The Greek Debt Crisis

The Greek Debt Crisis is an event that has had an impact on the European and Global Economy throughout the past decade. I have only really paid attention to this issue in the past year after taking courses in Global Economics and studying in Europe, where the Greek Financial Crisis is an ongoing issue. Most of you have probably heard something about Greece this past summer as a lot of decisions were made about whether the European Union would continue to bailout Greece and loan them money to make up for the massive debt it has accumulate over the past 15 to 20 years. For those of you who don’t know much about this issue at all, here is a brief overview of the situation. Basically, it all began when the European Union created a Eurozone that was put into place in 2001. The Eurozone is a monetary union that consists of 19 countries in the European Union that all agreed to adopt a common currency, the Euro. Greece is one of these countries. However, in order to become eligible for the Eurozone, a country must meet specific financial requirements. Apparently, Greece already had a fair amount of debt before the creation of the Eurozone, but the Greeks had lied about their government budget deficit at the time in order to be accepted into the Eurozone. This wasn’t a problem for the European economy at first, but the global market crash of 2007-08 exposed all of Greece’s financial problems due to a slowing economy that affected the tourism in Greece which Greece’s economy was very reliant on. Many different bailout packages and failure to meet repayment dates to pay off its debts has led to a huge debt crisis that is having an impact on the entire Eurozone. 

  

 Prisoner's Dilemma in the Greek Debt Crisis

So how does this relate to game theory? There are a number of ways which game theory can be applied to the Greek Debt Crisis. Recently, many economists have been trying to relate the Prisoner’s Dilemma to the current situation in Greece. The players in this game are Greece and the European Union. Both Greece and EU must make decisions about the financial crisis in order to determine what will happen to the future of the European economy. The outcome is dependent on both Greece’s and the EU’s strategies. Greece developed a bailout plan that would incorporate new taxes on the wealthy in order to reduce its spending cuts while also trying to pay off its debts. Greece would still need the economic assistance and approval from the EU in order for this plan to be put into place. 

The strategies for Greece are to either:

1)      Accept its plan and accept the continued assistance of the EU

2)      Be forced to leave the Eurozone, because Greece defaults

The strategies for the EU are:

1)      Accept Greece’s bailout plan and continue to bailout Greece

2)      Reject Greece’s bailout plan and force Greece out of the Eurozone

The decision tree below explains the three possible outcomes for the above strategies.

1) As you can see, the most beneficial option for Greece is to offer its bailout plan and ask for assistance from the EU. The EU would then have to accept this plan in order for Greece to receive maximum payoffs. The EU's payoffs would not be as high as for Greece in this situation, because the EU would continue to bear some of the Greek debt burden. The payoff for this outcome is (1, 3/4).

2) The most beneficial outcome for the EU would be to reject Greece's bailout plan with the assumption that Greece would solve its debt problems internally by leaving the Eurozone, but uncertainty and outside factors cannot ensure this outcome for the EU. The payoff for this outcome is (0, 1).

3) If the EU rejects Greece's plan and Greece leaves the Eurozone, this could be detrimental to the European economy by causing the Eurozone to collapse. This is the worst possible outcome for both Greece and Europe. The payoff for this outcome is (0, 0)

Because the existence of outside factors have a large impact on whether a Grexit would impact the entire European economy, there is no way to avoid a Eurozone collapse if Greece were to leave the Eurozone. This is why the EU would choose to accept Greece's plan every time in order to avoid the worst possible outcome for both the EU and Greece. The Nash Equilibrium in this case would be if Greece offers its plan and the EU accepts it with the payoff of (1, 3/4). 

This example differs from the Prisoner's dilemma in a few ways. First, this is a cooperative game as opposed to the a non-cooperative game in the Prisoner's Dilemma. Greece and EU are expected to cooperate and discuss their strategies and possible outcomes. Also, the Prisoner's Dilemma is a symmetric game which is a game where one player's payoffs can be expressed as a transpose of the other player's payoffs. This is not the case for the Greek Debt Crisis, so we call this game an asymmetric game. 

Coming soon...

There are many more ways to apply game theory to this complicated financial crisis that is having a large impact on the world today. Lucky for all of you, you will be hearing about some more applications of game theory to the Greek Debt Crisis in just a few weeks. I am writing my final paper on this topic, so hopefully you can all learn a little bit more about this application. Let me know if you have any questions or concerns so far, and I'll try my best to answer them!

Sources:

http://www.bbc.com/news/magazine-33254857

https://www.stratfor.com/analysis/john-nashs-legacy-mathematic-theory-strategic-implications

http://www.nytimes.com/2015/06/05/business/in-greek-debt-puzzle-the-game-theorists-have-it.html?_r=0

http://www.nytimes.com/interactive/2015/business/international/greece-debt-crisis-euro.html

http://www.investopedia.com/articles/investing/071415/game-theory-and-greece-bank-crisis.asp