Euro negotiations

Greek Game Theory

A European Union flag (L) and a Greek national flag flutter as the ancient Parthenon temple is seen in the background in Athens June 1, 2015. Greece and its European creditors agreed on the need to reach a cash-for-reforms deal quickly as Athens missed a self-imposed Sunday deadline for reaching an agreement to unlock aid, sources close to the talks said. REUTERS/Alkis Konstantinidis
Will anything be left but ruins?
  • Why it matters

    Why it matters

    Greece is covering its back in case it has to default on its debts and leave the euro.

  • Facts

    Facts

    • Greece is racking up debts of €1 billion, or $1.13 billion, a day and using them as leverage against the euro zone.
    • It is also allowing the flight of capital from the country to further increase the cost of its rescue.
    • The moves aim to force the euro zone to provide more financial aid and smooth a return to the drachma if necessary, the author says.
  • Audio

    Audio

  • Pdf

Game theorists and bargaining strategists know they must think through Plan B because it is the threat on which the bargaining for Plan A depends.

In Greece, Finance Minister Yanis Varoufakis, an expert on game theory, is the hatchet man working on Plan B while Prime Minister Alexis Tsipras advocates for Plan A. Role playing is part of their strategy.

Preparation for Plan B – the Greek exit from the euro – has two elements. First, it requires provoking its citizens in the event of an exit. Without escalating the dispute, the Greek people won’t remain supportive of the government during the tough times that will follow an exit.

Second, it seeks to make the costs of Plan B exorbitantly high for the other side. The Greek government is doing this by allowing its citizens to move their money outside of the country.

Athens could curb the capital exodus if it demonstrated more conciliatory gestures. Or it could use capital controls to prohibit it immediately, but that would impair the threat.

Capital flight doesn’t mean money is migrating abroad in net terms, only that private capital is being exchanged for public capital. Greek citizens are borrowing money from banks that will be offset by the Greek central bank’s emergency loans (its emergency liquidity assistance, backed by the European Central Bank), which then transfers the funds abroad.

The transfers force the central banks of other countries to create new money without granting credit and complying with the payment order. In essence, these central banks are issuing to the Greek central bank an overdraft loan as measured by target balances.

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