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How Game Theory Affects the EU

Ever since Greece began its tumultuous downhill spiral of fiscal welfare, the European Union has been scrambling to protect its image and perceived status.  Despite concerns from multiple countries in the EU about scaring investors away from Europe, a debate about whether or not to keep Greece is currently underway.  Contrary to the beliefs of those concerned European countries, many other countries have adopted the idea that pushing Greece toward a quick exit could act as a lesson to others, reminding each member of the union not to take advantage of the overall power for a supposed provincial gain.  Unfortunately for the EU’s regulators and its member countries, the dilemma of what to do with Greece has evolved into a fairly complicated zero-sum game in which each member feels like a victim of its ally’s verdicts.

 

Although this issue is mainly focused on the former actions of Greece, it is up to other members of the EU to make a true change toward improvement.  Strategists at Bank of America and Merrill Lynch decided to turn to zero-sum game theory for a proper analysis of future events.  These analysts believe that players (in this case, countries) may not trust one another enough to collaborate, or may see greater individual outcomes in singularity, even if the net outcome for the entire EU would result in a gain based on said collaboration.  Many pundits believe that Germany could be the first to leave, because although they are the fiscal powerhouse of the EU and currently in a position of power, it may be in their best long-term interest to return to the Deutsche Mark despite initial low growth and possible high borrowing costs.  While Germany and Greece both stand to gain if Greece carries out its bailout plan and Germany agrees to insure it, neither party is likely to participate due to the fact that any sacrifice at all in this issue will result in a net loss.  On the other hand, Finland may be the first to exit due to its status as a fiscally prudent country with a triple-A credit rating.  Finland knows that this degradation of the EU zone could result in growing liabilities from the weaker group of countries.  Also, countries like Italy and Spain, which are dealing with much higher borrowing costs and an enormous loss in market power, may be in serious luck if they decide to exit instead of Greece.  This success would be due to the fact that Italy could make significant competitive gains in the marketplace with a weaker currency such as their former, the Lira.

 

In carefully analyzing each scenario involved with each of the 17 members of the EU, it becomes evident that both Italy and Finland have a relatively high chance of success upon exit, whereas Germany has the lowest exit incentive of all.  Although Italy is much weaker than Finland, both would be better off gone – Italy for their current instability and potential growth without the EU, and Finland for its current stability and potential losses if overwhelmed with liability from weaker nations.  Germany, despite being the EU’s “paymaster,” would eventually suffer high borrowing costs, causing a negative balance sheet effect.  In closing, game theory can be applied to nearly any dilemma, but I have chosen this particular representation due to the multitude of outcomes available.  One of the most fascinating concepts dealing with game theory is its ability to create new opinions or clearly disprove others, as noted in lecture.  With this example, the choices are evident – now, it is in the hands of bureaucracy.

–kingunicorn

Source:

http://www.nytimes.com/2012/07/24/business/global/using-game-theory-to-predict-the-euros-future.html

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