Thursday, April 16, 2015

Miscalculation in a game of chicken

FT has a nice four minute discussion of the Greece's strategy in their prolonged game of chicken with the EU:


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  2. When first learning about the strategic games in economics, and certain strategies referred to as a simple “game of chicken,” I thought, surely there is more to it than a metaphorical children’s playground game. As it turns out, individuals, organizations, and even governments engage in this game quite frequently. In this case, Greece is in a virtual stare down with the World Central Bank and, to a certain degree, its fellow governments in the Eurozone.

    According to economics expert Martin Wolf, Greece’s bonds are rising while bonds belonging to other members of the Eurozone are falling. On the strength of this, Greece is giving the impression of confidence by vowing not to fulfill its obligations to its creditors. Greece is making the first move here. They are committing to not follow through on their obligations, which would call for painful reforms. By taking this stance, Greece is forcing its creditors to call its bluff or make accommodations to Greece. According to the Financial Times, The risk here is not that if Greece miscalculates, they may default and in essence need to develop a new currency, and leave the Eurozone – no, the bigger risk is that Greek citizens may not feel as confident in their leaders’ stance and withdraw funds from banks, and in essence cause the Greek economy (and Eurozone’s economy for that matter) to further implode. Ultimately, the two worst possible outcomes for Greece in this game of chicken are: stay in the Eurozone and give into its painful reforms or face the painful task of exiting the Eurozone and developing its own currency. By making the first move, it hopes that its creditors will make accommodations, while they stay in the Eurozone.


  3. As it relates economic freedom, Greece is ranked 40th out of 43 countries in the Europe region, and its overall score is below the world and regional averages Therefore, Greece should realize that they don’t have a good leverage to engage is the chicken game. Furthermore they have a sturdy economic leg to stand on should in a crisis that demands expensive recovery plan. Their current strategy, can only benefit them for a short period as the repercussions will only further hurt their economy, trading agreements and international relationships. Essentially the game of chicken is a sequential game that allows decision makers to look ahead and reason back and predicts what will happen in the near future in response to actions today (Froeb). That being said, the first mover, EU, has the advantage so Greece’s moves represent regression rather than progress. Apparently, although Greece’s economy had an uptick in 2014, after six years of recession had lopped more than a quarter off GDP, its economy is running empty according to “The Economist” publication. At the end of the day, Greece needs to seek innovative and strong economic drivers that can boost their GDP and global export abilities thus lessening their dependency on EU loans.

    Leo palmer ESC Managerial Econ.

    Froeb, MCcann, Ward, Shor. (2014) Managerial Economics. A problem Solving Approach.
    Ohio:South-Western Cengage Learning.
    The Economist: Political brinkmanship has exacted a heavy economic toll. Retrieved 4/20/15
    Heritage Foundation: Greece. Retrieved 4/20/15

  4. In the game of chicken, and any game of strategy for that matter, one must look for ways to change the game to their advantage. In addition, in the game of chicken in particular, one must commit to their position, and make the other party believe in it. The problem in this situation with Greece is that they have nothing to leverage an advantage with the EU. They have no money and are basically “biting the hands that feed them” now. As Martin Wolf mentions, taking the route of cutting into the pay of civil servants and piling up IOU’s would only cause Greek citizens to panic and withdraw their funds from the banks, making the situation even worse. They are taking a big chance here that could very well backfire on them and put their citizens and country in a worse position. The new prime minster needs to follow through with whatever reforms will put Greece back on their feet or creditors will no longer back them and make any additional concessions. The fact that the EU is not all that concerned with Greece leaving the euro should be an indication that they are taking a stance, committing to their position, and Greece should believe it.

    Froeb, L., McCann, B., Shor, M., & Ward, M. (2014). Managerial economics: A problem solving approach (3rd ed.). Australia: South-Western Cengage Learning.

  5. Nina, this is the great Prisoner’s dilema of the decade, where the European Union is conflicted between what appears to be a conflict of self interest for the member states and cooperation with Greece (Froeb, Pg. 174). As you mentioned, Greece is basically “biting the hands that feed them”. Even though the fundamentals of the Greek economy are poor and is widely known by all parties, the Greek parliament seems to have an invisible leverage with the EU. Greece is committed to keeping austerity meaures in place and has promised its populace things it cannot provide. It is less painful for them to negotiate from a distance than the alternative of rioting in the streets at home. So why doesn’t the EU just “lop off” the decaying country from its ranks swiftly? The equilibrium must be regarded in the EU’s decision how to proceed. The EU is a fragile union that contains a certain portion of like minded socialist and austerity focused countries. The EU cannot allow the precedent of Greek cecession to happen easily. Other countries that have gone through similar financial issues, such as Ireland a few years back, could use the current crisis as reason to do the same.
    Froeb, L., McCann, B., Shor, M., & Ward, M. (2014). Managerial economics: A problem solving approach (3rd ed.). Australia: South-Western Cengage Learning.

  6. Greece is potentially the first country within Europe to leave the Euro currency. In this game of chicken, Greece has acknowledged that their bonds are rising, whereas others within the Eurozone are falling. With this notion, Greece is implying they intend to default on their obligations, thus starting this game of chicken. However if Greece does follow through with their promises, it becomes a question of whether or not the country may face the turmoil that the U.S. experienced in the Great Depression. Greece leaders seem confident that they could just exit the Eurozone and develop their own currency. But what happens when their citizens run to the bank and withdraw their entire account balances? What if leaving the Eurozone is not in the best interests of the countries citizens?

    The question becomes, who is going to sway out of danger first? Will Greece fold and succumb to the European Union’s demands of paying back their debt? Or will Greece stand their ground, and risk running their own country into further turmoil? Paul Krugman of The New York Times has summed this situation quite nicely. “Germany to Greece: Nice banking system you got there. Be a shame if something were to happen to it. Greece to Germany: Oh, yeah? Well, we’d hate to see your nice, shiny European Union get all banged up”. It’s evident that Greece has their “eyes bigger than tummy” (as the saying goes), but the Germans are showing their true attributes of how hard headed they really can be. It seems as if they are truly OK with letting another country, a fellow member of the Eurozone, and go into turmoil and wash their hands clean and not be bothered anymore with the matter. One would think from seeing this situation arise, that the Eurozone and its members would want to do anything possible to protect their economy and its institutions.
    Krugman, P. (February 6, 2015). “A Game of Chicken”. Retrieved from: