The repeated willingness of Greece and its creditors to bring the entire euro area to the brink of disaster presents a difficult and fascinating question for economic theorists: What game are they really playing?
On the surface, it seems like a classic game of chicken, in which each side tries to look determined enough to make the other crumble. The creditors, including the European Union, the International Monetary Fund and the European Central Bank, insist that they can’t provide any more debt relief or loosen their austerity demands any further. Greece pushes for more, suggesting that it is willing to default on its debts, possibly triggering an unraveling of the monetary union, if it doesn’t get its way.
It might also be a prisoner’s dilemma, as my Bloomberg colleague Justin Fox suggested back in February. Both sides would be better off if they cooperated, but distrust prevents them from doing so. As a result, the creditors keep demanding terms far too onerous for Greece to meet, and Greece edges toward a disorderly default that would be the most costly outcome for the creditors. This interpretation, though, assumes that the potential gains and losses for both players are roughly symmetrical — a condition that doesn’t necessarily hold here, given the immense downside for Greece.
Hence, another classic game — the ultimatum game — might provide a better analogy. In the game, a player receives some money — say, $100 — but can keep it only by convincing a second player to accept part of the sum. If both parties are interested solely in maximizing their financial well-being, the first player should be able to offer as little as $1. After all, for the second player, $1 is better than nothing.
When real people play the game, though, that’s not how it works out. The second player tends to reject any offer less than $30, seeing it as insulting. As a result, neither player gets any money. The game reaches inside people and stirs up deep emotions, demonstrating that humans are not dispassionate economic calculators. You can’t understand it without thinking about human perceptions of fairness, justice and honor.
This seems to fit the current situation in Europe. The creditors think Greece, in a position of weakness, should be grateful for the relief they’ve offered and get on with economic reforms. After all, it’s better than nothing. Yet Greece, while recognizing the need for reform, sees that the creditors can afford to do more and feels insulted by the suffering it must endure. If necessary, the Greeks are ready to risk blowing up the euro to preserve their independence and dignity.
From this perspective, it’s not really an economic confrontation at all. The technicalities of funding mechanisms and repayment schedules are merely the instruments through which power is being exerted from one side and resisted from the other. So when Greek Prime Minister Alexis Tsipras called the creditors’ latest proposal “absurd,” it might have been because, from the broad perspective of human decency, it was absurd. And when Jean-Claude Juncker, the chief executive of the EU, reportedly refused to answer a subsequent phone call from Tsipras, he might have done so because he was completely flummoxed by Greece’s irrationality.
The ultimatum game teaches us that the Greek standoff can’t be understood through the lens of economic rationality alone. Those who attempt to do so risk making a costly miscalculation. [Bloomberg]