by Bill O’Grady
After the Syriza party won 149 of the 300 seats in the Jan. 24th Greek elections, European markets have been roiled by worries over another crisis developing. The party has engaged in some provocative behaviors; its leader and Greece’s new prime minister, Alexis Tsipras, decided that his first official visit would be to a monument that honored Greek citizens who suffered a mass execution at the hands of the Nazis. That symbolism wasn’t lost on anyone. Tsipras, and his new finance minister, Yanis Varoufakis, have indicated that they have no interest in fulfilling the bailout requirements of the European Central Bank (ECB), the European Union (EU) and the International Monetary Fund (IMF), the “troika” that has managed the bailout for Greece.
Austerity has severely harmed Greece’s economy, cutting its GDP by 26% from the pre-crisis peak. The unemployment rate is 26% and youth unemployment is over 50%. The election of Syriza is a reaction against the economic depression that Greece has endured as Syriza ran on an anti-austerity platform.
Of course, one nation’s austerity is another nation’s reform. The German position, which has become the establishment position in Europe, is that excessive Greek fiscal spending and borrowing is responsible for the problems in Greece. This excessive spending and borrowing is seen as leading to rampant corruption, gold-plated salaries and benefits for government employees and economic inefficiency. Only reforms, or austerity, can bring Greece any hope of recovery.
The Greek and anti-establishment position is that Germany is the cause of not just Greece’s economic collapse, but the economic crisis in the Eurozone periphery.
In this report, we are going to use game theory to describe the situation between Greece and the EU/Germany/ECB. This method shows how misunderstandings can develop and how catastrophic mistakes are made. Using this structure, we will outline the positions and perceptions of both sides and describe how this situation could lead to another crisis. As always, we will finish with market ramifications.