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Landon Baker10/4/12Essay #1Math 89S GTD
Saving Greece: A High-Stakes Game the Size of Europe
The current European debt crisis has arguably been one of the most highly
debated and discussed stories globally in today’s media. Caused in large part by the
global economic recession that began in the U.S. in 2008, massive deterioration of
Europe’s finances in the last few years has resulted in a high-stakes game between the
fiscally stronger countries of the European Union (such as Germany and France) and
several of the fiscally weaker countries in the union. Among the countries with the most
severe economic problems are the “PIIGS,” which include Portugal, Italy, Ireland, and
Spain. However, Greece – the “G” in this acronym – has undoubtedly been the worst
victim of the economic downturn. When coupled with a decade of fiscal irresponsibility,
Greece’s unprecedented and massive debt load has threatened its existence as a member
of the European Union (EU) and as a participant in the common European currency, the
euro.
Faced with the possibility of a massive debt default that would have taken down
Greece’s entire banking system, the EU Commission, in conjunction with the
International Monetary Fund (IMF) and the European Central Bank (ECB), put together a
series of bailout loans in order to prevent Greece’s crisis from spilling over to the other
members of the “PIIGS.” The “Troika,” as these three groups have come to be known,
attached very severe fiscal austerity conditions onto these bailout loans to Greece (the
“Memorandum”), which resulted in rebellion and rioting from many factions of the
Greek people as unemployment skyrocketed, wages collapsed, and taxes soared. By
agreeing to such drastic austerity conditions in exchange for the money necessary to
prevent a government debt default, did Greece misplay the game with the Troika? As the
Greeks went to the polls in May (and consequently June) of 2012, the Troika certainly
wondered if it was the one who misplayed the game instead. The surprising results of the
Greek elections, and the questions raised regarding Greece’s voting methodology, offer a
fascinating study on game theory at work in a democratic society with international
interests.
Greece stays in EU (Austerity) (Cooperate)
Greece exits EU (No Austerity) (Defect)
“Troika” bails out Greece (Cooperate)
(R, R) = (3, 3) (S, T) = (0, 5)
No “Troika” bail out (Defect)
(T, S) = (5, 0) (P, P) = (1, 1)
In the chart above, R stands for the reward for mutual cooperation, T stands for
the temptation to defect, S stands for the sucker’s pay-off, and P stands for the
punishment for mutual defection.1 As the graph shows, Greece would be better off by
defecting and going back on its promise to implement austerity measures in exchange for
the Troika loans. The Troika would be better off by not providing additional money to
Greece because there are no guarantees that Greece can follow through on its austerity
promises and maintain their membership in the EU (T > R > P > S).2 If this situation were
a pure case of Prisoner’s Dilemma, Greece and the Troika would be playing this game
without any knowledge of what the other would do. It is that assumption that results in
the Nash Equilibrium being (P, P) = (1, 1), or the box in the lower right quadrant. The
Troika would worry that if they cooperated and made the loans, Greece would take the
1 Roman Wright, “The Prisoner’s Dilemma.”2 Roman Wright, “The Prisoner’s Dilemma.”
money and run, leaving the Troika broke and very embarrassed (0, 5). Greece worries
that if they agree to austerity measures and to stay in the EU, and the loans don’t come
through or aren’t enough, that they will be worse off as well, so they would also defect.
However, this situation is not a pure case of Prisoner’s Dilemma where two players are
making decisions in isolation from each other. Because both parties can collude and
negotiate with the other, a compromise agreement can successfully be reached. This
compromise is reflected in the (3, 3) Pareto Efficient result (R > ½(S + T))3 and is
superior to the (1,1) alternative of two defections (Nash Equilibrium). In the end, the
price of pure self-interest is too high for both players given the repercussions to the EU
and the global economies as a whole, so they decide to cooperate instead of defect. In the
Troika’s case, not bailing out Greece would have serious implications on the entire
European economy, possibly throwing it into depression. The contagion effect might
make Spain and Italy, two weak countries who are too large for the Troika to save,
collapse economically, forcing them to also leave the EU. From Greece’s standpoint,
leaving the EU results in an uncertain future, which could leave it isolated and financially
ruined. With risks this great, Greece accepted over $300 billion in loans from the IMF
and, in return, agreed to abide by the severe austerity terms in the “Memorandum.”
