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.