Sisyphus,Tantalus and a prisoner's dilemma

Should Greece leave the Euro? That was the title of the Oxford debate at the Prague Summit in which I had the pleasure of participating yesterday.

But this is the wrong question. Unless there is a considerable shift in Eurozone politics, Greece WILL leave the Euro - eventually. The question is when, and how.

To see this, we need to look at the motivations of all the players involved in the negotiations. The Greek negotiations resemble a "prisoner's dilemma", in which the best outcome for everyone is achieved through collaboration but the participants don't trust each other enough to collaborate. Games are fundamentally psychological, and their outcome is often determined by unspoken or even unconscious drivers. In this case, despite the collaborative rhetoric of the Memorandum of Understanding, distrust and self-interest are the real drivers of the negotiations. In such a situation, true collaboration is impossible and the eventual outcome must be negative for all players.

So, let's look at each player in turn.

Firstly, Greece. Greece's attempt to play the cliff edge game ("go on then, push me") backfired badly last year when the European Council called its bluff. The essence of the cliff edge game is that the player at the edge of the cliff must be prepared to be pushed over the edge, because otherwise the psychological barrier for the other players ("if you push them over you are a murderer") is not credible. But when the European Council threatened to push Greece over the edge ("agree to our terms or leave the Euro"), Greece backed off. In a long and intensely painful night of negotiations, its prime minister, Alexis Tsipras, effectively accepted the European Council's terms.

Since then, Greece has agreed to everything the Eurozone institutions have thrown at it. Everything, however unreasonable. Having failed at the cliff edge game, Greece is now trying to collaborate, apparently in the hope that this will eventually lead to the prized debt relief, along with easing of monetary conditions and the return of investment. It is quite a gamble, but since it has rejected leaving the Euro, Greece has no alternative. This is a very weak negotiating position.

Secondly, the European creditors, led by Germany. Despite its name, the Eurogroup essentially represents the European creditors, since its members are the finance ministers of Eurozone member states.

The creditors want their money back. All of it. Their sole objective in this game is to achieve full repayment. They have no interest in restoring Greece's economy except in so far as it would enable them to extract more of their money. And since the failure of the cliff edge game, psychologically they have the upper hand. They know Greece will not take the risk of being pushed out of the Euro, and so they can make whatever demands they wish in the certain knowledge that Greece will comply. Unless some Exocet hits the negotiations, they can't lose.

But of course there is the European Commission (EC). Isn't that interested in an outcome that benefits everyone, including Greece?

Not really. The EC is interested in furthering the goal of EU integration. Since a state leaving the Euro would be (at least) a step backwards, and there is a not insignificant risk that other states might follow, furthering EU integration means doing whatever it takes to keep Greece in the Euro. If keeping creditors happy is the only way of keeping Greece in the Euro, then the EC will side with the creditors. Of course, since blatantly siding with creditors makes it look biased, which is a bad political message for a supposedly neutral institution, it may attempt to push the creditors towards a gentler approach. But if the creditors resist it will give in, thus making itself look weak.

So the EC also has a very weak negotiating position. In fact the weakness of the EC is telling. One of the fundamental problems with the Euro is the weakness of its institutions relative to the governments of nation states.

Hang on though - what about the ECB? Surely that is a powerful Eurozone institution?

No. The ECB is by far the weakest of the major central banks. Despite its supposed independence and protection from political influence, it is in reality fenced in by treaties and subject to both political and legal challenge. It has been forced into a political role that it should not have. In this game, the ECB is trying (and mostly failing) to stay out of the limelight and preserve the appearance of political neutrality. And beneath this, its primary objective is to keep the Euro together. Since Greece leaving the Euro carries unquantifiable risks to financial stability and the integrity of the Eurozone, the ECB does not wish this to happen. Therefore its natural bias is towards the creditors. It will do whatever it takes to force Greece to comply with creditor demands.

It should be apparent by now that the Eurozone dimension of this game has reached an unhealthy equilibrium. Greece has been cast in the role of Sisyphus, forever pushing a rock up the hill of "structural reforms" only to see it roll back again as it fails to meet fiscal targets or creditors impose more demands. Or perhaps in the role of Tantalus, forever reaching for the water of debt relief only for it to be drawn out of its reach. These perpetual-motion myths are descriptive of the psychological traps created by more powerful players to perpetuate the game.

