be supported by Greek citizens in any difficult and prolonged austerity measures. The Greek ministers don’t really have the authority they pretend to have. If they insist on austerity, rioting and labor strikes will disrupt the Greek economy further.
Here’s a fun scenario: Suppose Russia reaches its tentacles into Greece… and Greece remains a part of the EU!
The sad thing is they are really arguing over how much to starve the milk cows. No one appears to me to be proposing a genuine long term solution for people that would involve the creation of an entrepreneurial class and the institutions that support it.
Russia is almost as broke as Greece. They don’t have the money to help Greece. However, as Claire pointed out in another thread, this hasn’t stopped Putin from meddling in the crisis in other ways.
That would imply liberal entrepreneurial capitalism, paying off debt, and telling “finance capitalism,” “public/private partnerships,” “sector subsidies,” and “central banking” to take a hike. What makes you think that’s feasible in Greece when it’s not in the United States of America?
As someone who played a lot of games with live opponents, plus numerous war games in the solitaire, I can tell you something that happens fairly often in games that is not modeled well in Game Theory.
There comes a point where one player decides he cant win the victory conditions anymore, and decides that he will throw the game in order to prevent someone else from winning. That players victory condition changes. When that happens the obvious cold rational hard choice goes out the window. Germany may well have reached that point.
The EU QE
IIIIIIVVVIVII………LXXXVI setting sail for beautiful Greece. A small craft was accidentally crushed as she left port. The Kobayashi Maru was lost with all aboard. No survivors were found.Captain Yellen ignored the incident and emphasized that the ship was on coarse and had not even lost 1 knot of speed.
When asked about game theory she replied,
“Bingo will be on deck 5 at 3 pm”
I always loved playing Illuminati! which has different victory conditions for each player from the outset, so part of your strategy has to be at least temporarily helping opponents reach their goals… just more slowly than you reach yours. Most games are N-player, zero-sum, with perfect information. Boring.