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Greece is less likely to get a deal after the referendum, but will get a better deal if it does get one

- July 5, 2015

A woman withdraws money at an ATM outside in Athens on Sunday, when Greeks voted on whether to accept more austerity in exchange for international aid. (Marko Djurica/Reuters)
It now seems almost certain that Greece will vote no in the referendum in which Greek citizens were asked whether they wanted to accept a bailout that imposed harsh austerity terms. What does this mean?
Basic bargaining theory provides one useful way of thinking about the consequences of the Greek vote. Scholars often think about bargaining as a game involving two levels — the international level (where negotiators try to make a deal, with more or less leeway given domestic conditions) and the domestic level (where the legislature, or, in the final analysis, the public may be prepared to accept or reject a deal). The Nobel-winning game theorist Thomas Schelling argued that under these dynamics, states should appoint weak negotiators (who are constrained by domestic politics and have little leeway to bargain) rather than strong ones. Weak negotiators will be less able to make concessions and, hence, less likely to agree to an international deal that favors other countries.
More recent work in political science has used this idea to build a set of basic claims about how international bargaining works. The logic discussed in an earlier post at the Monkey Cage plausibly helps explain what has happened in Greece:

Robert Putnam’s classic article on two-level games provides a simple way to think about this. Imagine that there is a universe of possible agreements that the United States could find acceptable. Imagine that there is also a universe of possible agreements that the United States’s negotiating parties in the Pacific region could find acceptable. Putnam calls these universes of possible agreements ‘win sets.’ When countries’ win-sets intersect so that there are some possible agreements that are acceptable to all countries, then it is possible to do a deal. If there are no agreements that all countries can accept, then no deal is possible.

This helps us think about the consequences of today’s vote. What it does is to shrink the U.S. win-set. There are some possible agreements that the United States will not now sign up to, because they would cause too much domestic opposition. This has two consequences. First, it strengthens the U.S. bargaining position if a deal is possible, since it shows that politicians back home are simply unprepared to accept some deals, forcing other countries to move closer to U.S. preferences. Second, however, it makes a deal less likely. It may be that the United States win-set has shrunk so much that there are no deals that are likely to be acceptable to the United States that would also be acceptable to all other negotiating parties.

For “the U.S.,” substitute “Greece,” and for “today’s vote,” substitute “today’s referendum.” The referendum has both constrained and strengthened the Greek government in its negotiations with other European member states and institutions. It has decisively shown that the Greek public is unwilling to accept the deal that is on the table, shrinking the win-set, so that the deal which Greece would have had to accept if it had voted “yes” is no longer on the table. This means that the Greek government is now better able to push for concessions from the other negotiating parties — if and only if the win-set has not shrunk so much that Greece’s negotiating partners are unwilling to make any concessions.
This is where we seem to be at the moment. On the one hand, the Greek government is declaring victory and looking to go back to the negotiating table with a strengthened mandate. On the other, a senior figure in the German government is declaring that Greece has “destroyed the last bridges across which Europe and Greece could have moved toward a compromise.” The Financial Times argues that this result plays into the hands of German Finance Minister Wolfgang Schäuble, who would like to see Greece exiting the euro zone. One side of the debate is effectively saying that Greece has a stronger position because it has narrowed its win-set. The other side says that the win-set is so narrow that there isn’t any deal now that can be done.
This kind of analysis can help us understand negotiating in the short run. However, there are important long-term issues, too. Perhaps the most fundamental problem that Greece and its E.U. partners (especially Germany) face is that they profoundly distrust each other. Greece interprets its situation as one of unending austerity, where E.U. member states seem willing to relentlessly and cruelly impose pain on Greek citizens (e.g., the Greek health-care system has been completely devastated) with no prospect of relief. Germany sees itself as having poured hundreds of billions of taxpayers’ money into building a European economic system that has to be based on clear rules, and it views Greece as a country that has repeatedly demonstrated that it is unwilling to abide by those rules.
The repeated negotiations over Greek debt (which everyone knows is never going to be repaid) strengthens the perceptions of both sides. Greece looks for debt relief that it fears will never come, while Germany and E.U. institutions use their control over debt as a crude instrument to reshape the Greek economic system in ways that they hope will make it sustainable over the longer term. The win-sets that states bargain over in the short term are the product of these longer-term goals, fears and perceptions, which make it very hard for both sides to find a compromise and increase the likelihood of a final separation.
Read more about Greece and the euro at the Monkey Cage:
Stathis Kalyvas: Why the Greek referendum is the referendum from hell
Amber Curtis, Joseph Jupille and David Leblang: Greece isn’t the first country to have a debt referendum. Does Iceland provide useful lessons?
Nikitas Konstantinidis: Has Greece always wanted Grexit?
Joshua Tucker: Why the Greek referendum is like a badly designed game of three dimensional chess
Melissa Schwartzberg: What ancient Athens can and can’t teach us about the Greek referendum