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.