Sunday, February 28, 2016

A Travel Agency Named Greece?

"I no longer understand the policies of the Greeks. It is unacceptable that Greece acts like a travel agency and simply sends all refugees onwards to the North!" - Werner Faymann, Federal Chancellor of the Federal Republic of Austria, a member of the EU. The comments are about a fellow member of the EU.

Is Werner Faymann an enemy of Greece?

Flashback to June 2015. The Greek debt crisis had reached boiling stage. In the Eurogroup, the ratio was 17 against 1. Greece had become a pariah. And in the midst of all of that, Faymann decided to visit Greece to express solidarity to Alexis Tsipras and the Greek people. Not all his European colleagues thought that this was a good idea. In fact, several of them criticized Faymann for sending out the wrong signal. And yet, Faymann warned that Greece must not be humiliated; that further linear budget cuts made no sense and would only hurt the poor; and that an honest compromise was necessary. From then on, Alexis Tsipras used the phrase "my friend Werner".

Flashback to October 2015. The refugee crisis had become a true "Völkerwanderung". Faymann decided to visit "his friend Alexis" to lend support. Together, they visited the island of Lesbos. "When masses of people are heading North towards the border, they cannot be stopped very easily", Faymann was quoted as saying after visiting a Hotspot under construction.

Around the same time, Faymann started a feud with his Hungarian counterpart Victor Orban. Orban's erecting a border fence was a slap in the face of humanitarian values, Faymann argued. His bussing of refugees from the Croatian to the Austrian border reminded Faymann of the transportation methods of the Nazis.

Four months after that, Austria hosted a Balkan Conference in Vienna. Having just set upper limits for refugees, Austria negotiated an agreement where the flow of refugees would be more of less stopped; at least reduced to very low levels. All countries would help to fortify the Greek/FYROM border so that refugees could no longer cross in an uncontrolled way. Even though it was not the intent of the Balkan Conference, the result clearly is that Greece will turn into a "warehouse for all refugees", to use Alexis Tsipras' words.

Greece was not invited to the Balkan Conference, which certainly is an injury to its interests. When asked why Greece had not been invited, the Austrian Foreign Minister Alexander Kurz said that "Greece has not demonstrated any interest to be constructive in the refugee crisis. There have been innumerable meetings and conferences with Greece. Except: Greece was never prepared to even discuss a reduction of the refugee flow. Greece only wanted to discuss how to send refugees as quickly as possible on to the North". That undiplomatic frankness added insult to injury.

One is inclined to think that Austria had a change of government. The previous government had clear humanitarian priorities and defended European values. The new government, installed in the beginning of 2016, made Victor Orban of Hungary look pale. Not only did it announce an upper limit for refugees but, literally overnight, it recreated the spectre of the Habsburg Empire where sly Vienna often was in defiance of arrogant Berlin. Diplomatic niceties were of no importance to the new government. Instead, the Interior Minister opened the Balkan Conference with the words: "Our intent is to provoke. Our intent is to initiate a domino effect. We want to cause a chain reaction of reasonableness".

Except, there was no new government in the beginning of 2016. It was the same government and the same ministers as the year before.

My intent is not to justify the conduct of Austria's government. Instead, my intent is to explain why the government has undergone such a radical change of conduct in the hope that this will be of service to my Greek readers.

I think it is important to differentiate between the flow and the stock of refugees. The flow are the hundreds of thousands of refugees who have crossed European borders in recent years. The stock are those refugees which decide to stay within the borders of one country. The flow incurs one-time costs (temporary infrastructure, transportation, logistics, etc.). The stock incurs permanent costs for generations to come.

Austria, too, has bussed hundreds of thousands of refugees from its Southern borders to the border with Germany and it has earned much anger from Germany for doing that. However, Austria has also built up a stock of 95.000 refugees in the year 2015 alone. Under current laws, these refugees will be entitled to bring along their families and the general expectation is that this will trigger a multiple of 3-4. In other words, 2015's stock of 95.000 will automatically become a stock of 300-400.000 within a few years.

