Applying Game Theory to the Greek Debt Crisis
The Greek debt crisis is not only a substantial exemplification of socioeconomic and political factors causing a painful accumulation of debt and necessary financial bailout, but also of real world applications for game theory. The Greek debt crisis itself brought upon many questions and proposed courses of actions such as leaving the Eurozone, to regain financial autonomy, and an extreme bailout aid in the form of debt relief from members of the Eurozone as well as the International Monetary Fund. The primary factor that has led to this economic crisis derives from Greece’s continuously shrinking economy ever since the 2008 financial recession which led to a decrease in Greece’s tourism sector, rising unemployment, and use of initial bailout aids to pay off international loans, leaving less compensation to help its own intra-country financial downfall.
Interestingly enough Yanis Varoufakis, the Greek finance minister, is an academic of game theory, having thoroughly studied and taught the subject at both the University of Essex and University of East Anglia. Game Theory is meant for an effective application into real world scenarios, and thus the finance minister found himself theorizing the potential future of Greece. This game imposes itself at high stakes, with a multitude of sociopolitical factors that may prevent strategies being chosen rationally. Decision making within real world applications of game theory must also account for the innumerate level of internal and external factors upon the players of this game, in this case Greece and the Eurozone. Each entity possesses governments, officials, economies, legalities, and social foundations that can change at any nuance.
Greece has two possible primary strategies, either provide a three-point tax plan or defaulting. If the 3-point tax plan, which included many spending cuts and new tax structures, is to be accepted, than the overall payoff would be 1 for Greece, and ¾ for the European Union. If Greece must default, or the Eurozone rejects this plan, than Greece would either be forced to undergo “Grexit”, the departure from the Eurozone, or cause the potential collapse of the Eurozone altogether. The former would lead to a payoff for Greece of 0, but would allow the EU to keep its maximum payoffs and get a payoff of 1. The latter imposes that there would be an external shock on the market, the worst case scenario, and lead to a payoff of 0 for both Greece and the EU.
The Greek debt crisis serves as a relevant application of Game Theory to potentially viewing the outcomes of economic crisis and financial reform. The players of the games are not autonomous individuals but rather larger entities with too many external and internal factors pressuring rational decision-making. There also lies uncertainty of the payoffs associated with each strategy due to the wide assortment of reactions the global economies and the European markets have from whatever strategy is chosen in the end. Greece only has a dominant strategy of having its three-point plan accepted by the Eurozone in this theoretical case. As economies are always fluctuating and shifting, and the political structures of nations and large collectives are never stable, it is difficult to see in the future what the state of Greece and the EU will be. The Greek debt crisis will be a pertinent issue for a while, and it is up to the EU and Greece’s authorities to avoid Grexit and any potential collapse of the Eurozone to maintain the welfare of European economy.
Reference:
http://www.bbc.com/news/magazine-33254857