This is not simply a problem for Greece: any debtor country is potentially in the same situation. Such toxic game-playing does not bode well for the long-term future of the Eurozone. Sisyphus and Tantalus were punished in perpetuity for offending the gods. But the Eurozone is a human construction: the political pressures created by such a power imbalance between debtors and creditors will eventually tear it apart. If the Euro is to survive in the longer term, this imbalance must be corrected.

The Eurozone desperately needs to strengthen its institutions relative to nation states, develop procedures for managing sovereign insolvency, and impose loss sharing on official as well as private sector creditors. But since these reforms would not serve the interests of creditor countries, it seems unlikely that they will ever happen. Eventually, therefore, the Euro is likely to fail.

Of course, there is one more player in this toxic game. To its credit, the IMF has been trying to force a resolution. Everyone knows that Greece's debt is unsustainable, but it suits the European players to pretend that if Greece does enough "reforms", it can be made sustainable. It is this pretence that locks Greece into its Sisyphean role, and keeps debt relief tantalisingly out of reach. But it is a bluff, and the IMF has called it.

However, the IMF itself is a creditor - an expensive one. And like the rest of the creditors it wants its money back. Unsurprisingly, therefore, the IMF's demand that other creditors accept losses while it accepted none did not go down too well. The European creditors dismissed the IMF's assessment that the demands placed on Greece were impossible, and its forecast that eventually Greece would default, They pointed out that the IMF's record of accuracy in forecasting is dismal, and repeated their assertion that Greek debt could be made sustainable through structural reforms. And to stick the knife in further, they offered to refinance IMF loans to Greece at lower interest rates than those charged by the IMF. Ouch.

The truth is that there is no genuinely independent arbiter in this negotiation, and there is a massive institutional bias in favour of creditors. True, the latest Memorandum of Understanding (MoU) includes some sensible reforms: but the overriding aim throughout is to construct the sustained 3.5% primary surplus that would be necessary to make Greece's debt sustainable without debt relief. The MoU imposes a fiscal tightening of 3% of GDP on an economy that has already contracted by 27% and is now back in recession. To counter the IMF's argument that 3.5% was neither desirable nor sustainable, the MoU provides for an additional contingent tightening of 2% through unspecified spending cuts and tax increases should Greece fail to meet its primary surplus target. Claims that Greece has "done" its internal devaluation are clearly wrong. Greek prices and incomes have a lot further to fall.

While this remains a wholly intra-Eurozone matter, with the IMF involved only because the creditors don't trust the EC to promote their interests (and itself significantly weakened by partisan interests), there can be no collaborative resolution to the game. But the longer it continues, the worse the eventual outcome will be, not only for Greece but for the other players too. A disorderly breakup of the Euro, possibly involving not only Greece but other countries too, would be terrible for everyone. But unless there is a major shift in the political stance, that is what will eventually happen.

European creditors have no incentive to offer debt relief unless they are faced with the credible threat of losing much more of their money. And they are hardly going to allow Greek default on official sector debts while remaining within the Euro. So as long as there is no prospect of Greece leaving the Euro, there will be no debt relief. Therefore, as Sisyphus and Tantalus cannot exist forever in our human world, eventually Greece WILL default and leave the Euro, whether it wishes to or not.

Related reading

The Eurogroup statement on Greece, annotated
The Greek bailout: repeating the mistakes of the past - Forbes
The Great EU-IMF Standoff - Forbes


  1. Your article assumes that Greece has attempted structural reforms <>

    Previous governments did little of that, and the current offers none.

    1. Ioannis, read the OECD Going for Growth 2015. It has a nice chart about which country did more "structural reforms" (as they call them). You will be surprised to find Greece at the top.
      The "Structural reforms" the creditors want are those meant to reinforce the internal devaluation process, hence create more deflation and downward wage adjustment, because that's how a fix exchange rate system like the Eurozone is supposed to work. Structural reforms have nothing to do with reviving the economy of Greece, they are simply meant to balance the current account. In Greece as everywhere else in the EZ.

    2. This comment has been removed by the author.

    3. " Greek prices and incomes have a lot further to fall. "

      That policy doesn't seem to tally with the principle of the European Union as a political Union, and also a social and political union of people, for example the UK is a political union and Unemployment benefit is the same in Scotland as London and a box of cornflakes costs the same in Scotland and London.

