The Greeks voted a resounding No! in today’s referendum, thereby rejecting a deal that had been taken off the table.
Figuring out the Syrzia plan is something of a puzzle. It reminds me of the old South Park Underwear Gnomes bit, hence the title of this post. One can see the desired objective (a more prosperous future liberated from a crushing debt burden) and one can see the initial move (referendum), but the middle steps are a complete mystery.
At first blush-and second, and third-it appears that what the Greek government is doing is crazy and self-destructive. This suggests two alternatives:
- The Greek government is crazy and self-destructive.
- The Greek government is pretending to be crazy and self-destructive for tactical reasons.
I say crazy because the Greeks are claiming that they are willing to accept economic Armageddon instead of making far less costly concessions to the Europeans. But if there is even a small probability that people are of this type (i.e., they much prefer to die on their feet than live on their knees), pretending to be this way and getting a reputation for being this way can be an effective way of extracting concessions from an adversary. It is often rational to defer to craziness.
This gambit works best if a repeat player is matched against a series of one-shot players: the repeat player benefits from creating a reputation, the one-shot players don’t. That’s not the case here, though. The solvent Euros (e.g., the Germans and Dutch) also have an incentive to build a reputation for being tough in negotiations, because they are repeat players. They reason that if they concede to the Greeks, the Southern Euros (Spain, Portugal, Italy in particular) will try to extract concessions as well. So they have an incentive to play tough with the Greeks even though if this was a one-off situation it would make sense to make more concessions.
Which all means that I have no idea how this will play out.
Furthermore, this is primarily a game about redistribution rather than creating wealth. This maximizes the potential for conflict, and increases the incentives for rent seeking and rent dissipation. The exact outcome is difficult to predict, but the basic contours of this outcome are pretty predictable: everybody ends up poorer and miserable.
It is hard to have sympathy for either side. The Greeks have a corrupt and bloated state, and its people have a socialist, welfare/entitlement state mindset, and they borrowed lavishly to achieve a lifestyle that their productivity could not support. The Europeans gladly lent more to a corrupt and bloated state, and a people with a socialist-tinged, welfare/entitlement state mindset than they could afford to repay. They jointly made their bed, and now they have to lie in it. So be it.
The least likely outcome is that Greece makes fundamental changes and conjures up a growth miracle, like postwar Japan or Germany, or Taiwan or Korea. The socialist/statist/welfarist impulses are too deeply rooted, and its interlocutors-the Euros-are also too statist to compel or persuade the Greeks to change their ways.
A couple of years ago I said that Europe had a choice between amputation and gangrene in dealing with Greece. They chose not to amputate. They now have to live with the consequences.