The stock remains in the country and it triggers enormous ongoing costs: building homes; expanding social services like schooling, training, health care; and integration measures in general. Put differently, there will be 300-400.000 new residents who are entitled to essentially the same social benefits as Austrians, and the social benefits in Austria are generous: roughly 850 EUR per month for the first adult, half of that for the second adult and about 200 EUR per child. A family of four will quickly collect 1.500-2.000 EUR per month. A politician recently published a calculation where, in Vienna, a family of four can make up to 36.000 per year if all special benefits are taken advantage of.

Mind you, these are not income figures for working. They are income figures if not working. And there are many Austrians who do not achieve these income figures despite working which makes for fertile ground for anti-refugee sentiment.

Given Austria's demographic challenge over the next decades, refugees could become a blessing and the answer to that challenge. Provided, of course, that refugees finds jobs, earn income for work and make contributions to the social systems. Regrettably, the statistics are not very promising. In Switzerland, for example, statistics show that up to 80% of refugees are still recipients of social benefits after 5 years in the country. Time will tell how Austria will fare in that regard. Early analyses suggest that, at the most, 25-30% of the arrivals have skills which are in demand. At the same time, Austria presently has the highest unemployment since the end of WW2.

For quite a few months, Chancellor Fayman was 100% loyal to Chancellor Angela Merkel. They both agreed that this was a European problem which could not be solved by any one country alone and that, in consequence, national measures were detrimental to the overall project. Merkel/Faymann preached without end that the stock would have to be Europeanized (a fair distribution throughout Europe) and that the flow would have to be reduced. And they were essentially told by others to go fly a kite, particularly by the East Europeans.

That was when Faymann showed nerves for the first time. Upset by the lack of solidarity from the East, he suggested that those who failed to show solidarity by accepting their fair share of refugees should see a reduction in subsidies they receive from the EU. After all, subsidies are a form of showing solidarity, too. As sensible as this suggestion sounded, Faymann was literally clobbered for making it. Blackmailing one another was not a European value, Faymann was educated. That was a formative experience for Faymann.

Then, major atmospheric changes took place in Germany, Austria and Scandinavia. Sweden, the former showcase for humanitarian policies, reached the end of the line and said they couldn't handle any more refugees. In Germany and Austria, the former 'welcome culture' mutated into a 'farewell culture'. Angela Merkel dared to tell Syrian refugees that when the war was over, they would have to return to Syria. But still, both Germany and Austria were still nobly accepting stock in their countries. And then Faymann blew a fuse.

After Austria broke a taboo by announcing its new policy of limiting the stock for 2016 to 37.500 (after 95.000 in 2015), literally all hell broke loose. Faymann was told by his European colleagues that this was anti-European, anti-humanitarian, anti-everything. Austria should be ashamed of itself. And then Faymann cried out: "Austria, with a population of 8 million, has accepted a stock of 95.000 in 2015. The Austrian ratio of acceptances/total population is arguably higher than that of Germany. Before anyone criticizes us, they should show the same humanitarian effort as Austria has shown so far!"

With that, the genie of diplomatic restraint was out of the bottle and it will be hard to get it back into the bottle. The Austrian government (as represented by a now upset and feeling-offended Chancellor, by a hard-nosed Interior Minister and by a slick young Foreign Minister) is now in defiance, a defiance which is based on demonstrated positive actions and not on beautifully articulated beliefs. The message to others clearly is: "First do as much as we have done and then we can talk!" The message to Greece is: "Don't make so much noise when you have taken in a stock of only 11.000 in 2015 with a total population 3 million greater than ours!"

It's a bit reminiscent of Clint Eastwood's "Go ahead, make my day!", except that Eastwood only had a revolver to impress his opponents whereas Austria has the track record of an accepted stock of well over 100.000 refugees by now. And all of these refugees are extremely well taken care of by Austria.

As unlikely as it appears today, it still cannot be ruled out that the EU, threatened by its demise, will eventually get its act together. Any European solution would undoubtedly have to involve some form of fair burden sharing among all members as regards the stock and some effective policies to control the flow. Who knows? If that miracle were to happen, and it would have to happen within weeks, then perhaps people will look back and conclude that the turning point was when Austria declared its intent 'to provoke a chain reaction of reasonableness'.

Wednesday, February 24, 2016

How To Magically Transform A European Problem Into A Greek Problem

If only the EU had known a year ago how easy it was to solve the EU's migration problem! And the solution is here:

For those who cannot read the small print of the above twitter exchange, the logical sequence is this: (1) close the borders in Austria; which leads to (2) a closing of borders South of Austria; which leads to (3) an accumulation of migrants in Greece; which then (4) forces Greece to close its borders in the middle of the Aegean. And the latter may not even become necessary because once the migrants see that they will end up in Greece instead of Germany, they will not take the journey across the Aegean any longer.

Now, why didn't anyone tell me before that this was going to be so easy?!?

Friday, February 19, 2016

Greece's Current Account: 2015 vs. 2014, And Both Against 2009

According to figures just published by the Bank of Greece, Greece, for the first time in living memory, accomplished a break-even in its current account balance. Below is a comparison of the 2015 figures with the figures of the previous year. Additionally, both years should be compared with the figures for the year 2009, which are in the far-right column.

(in BEUR)

2015 2014 2009
Revenue from abroad
Exports 24,8 26,8 17,8
Services (e. g. tourism) 28,0 31,1 27,1
Other income 5,9 6,9 6,9
Current transfers 1,9 2,6 2,7
------ ------ ------
Total revenue from abroad 60,6 67,4 54,5
Expenses abroad
Imports 42,0 49,1 50,9
Services (e. g. tourism) 11,0 12,8 15,6
Other expense (e. g. interest) 5,2 6,3 13,7
Current transfers 2,4 2,9 3,7
------ ------ ------
Total expenses abroad 60,6 71,1 83,9
Net foreign deficit (current account) 0,0 -3,7 -29,4
Trade balance -17,2 -22,3 -33,1
Services balance 17,0 18,3 11,5
Other balance 0,7 0,6 -6,8
Current transfer balance -0,5 -0,3 -1,0
---- ---- ----
Net foreign deficit (current account) 0,0 -3,7 -29,4

2015 vs. 2014: a very unusual development in as much as BOTH, revenues AND expenses, declined substantially. In fact, every single category, both on the revenue as well as on the expense side, declined! Since expenses declined much more than did revenues, the current account balance improved from a negative 3,7 BEUR in 2014 to the break-even in 2015. A most significant performance in terms of sheer numbers. As regards content, the situation looks a bit like a race to the bottom.

2015 vs. 2009: this comparison reveals the staggering transformation which Greece's current account has experienced since the beginning of the crisis. While revenues increased 6,1 BEUR, expenses declined 23,3 BEUR (!). The combined effect was the elimination of the current account deficit which had stood at 29,4 BEUR in 2009. Obviously, the 2009 deficit was not sustainable. To what extent the race to the bottom will do the Greek economy any good remains to be seen.

A Swan Song On The EU Task Force For Greece!

Few subjects have been as much the focus of this blog as the EU Task Force for Greece. From the time it was established in 2011, I was convinced that it could be the greatest thing for Greece since the invention of democracy. Today, I am still convinced that it could have been the greatest thing for Greece since the invention of democracy. Just consider this excerpt from the Executive Summary of the TFGR's First Quarterly Report, published in November 2011:

"The Task Force is a resource at the disposal of the Greek authorities as they seek to build a modern and prosperous Greece: a Greece characterized by economic opportunity and social equity, and served by an efficient administration with a strong public service ethos".

Read that excerpt again and ask yourself if you can think of a more beautiful description of what one would wish Greece that it can achieve.

My enthusiasm for the TFGR triggered a new New Year's Eve activity for me. On New Year's Eve 2012, I submitted a proposal to the TFGR which I titled "Make 2013 the year of the EU Task Force for Greece!" And on New Year's Eve 2013, I asked the question "Was 2013 the year of the EU Task for for Greece?"

As I followed developments with the TFGR, my initial enthusiasm waned. On New Year's Eve 2014, I resigned myself to the title "EU Task Force for Greece - Death in slow motion?" And by April of the following year I titled "Dismantle the EU Task Force for Greece?" By June 30, 2015, the TFGR's mandate expired and it was not renewed. Dismantling and institutional death had occurred.