Another way of looking at the game between Greece and the Troika would be
through Martin Shubik’s game called the “Dollar Bill Auction.”4 In this game, two
players bid in an auction for a dollar bill in one-cent increments. However, not only does
the winner have to pay what he or she bid for the dollar bill at the conclusion of the
auction, but the loser has to pay the amount he or she bid as well. This results in an odd
3 Roman Wright, “The Prisoner’s Dilemma.”4 “Kipling’s game theory lessons for Greece,” Financial Times, 27 July 2011.
twist in the game: once Player A bids $1.00, Player B will either pay $.99 and not
receive the dollar bill, or Player B can increase his or her bid to $1.01 in the hopes of
outbidding Player A. In that case, Player B is paying more than the dollar bill is worth,
but is giving up only one cent above the value of the dollar rather than handing over $.99
for nothing. The bidding continues in this manner until someone eventually surrenders
when they run out of money, but the point has been made: sometimes it seems better to
pay a small amount to hopefully avoid paying a larger amount down the road. The
Troika hopes that $300 billion is a worthwhile investment in Greece if it prevents a much
larger expense down the road (complete collapse of the “PIIGS” economies, the EU, the
euro, and a depression in Europe). Based on the lessons of the dollar bill auction, “…one
party eventually scores a pyrrhic victory and takes possession of the dollar bill. Both
parties lose, but the smaller loser is the person who sticks out longest. That is not usually
the rational player.”5 However, whether or not the Troika played the game with Greece
correctly remains to be seen, especially in light of the surprising results of the Greek
elections in May and June of 2012.
Greece’s government is a parliamentary republic and consists of a President, an
Executive Branch (the Prime Minister and the Cabinet of Ministers), and a 300-seat
Parliament. The President is elected by Parliament (2/3 majority) for a five-year term.
The President appoints the Prime Minister and all other cabinet officials at the
recommendation of the Prime Minster, but the Executive Branch must “enjoy the
confidence of Parliament.”6 Therefore, Parliament is the key to the success of the Greek 5 “Kipling’s game theory lessons for Greece,” Financial Times, 27 July 2011.
6 "Flag of Greece." Greece. N.p., n.d. Web. 02 Oct. 2012.
government. The voting system used is based on a plurality of the votes, and seats in
Parliament are allocated in proportion to the percentage of votes won with two caveats:
the party that comes in first in the plurality rankings gains a bonus of 50 seats in
Parliament, and any party that fails to win at least 3% of the vote is not allocated any
seats.
Prior to the 2012 elections, the New Democracy party (ND) and the Pan-Hellenic
Socialist Movement (PASOK) were the two most substantial parties in Greece. In every
election since 1974, one of these two parties had been able to gain a majority of the 300
seats in parliament and form a government. However, the May 2012 election marked the
end of the two-party system era since the top vote getter, ND, received only 18.85 percent
of the vote and 108 seats in parliament, including the 50-seat bonus for getting the largest
percentage of the vote. Syriza, a radical left, anti-bailout party that campaigned to
eliminate the austerity conditions of the loans from the Troika, received the second
largest percentage of the vote, garnering 16.78 percent and 52 seats in parliament. In a
shocking vote of no confidence, PASOK, the former leader of the parliament, finished
third with 41 seats and only 13.18 percent of the vote.
