Published on 9 Feb 2015

Forget game theory or economics, Greece’s future depends on emotion

Market sentiment over Greece has darkened considerably in the past 24 hours.

Investors have not only been digesting PM Alexis Tsipras’ speech in parliament, which definitively re-stated his “no U-turn” policy.

Alexis Tsipras said that he will put an end to the

There is also to be a mass mobilisation across Greece on Wednesday – and if they can pull it off across Europe – in support of the far left government, and aimed at putting pressure on the Eurogroup, which meets the same day.

On top of that the UK government has begun contingency planning for “Grexit”, and numerous governments on the periphery of Europe are briefing they will not back Greece in the negotiations.

So analysts, being asked to put a probability on a Greek exit, are typically saying “40-50 per cent” – which means realistically that only the people who really want to do racecourse-style betting with their money will be holding Greek bonds.

I understand the comprehensive proposal that is set to be put by the Greek side at the Eurogroup on Thursday will attempt to defuse the situation as follows.

I understand the European Central Bank (ECB) offered the outgoing Samaras government in Greece a six-month extension to the bailout programme, but it chose two, thus shortening the timetable of the crisis. Since Alexis Tsipras refused to ask for an extension, that set the stage for a short term crunch over ECB support for the Greek banks. But if they can revive a four month window of negotiation, the Greeks will.

So everything in the short term hinges on Greece getting a “bridging programme”. That is: the Greeks won’t ask for a Troika loan extension, but will attempt to enter into an arrangement that is (a) not the Troika (b) not their own desired programme.

In this I understand the emphasis will be as follows. First, the Greeks will offer to include elements of the old, European structural adjustment demands that do not conflict with their own. For example tax evasion and anti-corruption.

Second, the Greeks will emphasise the measures on which they have already softened. For example the minimum wage, whcih is now to be hiked to 750 Euros a month, but only over four years. They will also emphasise the fiscal neutrality of some of their measures: for example the re-hiring of civil servants sacked by the last government will be done within planned hiring budgets.

There will likely have to be a form of words that signals that, though Greece does not recognise the Troika going forward, it will deal with it as part of the transitional arrangement.

So it’s fairly clear the Greeks’ aim is to produce a temporary amalgamation of their micro-economic programme and the old Troika one, front-loading those points which Brussels can sell to the taxpayers of northern Europe.

In return they will ask for “fiscal space” – that is, permission to spend more and tax less, and in different ways, than the old government agreed.

The Greek aim is to get a strategic deal on the debt, and to avoid a short term bank collapse and default – but they can only do this by taking their negotiating partners to the brink.

If negotiations fail, and Grexit happens, I would expect the sequence to be:

(i) Failure to agree a bridging program triggers more rapid capital flight

(ii) ECB signals decisively it will pull Emergency Lending Assistance, triggering a bank run and bank closures, probably between 18 February and 28 February,

(iii) Capital controls, with Greece effectively operating as semi-detached member of the Eurozone;

(iv) default on debts to European sovereigns as they come up for refinancing

(v) the possible issuance of alternative currency, or paper acting as such in the banking system.

Of course, alongside this, there would be capital flight, and social unrest.

What a lot of observers are missing is that this would not be a rerun of Cyprus: it would take place amid massive popular pressure on other EU governments, including ones like Spain, currently egging on the ECB hardliners, and would be a traumatic moment for the European Union as a whole.

More from Paul Mason – Austerity, Neo-Nazism and Protest: The Greek Crisis in full

A lot has been made of this being a game of academics vs bankers, and I think that’s overblown. But Investec’s senior bond strategist Dawn Kendall lays out the real danger in the mismatch of methodologies being played out.

Decrying the Greek finance minister’s expertise in game theory, Ms Kendall writes:

“Whereas game theory can be irrational, the combined approach of the European Commission, the ECB and the IMF is based upon mainstream economic theory and is rational. In dealing with two entirely different ideologies, it is difficult to see how the two thought processes can be reconciled, as they do not start from the same premise.”

If we get to Thursday night, in fact more likely the early hours of Friday, and there is still no common ground signalled between Greece and its creditors, I would expect the decisive factor to be neither game theory or economics but emotion.

When the Greek protesters assemble on Syntagma Square on Wednesday, if it is anything less than massive, that will be one key signal to the ECB.

If there is strong anti-German rhetoric – with nationalist-minded Greeks parading in parody SS uniforms and Swastikas as happened when Merkel visited Athens – it will be hard for German policymakers to have a rational discussion about debt relief with their voters, once those images hit the evening news bulletins.

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7 reader comments

  1. Izzy says:

    ‘…permission to spend more and tax less,’
    Permission to make decisions to run the country you’ve just been democratically elected to run! How is this right? In a nutshell, this is why the outcome should matter to all of us.
    Thanks for another detailed and insightful report.

