The Greek Game: Dominance or Chicken, Fear or Reason?

The outcome of the Greek game depends on how Syriza sees itself in two possible futures: "Exit" or "Buckle"

Tony Curzon Price
Tony Curzon Price
8 March 2015

First, I'd like to say what a pleasure it is to elicit such a thoughtful counter-analysis to my original depiction of the Greek game from  Frances Coppola.

Here are my thoughts on whether there is any substantive disagreement between us.

First, on the consequences of any outcome, I think we're in agreement. I've shown these below in a reduced form game matrix which is often more intuitive to analyse than the extensive form that I used last time.

The way to read the table is the following:

Imagine you are Greece and playing "Hard" (ie sticking firm to the position that there must be better terms or else...). Now stay on that row and move through the "Germany" columns.

If Germany also plays "Hard" (ie the bailout terms are the bailout terms), then we move to Grexit.

If Germany is "Soft" (ie, saying, OK Greece, you can reduce the surplus you're running & we'll agree a debt for equity - growth bond - swap), then the outcome for Greece is a thorough restructuring of the economy (as per the rather impressive Varoufakis "to-do list") and growth; the outcome for Germany is some loss of face on its principle of monetary probity.

  • Now move to the next row - with Greece playing "Soft" (ie Syriza says "OK, you win, we'll implement the bail-out conditions"). 

  • If Germany plays "Hard", then the outcome is ignominy for Syriza, continued Greek recession and German face is preserved. 

  • Moving along the column, if Germany plays "Soft" then we have the good outcomes for Greece and some preservation of face for German monetary probity, in that the claim can be made that Syriza conceded even if Germany also conceded.

As I say, I think Coppola and I basically agree on this description of the outcomes. We even agree on the transmission mechanism of Grexit, which is not directly through bank asset write-downs but through the risk premium increase on other Euro-denominated assets.

The question of whether or not this is a game of chicken or one in which Syriza has a dominant strategy still interests me and maybe I continue to disagree with Coppola there. A dominant strategy for Syriza would be one where the best course of action in the game does not depend on what Germany does. My original argument was this:

If Germany plays "Hard", then continued recession and ignominy is worse for Syriza than acute recession and Icelandic revival;

If Germany plays "Soft", then restructuring without loss of face is better than restructuring with loss of face for Syriza, so it plays "Hard";

Conclusion: whatever Germany does, Greece should play "Hard"; Germany knows that, and whether or not we have Grexit therefore depends only on whether Grexit is thought of as being worse in Germany than German loss of face on the principle of monetary probity.

The fundamental difference in Coppola's analysis comes when she argues the following:

Exit now would force an already deeply depressed economy into an even worse recession. It is hard to see that the Syriza government would survive such a decision, especially as it has no popular mandate to take Greece out of the Euro. And if it did not survive, then political chaos would be added to Greece’s woes, adding fuel to the flames of extremism. Greek exit now would be disastrous for Greece.

My disagreement is about Syriza's future. I think that it has no future if it plays "soft" whereas Coppola thinks it has no future if it plays "Hard". If Coppola is right, then it is true that we have a game of chicken: if Germany plays "Hard" then Syriza should play "Soft" and if Germany plays "Soft", Syriza should play "Hard".

My current forecast? That we'll end up with "Soft/Soft", where Greece gets the best real outcome and German monetary rectitudinarians get a small symbolic offering. Getting us there is what skilled diplomacy is all about.

But having clarified all that, I feel that what I really would like at this point is to hear from someone who really understands Syriza's view and what will shape it. Anyone?

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