Game Theory and Greek Debt
As with most country relationships, economies are closely tied to each other through various economic deals, loans, and debts. This case has shown its effects greatly in Greece’s relationship in dealing with Eurozone and their own debt crisis. Once Greece was adopted into the European Union and given use of the Euro after the country’s financial collapse they were forced to adopt many controls from the EU, ECB, and the IMF. This past summer Greece, which has been drowning in its increasing debt, was forced to negotiate deals to prevent defaults on the various economic loans and debts it faces. The country and Eurozone both faced different decisions. Greece could remain involved in Eurozone by offering up even more of its own economic autonomy or it could just default and make a “Grexit”, leaving the Euro, that is if Eurozone doesn’t collapse and force the Euro out completely. Whereas Eurozone could choose to accept their plan and bailout Greece once again or refuse to help them and let Greece make its own exit, ending its financial burden on the EU while risking their own collapse. Much of the negotiations made during this time were laced with deception through the Finance Minister, Yanis Varoufakis, trying to encourage decisions in Greece’s favor through the assumption of Eurozone’s use of Game Theory in their decision-making (or at least he was accused of such actions).
The use of Game Theory allows you to study decision-making and the effects of someone’s decision on another person’s decision in comparison to playing a game. In this way each participant weighs out the payoffs in order to see which response will give the best payoff on average, taking into account the other participants possible responses. In this case it seems clear that a game can be made of Greece’s debt defaulting issues, giving way to a clear decision on the months-long debates that were underway. If both parties agreed to extend Greece’s payments on their debts and keep them in the EU Greece would avoid all the financial issues of losing their currency. If Greece defaulted it would be very bad for them due to the money they would owe the EU from their banks, but it would be worse for the EU if it causes a collapse in the Euro from all of the money already placed into rebuilding the Greek economy, but if Greece exited it could benefit the EU in the fact that they would no longer be able to financially support the country.
From this, if monetarily laid out, it would become clear that for Varoufakis the only benefit lies in remaining in the EU. In this way, despite offering the idea of the “Grexit”, which would economically benefit the EU, he appeared to work to make it harder for them to separate without collapse. In the end, the negotiations led to an ultimate decision to prevent Greece from defaulting, allowing them to remain on the Euro and not make debt payments for many years to come. Though other decisions were ultimately involved in this, it seems clear that game theory prevailed. It’s very interesting to note how Greece understood that remaining in the EU was their only option with some benefit and used it to their advantage in order to make it appear to be the best option for the EU to accept the offer to extend their debts rather than reject it. It shows that game theory can also be manipulated which shows the complexity of how decisions affect each other.