As I implied above, the TFGR didn't come close to achieving the goals which dreamers like myself would have expected it to achieve. My own explanation for that was as follows: it had not been the Greek government which had passionately requested the EU to assist Greece on its path towards modernity and prosperity. Instead, the TFGR had been more of an invention of the EU so that they could monitor, if not influence developments in Greece and the Greek government passively accepted it. However, the Greek government never owned up to it. I do not recall a single Greek politician who ever spoke enthusiastically about the TFGR.

The European Court of Auditors has now put to rest any speculations as to why the TFGR did not achieve the objectives which had been set for it: it was the Task Force's fault!

"The urgency of responding to the crisis in Greece meant that the TFGR was set up very rapidly, without a full analysis of other options and without a dedicated budget. It had no single comprehensive strategic document for the delievery of Technical Assistance or for deciding between competing priorities, despite the TFGR's mandate to identify and coordinate the Technical Assistance. In the absence of such a document, the TFGR worked with the Greek authorities 'on demand' and based on the program's conditionality".

Well, here you have it. The EU is a bunch of amateurs. They can't even put together a Task Force professionally. The Task Force for Greece was not even sufficiently competent to produce one single strategic document. Poor Greeks that they had to suffer such fools.

Help is under way, though. The French Republic will pick up the broken pieces which the TFGR left behind and the Grande Nation will now show the world how one brings a public administration into shape. An agreement for Structural Reform Support Service (SRSS) was entered by France and Greece. To lend credibility to the project, French President Francois Holande flew to Athens to personally sign the document with PM Alexis Tsipras. Presumably, this means that both leaders are committed to this project and that the will personally make sure that the project succeeds.

The TFGR is dead. Long live the SRSS!

Saturday, February 13, 2016

Greece & Schengen

I fail to see the connection between Greece & Schengen on one hand and the refugee crisis on the other. Currently, many predict that the EU's hidden agenda is to exclude Greece from Schengen for 2 years so that the migration of refugees to the rest of Schengen can be significantly reduced.

Except, why would that be so?

All that Schengen means is that, between Schengen countries, there is no cross-border traffic. Instead, all traffic is completely free as though there were no borders. Greece does not neighbor on any other Schengen countries. One can only get from Greece directly to another Schengen country by ship or by plane.

I am not aware that any of the refugee traffic from Greece to the rest of Schengen takes place via ships or planes. Instead, all of it seems to follow the land route through the balkans. If the countries bordering on Greece from the North, which are not Schengen countries, were to seal their borders with Greece, the refugees would not get to the rest of Schengen whether Greece remains in Schengen or not. At the same time, if refugees can overcome these borders, they will get to the rest of Schengen whether Greece remains in Schengen or not.

Of course, all the refugees could suddenly switch to scheduled flights and/or cruise ships and enjoy free travel within Schengen that way but, frankly, that strikes me as a very unlikely scenario. Some say that refugees would take boats from Greece to Italy. Ok, but they could do that whether Greece is in Schengen or not.

In short, I wonder why the EU is threatening an exclusion from Schengen, temporary or not, when such an exclusion does not seem to offer any improvement in the refugee crisis. Perhaps there is indeed another hidden agenda on the part of the EU.

Tuesday, February 9, 2016

A Fair Chance for DiEM 2025!

I have once before written about Yanis Varoufakis' Democracy in Europe Movement 2025 (DiEM 2025). It was based on the first draft of DiEM's manifesto. The final version of the manifesto now reflects major changes. For starters, someone must have advised Varoufakis that it may not be such an awesome idea to begin the manifesto with one of the most famous quotes of Karl Marx ("A spectre is haunting Europe...").

The official Opening Ceremony is taking place as I write these lines. I wonder if the organizers were aware of the fact that today is probably the most important day in the carneval season in German speaking countries ("Faschingsdienstag"). I suppose there will be cheap shots tomorrow reporting that the start of DiEM 2025 was the best carneval joke.

I have decided for myself that I will observe the development of DiEM 2025 as objectively as I can. That will be quite a challenge for me because I obviously have prejudices when it comes to Varoufakis' endeavors. But I will try hard!

