A Game of Ultimatum: Greece and the EU

As it stands today, Greece has received 86 billion euros in total bailout from the IMF, 50 billion from trust funds, 7.16 billion from bridging loans and 35 billion from the EU.

http://www.bbc.com/news/world-europe-36149147

Last summer following the referendum, Greek, IMF and EU representatives agreed on a third rescue plan which dictated that the IMF would erase fifteen per cent of Greece’s debts while Greece would implement austerity measures to save 4 billion euros annually from it’s welfare payment. Well, almost a year has passed over the agreement and neither party is holding their end of the bargain. Currently, the left wing Syriza government demands an end to austerity measures and demands the bailout without any imminent cutbacks. And in response the European and IMF creditors are awaiting fiscal changes by the government to lend any more money. This is a perfect example of the ultimatum game we discussed in class.

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At the essence of the ultimatum game lies a deal. One player offers the other one a part of his money, and if the offered player accepts the transaction is complete. If the player rejects, they both lose the money and the utility that comes with it. Given the human nature, players usually make an unfair offer that maximizes their own utility, while the recipient of the offer declines as a means of protesting the unfairness. As a result, they both get nothing when they could have both gotten something.

Although the Greek debt crisis is more complicated than this simple example, the essence of the problem is the same. Europe is not accepting Greece’s offer out of pride and Greece is not accepting Europe’s offer out of pride. If the offers were accepted Europe would get some of it’s money back and the Greek economy could have gotten a chance to get back on track. But because the offers are declined, Europe has no hope of getting any of it’s money back and the Greek economy promises as much hope as a Deez Nuts presidency.

Both players should learn to control their egos and stop giving one another ultimatum if they want to achieve the most utilitarian solution. But unfortunately the ultimatum game never works as hypothesised.

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