This sudden change in political sentiment was attributed to the displeasure of the
Greek people with PASOK’s (and ultimately ND’s) support of the Troika’s bailout plans
and the Memorandum. Greek citizens were devastated by the austerity cuts that reduced
wages drastically and increased taxes tenfold. Consequently, the May election seemed
very much like a protest vote. Extreme parties such as the far left Communist Party
(KKE) and the ultra right wing, neo-Nazi Golden Dawn party (XA) gathered 8.5 percent
and 6.9 percent of the vote, respectively. The overall attitude of the Greek citizens was
clearly trending toward a growing discontent with these new austerity measures,
especially the coalition government’s (Pasok and ND) promise to further cut public
spending in order to “raise another 11.4 billion euros by 2014.”7
May 2012 Election Results:% of Votes Seats won
New Democracy (center-right): 18.85% 108 (w/ 50 bonus seats)
Syriza (radical left party) 16.78% 52
PASOK (center left) 13.18% 41
Independent Greeks 10.60% 33(right wing)
Communist Party of Greece 8.48% 26(far left party)
Golden Dawn (neo-Nazi, far right party) 6.97% 21
Democratic Left (new party,democratic socialists) 6.11% 19
______ ______80.97% 300 seats 8
Although voters were able to successfully express their dissatisfaction for the
current government in the May election, no party gained a majority of seats, and the three
leading parties (first ND, then Syriza, then PASOK) were unable to put together a
coalition to reach the 151-seat hurdle needed to form a government. As a result, another
election was called the following month. In the meantime, ND, Syriza, and PASOK
7 Demetris Nellas, Elena Becatoros, “Greek Election Results: New Democracy Wins,” 17 June 2012.
8 N.p., n.d. Web. 02 Oct. 2012. <http://eklogesprev.singularlogic.eu/v2012a/public/index.html>.
realized that in order to win more of the vote in June, they each needed to modify their
platforms and appeal more to the desires of the people. ND, which was punished in the
polls in May for supporting PASOK’s negotiation and approval of the Memorandum with
the Troika, campaigned on a modified platform of working to renegotiate the terms of the
Memorandum. Syriza toned down its anti-EC and anti-euro stance to attract voters who
were anti-austerity but fearful of leaving the Eurozone. Both ND and Syriza picked up
support in June’s voting:
June Election Results:ND 29.66% 129 (w/ 50 bonus seats)
Syriza 26.89% 71
PASOK 12.28% 33
Independent Greeks (ANEL) 7.51% 20
Golden Dawn (XA) 6.92% 18
Democratic Left (DIMAR) 6.26% 17
Communist Party of Greece 4.50% 12(KKE)
_______ ______94.02% 300 seats 9
The June election yielded an outcome that allowed ND to form a coalition
government with PASOK and the Democratic Left (DIMAR), a very new party that
9 N.p., n.d. Web. 02 Oct. 2012. <http://ekloges.ypes.gr/v2012b/public/index.html?lang=en>.
wanted to renegotiate the Memorandum but stay in the EU. Following an extremely
close and fragmented May election, these results were welcomed around the world, as the
fear of Greece’s potential exit from the euro seemed to now be in the rear-view.
However, the June results still highlighted an apparent polarization between those voting
for ND and those voting for Syriza. Both parties managed to increase their percentage of
the vote by roughly 10 percent each, while PASOK, KKE, ANEL, and parties receiving
less than 3 percent of the vote, experienced a decrease in support as a result. In fact,
parties that failed to overcome the 3 percent threshold accounted for only 5.98 percent of
the total votes, as compared to the 19.02 percent they received in May.10 However,
extreme parties from the left and right – including Syriza – came away with almost half
of the total combined vote, and it cannot be ignored that there was a less than 3 percent
margin of victory for ND over Syriza. It is certain that the Troika was greatly relieved
with ND’s first place finish, as a Syriza victory would have made it a tremendous loser in
this high-stakes game.
The Greek election process has been questioned and often criticized for some of
its very eccentric aspects. From a game theory perspective, it is evident that a slight
change in the way these recent elections were carried out could have resulted in a
radically disparate outcome. One of the most obvious idiosyncrasies of Greek elections
that most definitely could have influenced the voting outcome is the fact that Greece does
not allow absentee ballot voting. As a result, Greek citizens living abroad cannot vote
unless they come home. Many of these citizens are young and highly educated and might
sympathize with the Greek youth who are experiencing close to 50 percent
10 Georgia Angelopoulou, “New Democracy won Greece’s government. What about its society?” 28 June 2012.
unemployment and have no allegiance to the established parties, ND or PASOK.11 This
archaic rule prevented a myriad of citizens from participating in the election. As a result,
thousands of seemingly legitimate votes were not factored into the election results. If this
peculiarity did not exist, Syriza might have added enough support to make up for the less
than 3 percent margin of victory, thus completely changing the winner of the election.