      You would not expect to see a British Prime minister trying to lower wages and prices in so called "depressed" regions of the UK, in fact the opposite , they are usually trying to raise them.

    4. to some extent the policy of an "internal devaluation" within a "union" is self contradictory.

      By the way, Internal devaluation is a bit of a misnomer as unlike a currency devaluation , savers, ie those with money, see the purchasing power of that money increase , unlike a currency devaluation.

    5. The EZ works through internal adjustment (prices and wages) rather than external adjustment (currency) precisely because there is no political union. The founding fathers of the Euro were very clear about this, they never tried to hide it. Read the Delors Report from 1989. It clearly says that after losing the flexibility of the E/R, the economies of the MS will have to become internally flexible to respond to demand shocks.

      The difference in a political union, like the UK, is that the settlement of internal trade imbalances is continuously done via official transfers among regions through the central government. People may not even notice them. But they are there, unconditional and undisputed.
      Yet, there may be calls for some forms of "internal" devaluation even in the case of a political union. For example back in the days of the Lira Italy had the so-called "wage cages" to keep depressed regions "wage" competitive.

      Anyway, a currency devaluation only decreases the purchasing power of the citizens with regards to foreign products whose currency has symmetrically appreciated. It does not necessarily reduce the purchasing power domestically, unless you take the extreme and historically unfounded assumption of a one-to-one relation between inflation and devaluation.
      Internal devaluation is much more vicious because it takes away income from the people while it leaves nominal debt burdens untouched. In this sense it creates a lot more trouble for the economy as a whole than a currency devaluation.

    6. This comment has been removed by the author.

    7. the "wages cages" that interesting, did they work.

      Internal Devaluation - The purchasing power I am noting is that of people in the devaluation area who are holding money before the devaluation starts. That money has more purchasing power within the devaluation area after the so called internal devaluation, and so it is not politically neutral, and that is in addition to the debt burdens you identify.

    8. Well...the wage cages were meant to keep the south of Italy competitive because the Gov feared that salaries there would have increased above the local productivity otherwise as they would follow the dynamic of the more productive north. The main tenet was purely neoclassical and it reflects the idea that unemployment is caused by excessive real wages. There's a whole lot of evidence against this and there's actually some support for the opposite argument that a "wage push" is good for productivity as it keeps pressure on companies to keep investing and become more capital intensive. I don't have a definitive answer. I only note that despite 3 decades of "wage cages", the South of Italy remained the South of Italy - even before entering the EZ. Now the relative situation is far worse of course.

    9. And it strikes me that if rich people are characterized as those with money and poor people as those without it and who work for it , then "internal devalution" , lower wages and prices, means within that country the rich get comparatively richer and the poor get poorer. Thats a different political dynamic to an exchange rate adjustment of currencies between trading countries.

    10. When the PSI haircut took place, debt relief had been promised with the conclusion, in 2015, of the then-new program (the second MoU). Unfortunately the last (fifth) evaluation that would have concluded the program never happened due both to lack of time (the failure to elect a new President of the Republic leads to elections) and an imminent new government that openly intended to abolish the program.

      One has to wonder why Syriza did not hold back for some months in order to let the program conclude successfully, and only then to claim the "prize" of debt relief. If not else they would have been in a very strong negotiating position.

      The issue of debt relief has always been a matter of political theatrics. It depended on the successful implementation of a stabilization program (fiscal consolidation and some structural reforms) which would allow EZ leaders to pass debt relief through their parliaments. This scheme failed twice because of intransigence on the part of the Opposition. First in 2011 (when the PM resigned, the opposition changed its stance and a second bail-out propped up the first), and again in 2015 as mentioned above. We are now in the third attempt, scheduled to conclude in 2018.

      Alas, the more the attempts on a painful but relatively simple program, the lengthier the adjustment, the deeper the recession, and yes it's true, the less it looks reasonable.

  2. Very interesting. I wonder what might happen next if Greece and others leave. Would this actually lead to EU institutional change? The problem here seems to be structures that undermine approaches which could reflect shared European values and find a better collective outcome. What reforms could promote collaboration, do you think?

