Center for World Conflict and Peace

Center for World Conflict and Peace

Thursday, July 16, 2015

A CWCP Conversation: The Greece Crisis

The below conversation between CWCP’s Brad Nelson and Yohanes Sulaiman took place over email between July 13 and 15. We hope you enjoy!

Brad Nelson: So now that it appears a Greece deal with the EU and creditors is done, let's take a step back and look at some of the consequences of the events over the last few weeks. Who (or what) comes out the big winner of this mess? Anyone?

Yohanes Sulaiman: There are winners for sure. But big winners? Nope. Germany wins, but got a bad hit to its reputation. Tspiras wins the deal and referendum and applauds from people like Paul Krugman (second thought, that may not be so good), but that’s only after wrecking Greece’s economy and causing regional panic. The EU? Yes it’s still united, but it looks so wobbly. Obama? He is a non-factor here.

Probably former Finance Minister Varoufakis, the game theorist economist, is the biggest winner. His name is praised to high heaven by every leftist and will probably get a plum teaching job! Putin, by doing nothing but just looming around, also managed to make the EU nervous and pulled Greece closer to it. Perhaps Hollande also could make a claim as saving EU, but he was a bit player here.

BN: For me, the winners are: Germany and Merkel, who flexed her diplomatic muscles and got the Greeks to capitulate. We can pretend that France still matters a great deal, but the truth is that Germany runs the show.

The other winners are the EU and the Euro and supporters of European integration, at least for now. The bloc suffered a major crisis, looked shaky, bent, but, in the end, didn't break. However, over the long-term, I'm not sure of the continued viability of the EU. The usual critique--at least one of them--has been that the EU contains one batch of countries that are strong economies and one that's weaker and unsteady. At this point, the EU probably has multiple tiers of countries--relatively strong economies (Germany, Britain, Poland), steady but low growth ones (France), and weak and wobbly economies (Greece, Italy, Spain, Portugal).

How does the EU, with its sclerotic institutions and internal divisions, deal with this issue over the coming years?

YS: Merkel and Germany sure flexed their muscles, but at what cost? As you said, the viability of the Euro is in serious question. Granted, they could argue that Greece is exception, and I tend to agree and actually sympathize a lot with Berlin. But it cannot be denied that the optics are bad, and this situation created lots of internal resentment; and with EU's dysfunctional way of doing business, Greece and supporters could cause problems, though this might be a long-shot scenario.

But if this happens, then EU either has to transform into more federalized system—doubtful that they have enough support for that--or more dysfunctions and collapse might well result.

BN: I think the EU either has to tighten (a more federalized system, as you suggested) or loosen (give individual members more freedom to cope with their own issues and problems, something that might have been helpful in the Greek case) to remain meaningful. The current status quo isn't working. I suspect bureaucratic inertia, internal divisions, etc., will prevent any kind of structural and institutional change, leaving the EU weak and crisis-prone. 

Let's turn to the other side of events, the so-called losers. Who or what are the losers of the Greek crisis?

YS: Obviously, the EU. We've discussed how this entire fiasco brings the EU to brink, and unlike other crises the EU doesn't emerge stronger here. The idea of unity is questioned.

Yes, Greece is an extreme case in which Athens is really badly governed and the leaders seem not to be willing to play by the rules. Thus, it’s not surprising the idea of a “Grexit” is discussed so openly. How about other EU members? Hungary? Romania? How many have skeletons in their closets waiting to explode? If they do, my guess is the EU won’t do anything until the shit hits the fan.

BN: The losers, to me, are the Greeks, both the Greek government and the people of Greece. The government gambled that it could get a better deal by showing that its people were against austerity and reform. It lost that bet. In fact, I wonder how long Syriza will remain in power. Rumors say that there will probably be a cabinet reshuffle, but that might not be all. One has to think there are limits to how far and long the junior members of the political coalition will go in supporting Tsipras's moves and actions.