A Syriza victory in the June election would have completely changed the game
between Greece and the Troika, as well as the entire complexion of the European debt
crisis. As opposed to the center-right ND party, Syriza is a radical left, anti-austerity
party that has not ruled out walking away from the Memorandum and leaving the euro.
The primary reason that the Troika agreed to make loans to bail out Greece was due to
Greece’s commitment to fiscal discipline. A Syriza victory would have shifted Greece’s
preferences from “cooperate” to “defect,” and would therefore give the Troika no choice
but to “defect” as well. Therefore, the new equilibrium would be in the lower right
quadrant of the matrix, as opposed to the upper right where it had previously been.
Syriza’s victory would have shifted the equilibrium from Pareto Efficient to the true Nash
Equilibrium, resulting in a lower level of aggregate satisfaction.
Greece stays in EU (Austerity) (Cooperate)
Greece exits EU (No Austerity) (Defect)
“Troika” bails out Greece (Cooperate)
(R, R) = (3, 3) (S, T) = (0, 5)
No “Troika” bail out (Defect)
(T, S) = (5, 0) (P, P) = (1, 1)
Another feature of Greek elections that, if changed, could have resulted in a
Syriza victory would have been to reduce the number of parties allowed on the election
11 "Wired And Ready- The Blog." Wired And Ready- The Blog. N.p., n.d. Web. 03 Oct. 2012. <http://wiredandready.net/2012/06/17/greek-elections-2102/>.
ballot. In June, 22 parties were on the ballot, seven of which cleared the 3 percent hurdle
needed in order to gain seats in parliament. If there were a restriction on the number of
parties eligible to run in the election, where would the voters in favor of the disallowed
parties go? Alternatively, what would happen if Greece modified its election procedure
to resemble that of France? France uses a Two Round Runoff Voting System, whereby a
first round is held similar to that of Greece, but then a second round runoff vote occurs
between the top two vote getters.
It is quite plausible to believe that, if this were the case, Syriza would once again
win the election. ND would most likely gain the majority of votes from those who voted
for PASOK and the Democratic Left (18.5 percent), since those parties make up the
current coalition government. Syriza would expectedly gain a majority of votes from the
remaining parties that make up roughly 22 percent of the voting results. This is basically
due to the fact that most of the other parties, with the exception of the Independent
Greeks, are radical parties that would be more likely to vote for the radical left Syriza
than for the center right, old guard ND. Independent Greeks strongly dislike ND, and
therefore, some of their votes could easily end up going to Syriza. Consequently, if this
eccentricity of Greek elections were changed and/or ND and Syriza had a runoff, Syriza
might have very well won the election and the game would have been dramatically
changed.
In order to better analyze the May and June Greek election results, I conducted a
survey that presented the following hypothetical situation to a total of 21 Duke students:
The “Troika”:
(A): European Commission (EC – Angela Merkel from Germany is key spokeswoman) + International Monetary Fund (IMF – Jean-Cluade Juncker is the
head of the eurogroup of finance ministers) + European Central Bank (ECB – headed by Italy’s Mario Draghi)
(B) 1 Sister (Angela) + 2 Brothers (Mario and Jean-Claude) are the de-facto Heads of a Family. The extended family has entrusted these three with managing the family finances to make sure that the family continues to prosper as evenly and as fairly as possible for generations to come.
The “Cousins”
(A) There are 17 European countries in the Eurozone (have adopted the single currency, the euro, as their national currency). There are actually a total of 27 European countries in the EU (European Union).
(B) Between the 1 sister (Angela) and 2 brothers (Mario and Jean-Claude) that head this family, there are a total of 17 children (the “Cousins”). There is great respect and admiration for Angela, Mario, and Jena-Claude. They are financially savvy, and it is their job to make sure there is peace within this large family.
