Game Theory in the Greek Debt Negotiations
Interactions between different bodies often times model behavior akin to game theory, whether those bodies be as small as rodents competing for food, to countries competing for economic advantages. One current example of how international relations can be explained through game theory is the Greek Debt negotiations. As two entities with different priorities, neither Greece nor the rest of the Eurozone want to select the other’s preferred strategy. In this case, the Eurozone would want to cut Greece out of the Eurozone and have them pay their debts in order to salvage finances, however, Greece would want to get an extension on their debt payments while remaining in the Eurozone. However, by manipulating foreign central banks and currency valuations through so-called TARGET liabilities, Greece’s finance minister Yanis Varoufakis is actively able to increase the negative payoff that the rest of the Eurozone would incur if they allow Greece to exit, encouraging the Eurozone to engage in more predictable behavior that is favorable to Greece, extending Greece’s debt bailout.
This situation can be modeled by game theory where Greece and the rest of the Eurozone act as two players, and Greece presents the two strategies of either leaving the Eurozone and becoming independent, or getting an extension and assistance on their debt payments. By increasing the negative financial payoffs the rest of the Eurozone would incur through influencing monetary policies, Greece has worked to change the payoffs of the game, and hence the behavior of the players, allowing the Greek government to reach much more favorable conditions that they could have before. This in turn makes extending Greece’s debt bailout the Nash Equilibrium, as it slowly becomes the dominant strategy for both players.
Sources:
http://www.project-syndicate.org/commentary/varoufakis-ecb-grexit-threat-by-hans-werner-sinn-2015-05
http://www.forbes.com/sites/timworstall/2015/05/31/explaining-the-game-theory-of-the-greek-debt-negotiations/