Streetwise Professor

July 5, 2015

1. Referendum. 2. ???? 3. Prosperity!

Filed under: Economics,Financial Crisis II,Politics — The Professor @ 8:38 pm

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:

  1. The Greek government is crazy and self-destructive.
  2. 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.


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  1. “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 […] they much prefer to die on their feet than live on their knees”

    “Dying like a hero” is deeply rooted in the Greek psyche, much more than rational decision-making I’m afraid.

    Being Greek, it’s just obvious. It’s taught in history classes throughout school: the valiant hero who faces impossible odds and either gets a glorious victory or dies on his sword, in the middle of the battlefield. The eternal glory of Leonidas of Sparta who dies in Thermopylae is emphasised over the careful deliberation of Themistocles of Athens who won the naval battle of Salamis.

    Comment by Jim Andrakakis — July 6, 2015 @ 2:44 am

  2. The problem seems to me to be that both sides are threatening the other with Grexit, and both are being successfully bluffed. The Germans threaten the Greeks with Grexit knowing that the Greeks are desperate to stay in the Eurozone. The Greeks threaten the Germans with Grexit knowing this would deal a mortal blow to “ever closer union”. Each sides knows the other is bluffing, so the result is a Mexican standoff. And inevitably, management by procrastination. Actual proactive decision is shirked until only one course of action remains open, which becomes the course adopted. Everyone thereby avoids having to make a choice or judge between options.

    The likely outcome for Greece seems to me to be managed default inside the Eurozone. They can’t pay these debts, writing them off won’t bankrupt anybody and Grexit will solve nothing anyway. It’s just a question of how long they are allowed to keep voting for other people’s money. A nasty little dose of near-Grexit might be called for, to warn the other -exit candidates that it’s a painful road.

    Comment by Green as Grass — July 6, 2015 @ 5:45 am

  3. a Trojan horse?

    Comment by b.terfloth — July 6, 2015 @ 7:03 am

  4. Incidentally, classic Greece related stuff here:

    Comment by Green as Grass — July 6, 2015 @ 7:28 am

  5. @Green-I think the point of the referendum was to try to convince the Eurol33t that the Greeks were truly crazy and not bluffing. Trying to make their crazytalk credible. We’ll see. The German backbenchers are not buying it. Hard to say whether Merkel and Schaebel and the Bundesbank are. They are being rather circumspect.

    The biggest problem is not what the Greeks owe the Europeans. It’s what they “owe themselves,” i.e., the Greek debt held by Greek banks. Defaulting on that will totally f*ck Greek depositors.

    I consider this beyond ironic because one of Krugman’s classic “no worries” responses to criticism of government debt/deficit spending is “we owe it to ourselves.”

    The ProfessorComment by The Professor — July 6, 2015 @ 8:30 am

  6. The things will soon or late arrive at a point when a Greek military coup becomes everything but inevitable. Then let those military clean some commies from the face of their home land 🙂

    Comment by Europeo — July 8, 2015 @ 11:28 pm

  7. […] 1. Referendum. 2. ???? 3. Prosperity! […]

    Pingback by Five Things Everyone Will Be Talking About Today - The Money Street — November 4, 2015 @ 7:08 am

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