The Greek Debt Crisis; It’s All Just a Game
The attached article speaks of Yanis Varoufakis, the former Greek Minister of Finance, and how his background in game theory influenced negotiations with the European Union related to Greek debt. Although his tenure was short (he resigned in July 2015 after just 6 months), many of Varoufakis decisions were well calculated using game theory, most basically derived from the Prisoners Dilemma, and had a lasting impact on the greek debt crisis.
The decision tree below, made in July 2015, when Greece was closest to defaulting on its loans and exiting the eurozone, shows Varoufakis’ alleged thought process, including each decisions expected payoff.
Contrary to the more simple prisoner’s dilemma, this decision tree involves multiple choices, both for Greece and the EU as a whole. The highest expect payoff, and the mutually beneficial decision, comes when Greece offers a three-point plan for repaying it’s debts and the Eurozone accepts. In retrospect, this is exactly what happened. Rather than defaulting, risking a Grexit (and possible ensuing collapse of the Eurozone), Greece offered a “watered-down” 3 point bailout plan, including tax hikes and pension cuts, which was ultimately agreed upon by the European Union. In an effort to pass this watered-down plan, which many knew would be imperfect (but agreed to nonetheless, for the common good), the terms were left open to negotiation. The plan has yet to reach it’s term, so these negotations continue, and as Greece continually struggles to meet the EU’s demands, they continue to see problems domestically. Recently, in direct response to the continued effects of this 3-point bailout plan, many unions went on strike to protest their continued wage cuts and pension cuts. Of these, the most notable was a 10-day sanitation strike during a heatwave, where the stench of garbage permeated the streets of Athens in the middle of high-tourist season. While the bailout plan Greece agreed to over 2 years ago has proven imperfect, and continues to cause problems, we have game theory to thank for avoiding a worse situation, like the hypothetical collapse of the Eurozone.
agt57@cornell.edu
http://www.bbc.com/news/magazine-33254857