Varoufakis (backed by Krugman) chose the wrong game

Yanis Varoufakis is a Marxist economist and an “expert” on game theory. Paul Krugman is about as close to a Marxist economist as one can get in the US. The only thing that “star” economists get right are back casts where they force their theories to apply to things that have already happened. Krugman is a Nobel prize winner – but in economics that is not something to be very proud of. Krugman has been a vociferous supporter of the anti-austerity camp. He has even criticised those who have argued against debt write-offs. Thomas Piketty is another “star”, French, “socialist” economist who has also been supportive of the anti-austerity brigade.

(In my own view this is not a battle of ideologies since austerity and anti-austerity are not ideologies. If anything it is a battle between profligate public expenditure on the one hand and prudence and good housekeeping on the other.)

In any event, tonight Greece is contemplating the stringent austerity measures they must sign up to by Wednesday along with the loss of fiscal independence required to be able to just enter negotiations on a 3rd bailout of some €85 billion. Debt restructuring is not included in the package though some rescheduling of debt service will be discussed. It is a package is much more stringent than the Greeks rejected in their much-vaunted and self-indulgent referendum. (What referendum if posing the question “Do you want more taxes?”, would not answer “No”. I was surprised that as many as 39% answered “Yes”.) If the negotiations had been completed 3 months ago, Greece would have been able to conclude a much less painful package.

But it all makes sense if seen as a high stakes “game” that Varoufakis convinced Tsipras and his Syriza colleagues to play. With his game theory credentials and the support of empty “heavyweights” such as Krugman and Piketty, Varoufakis probably thought that he could outmaneuver Schauble especially as he was initiating the game. Perhaps he even felt he was defining the game. A threat to leave the Euro was the nuclear weapon in his arsenal. Seen as such a game, the calling of the referendum was probably planned as the decisive, pre-ultimate move. Even his resignation immediately after the referendum was probably a premeditated move for the negotiation they expected to have. But these moves backfired. First, against Greek expectations, the banks were asphyxiated. Varoufakis had probably miscalculated in thinking that the ECB under friendly French influence would not shut off the liquidity tap. Schauble’s decisive counter-move came yesterday when, for the first time, a Grexit, in the form of a 5 year time-out, was openly named as the alternative. Once Schauble had hijacked that as the nuclear weapon, the game was over. Tsipras had no weapons left and no alternative to capitulating completely.

The Greek population are not only paying for the profligacy of the past. They are also now paying for a game started by Varoufakis which went horribly wrong.

This game is over but the match is still going on. Tsipras would do well to ignore Varoufakis (and Krugman and Piketty) for the rest of the match. Marxists and economy just don’t mix. Marxism may be able to hide its face in the blend but the economy is poisoned.

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