The Scenario:
The economic crisis that has plagued the world for the last few years has also impacted each of the cousins in some way. Some of the cousins were quick to react to difficult economic times, and worked hard to cut expenses and make their lives and businesses more competitive. Approximately 1/3 of the cousins, however, either didn’t want to make the hard choices, or just couldn’t adjust to the changing climate quickly enough. The latter group approached the Troika for loans so that they could get through the crisis, promising to also make changes to their lifestyles. However, one of the cousins in particular, has been a bit of a “problem child.” He tried to cut expenses, but the amount of interest on the loans, plus the loan principle itself, is just too large to manage. This cousin’s children are complaining that their lifestyles have become too restrictive, and that they need more loans from the Troika, as well as lower interest payments and a longer time to pay back the money, so they don’t starve completely while they try to fix their fiscal house. The Troika no longer wants to make concessions, because they worry that if they do, not only will this problem child never fix his problems, but some or all of the other nieces and nephews who have also borrowed money from the Troika may decide not to repay their loans in a timely manner or, quite possibly, default altogether. If the loans aren’t paid, the entire extended family loses a tremendous amount of their wealth, adversely impacting the responsible cousins as well as the irresponsible cousins. If the Troika forces the problem cousin to pay more than he can afford, they risk complete default on their loans and a big rift within the family. We have a family stalemate, with the Troika insisting that the problem cousin keep his word, take the pain, and repay the loans on the schedule that they set. The next move belongs to the problem cousin.
After reading this background information, each participant in the survey was
asked to rank the following, with 1 being the preferred strategy and 4 being the least
preferred strategy, according to which course of action the “problem child” should take:
Option A: Make the loan payments + keep the current budget cutting austerity measures in tact
Option B: Don’t make loan payments (default) + break away from the larger extended family (handle things alone)
Option C: Suspend loan payments temporarily while crafting own independent austerity measures + stay connected to the family
Option D: Work to renegotiate loan repayment + get rid of some of the harsher elements of the austerity plan + keep good relations with the family
The goal of this survey was to bring the Greek situation down to much simpler terms and
determine which of the four choices is the most logical course of action. In the
background information, it is pretty apparent that the “problem child” is Greece and the
“siblings” are the other countries in the EU. However, what the participants didn’t know
was that each course of action represented a certain political party’s platform (in much
simpler terms of course).
May election June election Survey results
Option A PASOK + ND PASOK 6 first place votes
Option B Communist Party Communist Party 0 first place votes
Option C Syriza Syriza 4 first place votes
Option D Democratic Left Democratic Left + ND 11 first place votes
The results of the survey need to be examined against the platforms presented by
the parties at both the May and June elections in Greece. The May election results
reflected voter disdain for the Memorandum agreed to by both the ruling PASOK party
and ND. However, once the May results were in, ND modified its rhetoric leading up to
the June election and took a position closer to that of the Democratic Left (Option D).
My survey results prove that Duke students have good instincts, because it was this more
moderate position that actually sealed an ND victory on election day. While Option C
came in third in the survey, it finished strongly in second place in the actual Greek
elections, which highlights the disparity between reason and emotion. Additionally, the
reversed ordering of the second and third place winners in the survey can be attributed to
the fact that my sample size was microscopic compared to the entire voting population in
Greece. Furthermore, my results yielded a significantly larger margin of victory for the
first place candidate than did the actual Greek elections; however, this discrepancy can be
attributed to the use of extremely simplified choices offered and the phrasing of each
option in my survey. Nonetheless, it is very intriguing that my survey results paralleled
what actually occurred in the Greek election this past June.
The Greek debt crisis is certainly one of the most significant, high-stakes events
occurring in today’s world. Currently, the Troika and Greece’s new government are
discussing ways to continue to keep Greece afloat and in the EU without sending
Greece’s economy over a cliff. Ultimately, both Greece and the Troika want the same
outcome: a healthy Greece and a healthy Eurozone. Hopefully, the game between the
two will continue to find equilibrium where they both cooperate. However, as we’ve
seen, the elections could have turned out very differently if some of the more eccentric
aspects of Greek elections were altered in some ways. Regardless, ND was the victorious
party (this time around) and hopefully, along with its coalition partners, it will be able to
play the game successfully alongside the Troika for the sake of Europe and the rest of the
world.