Meantime, the Greek people were permitted to voice their political preferences on a deal via referendum, but ultimately those preferences were ignored. Reality trumped poker playing and the government, despite the outcome of the referendum, had to negotiate with the EU and concede to German demands.

How do you think all of this plays out over the long-term for Greece?

YS: Long-term, it depends on whether Greece is willing to reform. I am very pessimistic, however. Expect another encore sooner or later. I mean, reforms imposed from outside rarely work unless there is strong domestic support, which is currently nonexistent in Greece considering the no vote. A majority of Greeks hate austerity and are angry with Germany.  This showed in the referendum results, when a majority of Greeks voted no simply because they consider that a rejection of German policy proposals.  Any reforms that sound like they originated from Berlin will be difficult for Greece to swallow.

BN: I agree with your pessimism; my main concern is the complexity of the issues at stake. Greece needs domestic reform, sure, but there are others things as well. It needs better governance, as you indicated. The Greek people need to be on board with any economic and legislative changes. Greece also needs debt forgiveness, something the IMF has suggested. Are creditors and the EU willing to go along with that? How does Greece stimulate enough economic growth to begin to get out of the hole it’s in? And mind you, all of these actors and actions have work in relative sync with one another. Is that likely? And who provides the leadership on all of this? Merkel? At what point do the Germans get sick of bailing out and providing leadership to the weak and troubled of the EU? And what cues are Spain, Portugal and Italy taking from the Greek drama?

Thursday, July 2, 2015

Why the European Union will not give in to Greece's demands

There has been much discussion already about the "Grexit" and its possible implications to Europe and the global economics, so I won't touch that. What I want to discuss, however, is the logic behind Greece's negotiating strategy, which is supposedly based on game theory. In fact, Yanis Varoufakis, the Greece Finance Minister, is a noted expert on game theory and even wrote a book on it. The strategy, as glimpsed by the New York Times:
Those on the other side of the negotiations are “portraying me as an irrational fool, which is doing my work for me,” Mr. Varoufakis said. “I’ve been stoic. I haven’t let myself get agitated.” Speaking like a true game theorist, he added, “I know who I am and I know they know who I am.”
Apparently, Greece is playing a game of chicken, where due to a weak hand, one of the strategies to get the best outcome is to act recklessly, irrationally, taking the path that everyone thinks and knows would give the worst reward out of all possibilities and thus forcing the other "rational" actors to give concessions. For instance, many believe that if Greece is forced to exit, then it would be disastrous to the European project.

The problem with this strategy is that the other players must have some confidence that this will be the only game of chicken that they will ever play again.

The European Union is playing on long-term game. Yes, Grexit will be very costly. Yes, it will be disastrous to the "European Project." At the same time, the leaders of European Union, especially in Berlin, must realize that if they, in the end, concede to Greece's demands, what will prevent Spain or Italy, which also had to implement painful economic reforms, to play the same game? Or worse, it's possible we could observe another stunt like this from the Greek government. Why would or should the European Union keep surrendering to the blackmails of its weakest and irresponsible members? As noted even by the Italian Prime Minister:
If there is a mass get-out clause over the rules, what will happen in Spain in October? And in France in a year and a half? It is one thing to ask for flexibility amid abidance by the rules. It is another thing to think that one is the craftiest of them all, in other words to be the one that does not abide by the rules. We want to save Greece. But the people of Greece also have to want that.
In other words, EU members don't want a rerun of these chaotic and destabilizing events and thus might have to make Greece, especially Syriza, an example of what happens if anyone dares to pull another stunt like this.

Plus, the fact is that most likely key players such as Germany believes the European Union is much more prepared for "Grexit" today than back in 2009. In other words, they believe that they will survive the game of chicken simply because they have a much stronger car.

So, rather than getting the best possible outcome, the Greek government is actually making a disastrous bet that could end up making it roadkill.