When Things Get Nashty
Today, people around the world are experiencing crisis after crisis. “Bank crisis,” “budget crisis,” and “government shutdown crisis” are all over TV and affecting the lives of many in different countries. After the economy hit bottom early 2009, many of us started to cheer for the recovery; in fact since mid-2010, the American economy seemed to have stabilized and people started to regain confidence in the stocks and corporations. Yet the global economic and social situation is far from stable. Just a little more than a year later, this past summer, things began to look gloomy again. While many countries in the Islamic world experienced revolutionary political transformation, several countries in Europe were facing treacherous economic challenges. Of those countries, Greece is the one that is closest to the brink of national bankruptcy and getting most global attention. As Greece is suffering unprecedentedly severer “Debt Crisis,” the ancient nation now has 98% chance of a national default in the next five years, according to Bloomberg.com.
So, what does Greece have to do with Networks and what we have learned so far in class? In fact, there is a lot of connection between the current Greek debt situation and Game Theory, one of the most important topics discussed in our class and economic concepts developed in 20th century. The Greek situation is extremely complex and crowded; there are a multitude of parties involved, each with entangled and codependent strategies different interests. In other words, it is a situation ideal for a Game Theory analysis. One of the most famous equilibria in Game Theory is the Nash equilibrium, which is defined as a combination of strategies whose payoff cannot be improved by any single altering his/her strategy individually. I found a recent MBA paper titled “Getting Nashty,” which approaches the situation in detail by applying Game Theory analysis and searching for Nash equlibria. Written by a graduate student at Hass School of Business at UC Berkeley, the paper incorporated the strategies different players in the situation might choose and offered interesting insights. Here is the link: http://faculty.haas.berkeley.edu/rjmorgan/mba211/2011%20Mid%20Semester%20Projects/Midterm_Nashty%20_final.pdf
The paper focused on the decisions each player involved in the Greek debt crisis can make and provided lucid explanation for the reasoning. First, the author began by relating to the background of the crisis and timeline of events. According to the paper, Greece’s debt crisis was triggered by high budget deficits that reached 13.6% of GDP (4times the amount allowed by the EU) and national debt level as high as 124% of GDP. This sky-high spending, mainly funded by other European counterparts, was done to enhance the luxurious life of Greeks, resulting in a tumult throughout the Eurozone as the debt crisis threatened to collapse the entire region’s economy. The decisions by both Greece and the EU would have a significant impact on the survival of Greece, the fate of the other the “PIIGS” (Portugal, Ireland, Italy, Greece and Spain) and the entire European Monetary System.
Before analyzing the Game Theory dynamics, we should first identify the players and understand the pros and cons of each option they have. Despite a dozens of parties involved in the situation, to simplify the game and build a comprehensible model, we can focus on the options available for Greece and the European Union. The author listed the options each party has and qualitatively discusses the Pros and Cons for each option. He first assessed the options for the European Union, which include letting Greece default, letting it ask IMF (International Monetary Fund) for help, or providing rescue package from EU itself. The author concluded that Letting Greece default is the most costly option for the EU, while providing the rescue package from EU itself will set precedence for providing assistance, which could reduce the incentive for other ailing countries, namely the PIIGS to reform. On the other hand, from Greece’s standpoint, if the country tries to resolve the problem internally, it will have greater freedom to conduct its own fiscal and structural reforms, but the chances are it will most likely not be able to repay the debts, which can lead to severe financial and social costs. Or Greece can choose to solve the problem with external help, which can probably prevent a default at a much more ideal rate, but will certainly restrict the economic freedom of the country.
Finally comes the Game Theory Analysis: The EU and Greece are playing a one-shot game that is not likely to be repeated between them, as Greece already violated the fiscal directives required of EU members in the Maastricht Treaty. The below matrix shows which strategies each party might choose:
| Payoff (EU, Greece) | Greece Runs Deficit | Greece Cuts Deficit |
| EU Bails Out | 1,5 | 3,3 (cooperate) |
| No EU bail out | -1,-1 | 5,1 |
As we learned in class, they were in a Hawk/Dove game, or a war of attrition. Although they were in the (-1,-1) cell, both the EU and Greece were playing the waiting game, seeing if the other would move first. If Greece decides to cut its deficit, EU would be inclined to provide no bailout. However, if Greece decides to keep running a deficit, it is more beneficial for the EU to bail Greece out (although with some penalty). Meanwhile, Greece is also waiting to see if EU will act first, in which case, Greece could take advantage by delaying or lessening its austerity measures, similar to what we learned in class. It is in the best interest of Greece and the EU to cooperate: for Greece to implement fiscal prudence and slash its deficit to reduce its future debt burden, and for the EU to bailout Greece to help the latter through its short-term debt commitments. The best outcome would be for both to act simultaneously and cooperate, which turned out to be exactly what eventually happened this year.
The paper was written in the last spring, and although half of a year has passed, things only went worse. The $110bn bailout last year unfortunately proved not enough to resurrect the economy or tighten up the deficit, and two months ago there a promise of a second $110bn bailout was made to save the country from default. German Chancellor Angela Merkel said she won’t let Greece go into “uncontrolled insolvency,” as politicians try to limit contagion to other euro members. But Greece’s pledge to adhere to deficit targets that are conditions of the European Union and International Monetary Fund’s bailout were undermined by data showing his country’s budget gap widened 22 percent in the first eight months of the year. As we have seen above, the EU and Greece was to enter a “one-shot” game and reached the agreement of last bailout. So what type of game is it going to take for a second bailout, or a third? Surely we all are eager to find out.
Jw585