To kick this off, I have come across the below publications which helped me more to understand DiEM 2025 than the movement's manifesto. Both commentators (Sven Giegold and Thomas Fazi) are self-declared Varoufakis sympathizers. That makes their opinions so much more valid.

Exchange between Sven Giegold and Yanis Varoufakis

Critique by Thomas Fazi

And now I will return to the live stream from Berlin.

ADDENDUM: the morning after the night before

Well, I have watched the entire program. Eight years ago, almost exactly to the day, Barack Obama had started a movement in Iowa. Watching his speech after winning the Iowa caucus was, at least to me, an electrifying experience. "We are the ones we have been waiting for", cried an emotional Barack Obama. And everybody felt like crying with him. From then on, it truly felt like a spectre was haunting the entire USofA. The spectre of decency, integrity and compassion. Perhaps not since JFK have I seen a politician who managed to mobilize the masses so effectively and so constructively.

Last evening's Opening Ceremony was far from such an experience. It was a rather sober event. I doubt that anyone shed tears out of emotions. I had the impression that Yanis Varoufakis did not step on the podium trying hard to generate enthusiastic support. Instead, I had the impression that he stepped on the podium confident that he deserved support.

Something tells me that one could have orchestrated this event in a better way. Even if Varoufakis did not perform at his best as a motivator of masses, he was still a star compared to the others. These were not winner types crying "Yes, we can!" but they seemed more like losers who thought it was time to get back at their usurpers. It seemed a rather sad looking group on the stage. Would I buy a used car from them. Perhaps yes, but only out of compassion, not out of motivation.

I have written before that if DiEM 2025 doesn't succeed in lighting a fire very quickly, it will evaporate rather quickly. As far as I can tell, no fire was lit last evening on the People's Stage on the Rosa-Luxemburg-Square. Rosa Luxemburg, if she could watch it from Heaven, might have considered it a missed opportunity.

Monday, February 8, 2016

Reconsider Capital Controls!

I was flabbergasted to read this article in the WSJ: "The hottest idea in finance: capital controls are good!"

Why flabbergasted? Because in one of the first articles in this blog back in June 2011 (and ever since) I have argued the merits of capital controls. Put differently: I argued that it was a mistake to consider the mere mentioning of capital controls a crime against freedom. And I was accused of crimes against freedom from all sides.

My views on capital controls were formed during the 7 years which I spent in emerging economies: Chile and Argentina from 1980-87. Both countries had just been indoctrinated by the free market doctrine as preached by the Chicago Boys. And, of course, both countries eliminated capital controls.

Not having capital controls is wonderful on the inbound. When economic prospects are good, capital arrives from all over the world seeking profitable investments. When such countries take the next step and implement a fixed exchange rate (like Chile and Argentina had done), Nirwana overwhelms foreign financial investors: they borrow at lower international rates, invest in higher local currency rates and have no exchange rate risk. In Argentina they called it the "Bicileta", the bicycle. With every push of your legs you became richer.

The trouble of not having capital controls becomes visible on the outbound. When economic prospects turn sour, every foreign financial investor wants to grab the cookie jar and runs for the exit door. A 'sudden stop' is the likely consequence.

Back in those years I came to the following conclusion: in the absence of capital controls, every medium-size (or even large) economy is vulnerable to the attack of ill-spirited financial investors. If George Soros and his twin brothers set out to gang up on such a medium-size economy, they would succeed. They would pour billions and billions into that economy and once that country has gotten used to using those billions and billions, Soros & Co. would call the funding due.

That can only happen to a weak country? Well, think Switzerland. In the case of Switzerland, foreign capital seems to be eternally on the inbound owing to the security which Switzerland embodies for foreign investors, the result being that the Swiss currency is eternally on an upward curve. Logic would suggest that this is a process which cannot go on forever. At some point, the Swiss economy will become so expensive that it simply won't be able to compete any longer. The result would be bankruptcies and unemployment.