  2. Dan Allen says:

    Dawn Kendall describes the troika’s plans as rational economic theorists, and yet the IMF researchers (part of the troika) already declared the Greek program as very faulty just 2 years ago. What can be more irrational than that? Sticking to failure.

    What explains the rationality of sticking to failure? Timothy Geithner wrote that he was told point blank that the Eurogroup FMs intended to punish Greece.

    What could be more irrational than Greece adhering to its own destruction?

  3. ghallas says:

    Paul, I really appreciate your articles, but I think that the persistence in naming Syriza “far left” is getting absurd. What would “plain” left be like then? Mind you, I do not consider the current phase of Syriza being more left than pre-Blair European social democrats.

    If the “far left” tag is anything else than the power of habit, it can just be the acquiescence of how far too the right the mainstream European political scene has gone.

  4. Andrew Dundas says:

    Greece should have never been accepted into the EZ. Greece was nowhere near ready. Council of Ministers is to blame …so is the European Parliament who’re supposed to be looking to our interests.
    Fortunately UK has few loans in Greece: we’re unlikely to suffer much loss. Thanks to the Brown reco that we shouldn’t adopt the Euro.
    The real cost of preventing a collapse in Athens is public discontent in Iberia, Italy and Belgium. All of them are deeply in debt. And will be understandably angry if Greece gets a bail-out and they don’t.

  5. Phil Perspective says:

    “Decrying the Greek finance minister’s expertise in game theory, Ms Kendall writes:

    “Whereas game theory can be irrational, the combined approach of the European Commission, the ECB and the IMF is based upon mainstream economic theory and is rational. In dealing with two entirely different ideologies, it is difficult to see how the two thought processes can be reconciled, as they do not start from the same premise.””

    How does Ms. Kendall say the ECB, IMF and the rest are acting upon mainstream economic theory. Mainstream economic theory says that austerity never works.

  6. VN Gelis says:

    They Destroyed Us and Now Want the Bones
    Whom did the ruling economic interests ask when they put us into the EEC? No one. The Left in that era screamed and warned: Greece out of the Lions Den! They understood then that the victors in WW2 has decided to implement the Nazi plan for the unification of Europe under the iron heel of big business, in alliance with the local collaborators in each country

    They abolished economic borders in Greece, services, and for people and goods without asking us. They dismissed us and demand sacrifices from us. Even our lives. They abolished our borders not to turn Asia into Europe but to turn Europe into Asia, with its people’s and the working Greek into an unemployed beggar left on the sidelines! Who apart from Euro and American grovellers. The political families Karamanlides, Mitsotakides,Simitides, Samarades, Venizeloi and other parasites who enriched themselves with our impoverishment. On the other hand the Left which hasn’t capitulated like the KKE which wavers towards the big construction bosses and the sold out trade unionists they who ally themselves directly with German and European interests.

    From the moment where the great European powers transformed once again without asking the European Nations, the European Economic Community to the European Union with the Euro as a common currency and the Greek economy (not only the Greek) became a totally open shop without any element of monetary, trade or other form of protectionism, so it was inevitable to transform the country into a massive trade deficit which would constantly increase and the country would be condemned to a total bankruptcy and destruction. This is the date imposed on us by the big european powers have the gall to ask us for its bones instead of compensating us for the destruction and the deaths they provoked. The political powers in Greece threw the Greek people into the Lions Den, provoking a massive destruction to the country and its people to serve big foreign interests so as they benefit accordingly, must give explanations and they will for their crimes.

    The Greek people never borrowed anything and owes nothing to nobody. Instead they are victims of exploitation by the big ‘allied’ powers. For the reconstruction of the country and development and in order to be able to have a despicable standard of living must become master of its own country, with borders for persons, for products, and with our national currency the Drachma. All the country and its wealth which has been created must be controlled by its people who shed blood sweat and tears creating it. There is no room for compromise and retreat. It’s time for all sides to understand this.

  7. Fluff says:

    Nice precis as usual from Paul….but Dawn Kendall has limited the credibility of her comments with her opening line: “Whereas game theory can be irrational…..”
    Given that, by far, the biggest criticism of GT is that it has as a fundamental tenet the assumption of rational actors, this is a very peculiar opener. Perhaps she is confusing “acting on incomplete information” with “acting irrationally”? (In either case, she might want to revisit an economics text book on this topic).

    She then goes on to claim that “the combined approach of the European Commission, the ECB and the IMF is based upon mainstream economic theory and is rational”. Again, one thing you would automatically appreciate (with a game theoretic perspective) is that humans (and groups of humans) can’t be assumed to act rationally. That said, even without any appreciation of game theory, I suspect most economists would be sceptical of the suggestion that an approach based on mainstream economic theory necessarily implies rationality.

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