By Alexander Holst
In game theory, the game of chicken requires two players. In one version of the game, each player drives a motorbike on a straight collision course with one another. The player who evades first and avoids a crash loses. The one avoiding the crash is called a chicken. The key to win the game is to convince your opponent that you will not budge in the face of the imminent crash, so that she better do so herself.
Last month, Greece and Germany played a political game of chicken. Greece lost. Crash avoided.
Four weeks ago, general elections in Greece resulted in huge victory for the Syriza party. Having narrowly missed an absolute majority, Syriza created a coalition government with the recently formed ANEL party. The two coalition partners are divided on most policy issues. Syriza, considered to represent most of the Greek radical left, wants to extend the welfare state and implement direct democratic measures on all level of government. ANEL includes strong nationalist forces, wants to reduce immigration and strengthen the role of the Christian-Orthodox Church. But there is one issue which brought these two parties together: Ending fiscal austerity.
Since the first bail-out package in 2010, Greek’s public creditors have demanded structural reform of the tax code, labor market reform and severe spending cuts in exchange for partial debt-forgiveness and cheap loans. Since Greece was not deemed creditworthy by private capital markets, the public bailouts by other Eurozone countries and the International Monetary Fund were Greece’s only option to avoid outright default.
During the election campaign, Syriza had vowed to roll back the painful fiscal austerity measures. But fiscal austerity was the pre-condition under which reluctant creditors, Germany chief among them, agreed to back additional loans. In February, just days after the new government was formed, Greece informed its creditors that it will fulfil its promise to end austerity. Furthermore, Greece would rather give up the Euro currency than agreeing to further austerity. In advance of subsequent official talks, the German government responded by declaring that any future loan agreement hinges on Greeks willingness to implement austerity measures. The motorbikes were in position. Game on.
Neither Greece nor Germany wanted the crash: Greece leaving the Eurozone. The simple reason why Greece backed down in the end is that it had much more to lose. Sure, Germany has a strong interest in keeping Greece inside. Greece’s exit would maybe destroy confidence in Europe and jeopardize what little economic growth the EU can muster right now. Also, the political signal of a Eurozone break-up would strike a blow to Germany’s ambitions of further European integration. But from the perspective of domestic politics, allowing Greece to end austerity while continue to finance its debt would be electoral suicide for any German government. German public opinion overwhelmingly favors harsh fiscal discipline in Greece.
In contrast to that, the consequences of a Eurozone exit would have been disastrous for Greeks themselves. The new currency replacing the Euro would quickly lose its value, leading to citizens rushing to empty their banking accounts. Subsequently, the banking system would collapse and many other companies would need to default too. Politically, Syriza’s record of standing firm in face of foreign creditors would pale against the role of overseeing the largest economic downturn in years. Greece simply had much more to lose than Germany. In face of this, Greece wisely backed down.
But the crash may just be delayed. The new agreement under which Greece grudgingly accepted austerity measures extends the flow of money for only four months. The players are probably already working on their strategy.