In a free market without capital controls, one can rest assured that the market will always correct imbalances: an irrational boom will eventually lead to an irrational bust with great cost to society. The only problem is that markets don't think; they just react and that reaction can come at a great cost for society. No one in his right mind would suggest capital controls in order to slow down investments. But everyone in his right mind should, in my opinion, evaluate intelligent capital controls which facilitate sustained growth and reduce the risk of irrational busts and of great cost to society.

And I say this as a passionate free marketer!

Saturday, February 6, 2016

Lagarde: Debt Relief For Greece!

Christine Lagarde of the IMF considers debt relief for Greece as important as the reform of the Greek pension system, reports the Ekathimerini. Well, in a way she is quite right!

Those arguing in favor of debt relief create the impression that the immediate consequence of such debt relief would be a relaxation of fiscal pressures. That is true only where debt relief leads to an immediate reduction in interest expense. Most of the EU financing for Greece is currently (and until 2022, I believe) free of interest. Even if one forgave all of that debt, there would be no impact on Greece's fiscal balance in the next years.

Greece has spent about 5,7 BEUR annually on interest in the last couple of years. One would have to examine who that interest was paid to. If the recipients of that interest forgave their debt, Greece would immediately benefit.

I don't have the numbers but I would guess that the largest recipient of Greek interest is the IMF since I believe IMF loans carry an interest rate of about 3,5%. I would further guess that the second largest recipient group of Greek interest are the remaining private bondholders. After all, their interest rates are somewhere in excess of 5%. However, it would be next to impossible to engage the remaining private creditors in a debt relief program at this time (or ever). They would likely prefer to remain hold-out's à la Argentina.

My recommendation: the IMF, ever so concerned about debt relief for Greece, should (1) publish a breakdown of the recipients of the 5,7 BEUR in Greek interest, (2) sort the recipients from top down and (3) start negotiating with the first one on the list.

The IMF would be negotiating with itself!

Wednesday, February 3, 2016

Intellectual Thought vs. Pragmatic Common Sense

I take the liberty of publishing an email exchange with a Greek who teaches economics at a German university. I have only made a couple of minor changes in order to keep the exchange confidential.

Here is what the Greek wrote to me:

I have been following your blog ObservingGreece for quite some time now and would like to congratulate you on offering so many informative aspects and interpretations of the Greek economic crisis. You can perhaps imagine that for someone like me—a young professor of economics and economics education of Greek descent working at a German university—the ongoing Greek tragedy has been, and continues to be, both perplexing and frustrating at the same time. I am now experiencing the same mixture of feelings over the refugee crisis. Will Europe ever get its act together? I am reminding myself every day anew that hope never dies.

Sometimes I am wondering what academic economists can do—apart from entering politics. Perhaps the (second) best thing we can contribute is a level-headed analysis of what is going on. A former PhD student and I took the courage last year to attempt a game-theoretic analysis of the then ongoing confrontation between Greece and its creditors. We discern several indications that the Tsipras government followed a brinkmanship strategy and that the eurozone responded rationally by holding out; we thus reject the notion that the actions of the Greek government were just erratic and lacked coordination. We argue instead that the decisions of the Greek negotiators, including asking the voters to reject the earlier terms demanded by the creditors in a referendum, can be explained by the logic of strategic bargaining.

As a result of risk-taking on both sides, the deal struck between the two sides became more costly for everybody. The outcome of the confrontation between Greece and the eurozone thus resembles a classical prisoners’ dilemma: If both sides had acted in the common interest right from the start, a better deal for all would probably have been feasible. Instead both sides decided to trump the other and, by doing so, ended up with a much worse deal.

Perhaps you might find our work interesting? If so, you can find the working paper here (link eliminated). Your comments—including critical ones—would be highly welcome.

And here is my reply.

Thank you for your mail. In order for you to understand where I am coming from, let me quote from John Nash’s ending speech in the movie „A beautiful mind“:

"I have always believed in numbers. In the equations and logics that lead to reason. But after a lifetime of such pursuit, I ask what truly is logic? Who decides reason? My quest has taken me through the physical, the meta-physical, the delusional, and back and I have made the most important discovery of my career. The most important discovery of my life. It is only in the mysterious equation of love that any logical reasons can be found.“

Let me translate that into my own background. I, too, believe in logic, numbers and reason. But where John Nash’s quest in the academic world took him to the mysterious equation of love (in the movie, that is), my quest was in the business world and it took me to the solid basis of pragmatic thinking and common sense. To me, it is a waste of energy to analyze whether SYRIZA’s negotiations proved or disproved the game theory. The only things which matter to me are the questions: Did it work? Were the desired results achieved? Are we better off now? 

