Greece is Playing to Lose

LONDON – The future of Europe now depends on something apparently impossible: Greece and Germany must strike a deal. What makes such a deal seem impossible is not the principled opposition of the two governments – Greece has demanded a debt reduction, while Germany has insisted that not a euro of debt can be written off – but something more fundamental: while Greece is obviously the weaker party in this conflict, it has far more at stake.

Game theory suggests that some of the most unpredictable conflicts are between a weak, but determined, combatant and a strong opponent with much less commitment. In these scenarios, the most stable outcome tends to be a draw in which both sides are partly satisfied.

In the Greek-German confrontation, it is easy, at least in theory, to design such a positive-sum game. All we must do is ignore political rhetoric and focus on the economic outcomes that the protagonists really want.

Germany is determined to resist any debt write-offs. For German voters, this objective matters much more than the details of Greek structural reforms. Greece, for its part, is determined to gain relief from the punitive and counter-productive austerity imposed on it, at Germany’s insistence, by the “troika” (the European Commission, the European Central Bank, and the International Monetary Fund). For Greek voters, this objective matters much more than detailed calculations about the net present value of national debt in 30 years.