  3. Wonder where the Goldman Sachs is now? They got Greece into the mess, maybe they could lend a hand to get Greece out of the mess?


  4. The creditor countries want their money back , they can help that along buy buying goods and services from Greece.

    1. But isn't tourism -- the only functional sector in the Greek economy -- already running at full capacity though? Greece is an economically non-viable country -- its mountainous terrain impedes capital formation (and is also the reason why ancient Greece was made up of independent city-states), while its multitude of Aegean islands demand a large military budget.

      Greece's dependence on imported food and fuels means that Grexit would be utterly catastrophic -- didn't Syriza MEP Kostas Chrysogonos say that a Greece expelled from the Euro would be more impoverished than Zimbabwe?

    2. I don't share your a negative view of Greece. It is not an incipient failed state only still functioning by virtue of its undeserved EU membership. It is poor, yes, but that is not the same as non-viable. It was an economically viable state before it joined the Euro and it could be so again if it left, though admittedly the damage done by the Euro crisis would take a very long time to repair.

    3. IIRC Greece has gone bankrupt no less than 6 times since it became independent of the Ottoman Empire, and since joining the EU had received aid equivalent to twice the US spending on the post-WWII Marshall Plan.

      Also from Stratfor's "The Geopolitics of Greece: A Sea At Its Heart":

      With the collapse of the Soviet threat at the end of the Cold War and the subsequent end of the Balkan wars with the 1999 NATO bombing of Serbia, the political geography of the region changed once again. This time the change was unfavorable for Athens. With the West largely uninterested in the affairs of the region, Greece lost its status as a strategic ally. And along with that status, Athens lost the political and economic support that allowed it to overcome its capital deficiencies.

      This was evident to everyone but the Greeks. Countries rarely accept their geopolitical irrelevance lightly. Athens absolutely refused to. Instead it did everything it could to retain its membership in the first-world club, borrowing enormous sums of money to spend on the most sophisticated military equipment available and producing erroneous financial records to get into the eurozone. This is often lost amid the ongoing debt crisis, which is commonly described — mainly by the Western European press — as a result of Greek laziness, profligate spending habits and irresponsibility. But faced with a geography that engenders a capital- poor environment and an existential threat from Turkey that challenges its Aegean core, Greece had no alternative but to indebt itself after its Western patrons lost interest, and now even that option is in doubt. (Trying to keep up with its fellow EU states in terms of quality of life obviously played a role in Greece's financial overextension, but this can also be placed in the context of keeping up with a modernizing Turkey next door.)

      Today, Greece cannot even dream of achieving its fifth geopolitical imperative, dominating the eastern Mediterranean. Even its fourth imperative, the consolidation of inland Greece, is in question, as illustrated by Greece's inability to collect taxes. Nearly 25 percent of the Greek economy is in the so-called "shadow" sector, by far the highest rate among the world's developed countries.

  5. Below is how the Encyclopedia Britannica described Greece and Greeks back in 1911, i. e. 104 years ago. Just for those who have great hopes that Greece and Greeks will ever change. Frankly, perhaps it is good that they don't change!

  6. The economies of western democracies are - it would appear - performing poorly compared to past performance. Austerity policies suggest that the design of the "engine" is at fault and must therefore have parts switched off if not dismantled. Credit acts like the oil in an machine. The current credit system is full of sludge that is adding to the damage already done. An oil change is required ... urgently. A better performing (lubricating) credit system can only arise after the sludge is cleared away - by writing off bad debts or providing some degree of debt relief.

    Failure to do so only harms the engine more - on top of the unnecessary damage caused by Austerity economics. The longer it takes for this reality to be realised the greater is the lost opportunities for the precariat and young of all Western democracies. Perhaps we need an economic equivalent of war crimes that can be judged by the International Criminal Court in The Hague?

  7. You already mention that there are discordances between the Eurogroup and the IMF (whose bluff was called).

    Is it conceivable that rifts might occur within the EU creditors themselves -- perhaps because of another debt crisis elsewhere -- which would lead some creditors to attempt to shaft the ones with less political and financial weight, or those with a much weaker hand because of a higher, risky exposure besides Greece?

    My point being: to what extent is the Eurogroup actually a monolith, and what could bring its members to diverge on the Greek case -- which would as a consequence potentially break the stalemate?


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