I agree with you that the results do correspond very much with the prisoner’s dilemma. But they only do so because one side in the negotiations decided to approach the whole subject as though it were an exercise in game theory. Game theory only works where people play games. 

Yanis Varoufakis may go down into history as one of the most interesting and flamboyant Finance Ministers of his time (and more). Perhaps like another John Maynard Keynes. But there is no question that in terms of results, he’s got to have been the worst Finance Minister the world has ever seen. He literally did enormous damage to his country. Why do I say that? Well, a pragmatic and common sense assessment: he could not convince any of his negotiating partners of his view of things and, in the end, he could not even convince his own Prime Minister, his boss, so to speak, of his views. There is no better measure of what failure is. Was/is Varoufakis right or wrong in his views? Well, I think he is right on more points than he is wrong. But the pragmatic and common sense reaction to that would be: „The graveyards of the world are full of people who were right!“

What could academic economists do for their country? Well, maybe this article which I wrote a long time ago will give you some ideas: An appeal to Greek brainpower.

I will look at your paper in the next days.

ADDENDUM - Reply to my above reply on February 9

My coauthor and I try to be as impartial as possible when it comes to economic analysis. We do not try to ``prove game theory.´´ We just think that understanding how ``games´´ work in theory can indeed help to better understand what is going on in the real world. Having said this, we are aware that many people tend to reject explanations that do not conform to their own worldview.

We are certainly not in the business of erecting monuments to Tsipras or Varoufakis or anyone else. Our interpretation of politics is inspired by political economy and thus devoid of any romanticism as to what the incentives of politicians are. In the paper we do not applaud the Syriza government for having fought successfully for the sake of the Greeks but, on the contrary, suggest that electoral concerns may have trumped other considerations in the negotiations.

What motivated us to write the paper was the frequent misunderstandings and misinterpretations of how brinkmanship works in the media coverage of last year’s confrontation between Greece and its creditors. We show how such a strategy may have looked like in the Greek case. In doing so, we differentiate between threatening with Grexit and running the risk of a really painful Graccident. We also show that there are situations (``parameter value sets´´) where our game proceeds exactly like the confrontation between Greece and the creditors. The model thus helps us for example to understand what the purpose of the referendum may have been, and how it may have affected the outcome. Regarding this, we concede that this particular move was bold and tactically shrewd. But do we say the Greeks were smart and the creditors stupid? No. Do we say the Greeks were stupid and the creditors smart? No. What we are saying is that the outcome of the bargaining between the two sides does reflect the objectives and the strategies of more or less rational ``players.´´

In the second part of the paper we argue that the outcome was clearly not optimal for the actors. You said that this is no wonder, since only ``one side in the negotiations decided to approach the whole subject as though it were an exercise in game theory.´´ We beg to disagree, since we have at least developed a good argument to reject the interpretation that the Greeks were playing a game but the eurozone was not—or the other way round. You also speak of ``trust´´ and ``respect´´ the new Greek government did not enjoy in Berlin or Brussels, implying that reputation was irresponsibly scuppered by the Greeks. We point out again to our paper in which we say that making oneself deliberately unpredictable is absolutely necessary for someone who follows a brinkmanship strategy. The key question for us is whether Tsipras and his team actually managed to make the creditors believe the outcome of the process were unpredictable. A good brinkmanship player achieves this.

Did the Greeks pay a heavy price for their brinkmanship? Definitely. But did the Greek negotiators achieve something better with brinkmanship than they could have achieved without? Looking at the pros and cons of the third bailout package, our answer is most probably yes. Certainly the terms of the new deal were harsher than those offered by the creditors earlier. But that should surprise no-one, as the new deal is about an entirely new bailout with a much greater amount of money.