A few months ago, Jacob Kirkegaard was congratulating the EU’s northern member states for having discovered how awesome brinkmanship was as a mode of bargaining over Greek policy reforms. As I noted then, brinkmanship, contra Kirkegaard, is a terrible way of making policy. It only works to the extent that the threat of catastrophe for all involved is a real one. And, to the extent that the threat of catastrophe is real, bluffing and seeking to constrain oneself in ways that will oblige the other side to do what you want them to do (Schelling’s definition of strategy), may work out very badly indeed. If you’ve miscalculated, both you and the other side may find yourselves in deep, deep trouble. To quote Branislav Slantchev yet again

Obviously, these are very dangerous tactics; they would not work unless they were dangerous because it is the generation of risk that makes them potentially worthwhile.

A weaker version of this critique applies to Matthew Yglesias’ more recent take on Grexit.

a short-term departure is much less likely than the hype would lead you to believe. Everyone has big incentives to bluff right now, but if Greece does end up leaving the euro it’ll happen later as part of a broader and more comprehensive split. … there’s an excellent chance that everyone is bluffing. Tsipras is a bit like a person who’s wandered into a rich guy’s living room and is threatening to shoot himself in the head unless the rich guy hands over some cash. It’s not a very credible threat … On the other hand, it might make sense for the rich guy to pay up. Brains splattered all over the carpet and furniture might be more expensive to clean than just paying the guy to go away. … In the case of the eurozone, the carpet and furniture are Portugal, Ireland, and Spain. Once it becomes clear that an exit from the euro is a real possibility, the odds are that people who hold bank accounts in those countries will want to take their money out.

The point is that while Germany would obviously prefer not to offer Greece more generous terms, there’s good reason to think that they’d be willing to do it. By the same token, it makes sense for Greece to ask. In essence, the situation is fertile territory for bluffing. Tsipras pretends it makes sense for Greece to demand a better deal, and Angela Merkel pretends it makes sense to let Germany walk away from the euro. This game of chicken might end up badly, but the frantic press reports are mostly a reflection of the bluffs not the actual likelihood of Greece leaving.

The final sentences of this post are absolutely correct – press reports do underplay the extent to which both Greece and Germany are engaged in bluffing and brinkmanship. But this doesn’t sit at all well with the claim that “if Greece does end up leaving the euro it’ll happen later as part of a broader and more comprehensive split.” It’s precisely because there’s some possibility of catastrophe that this kind of bluffing is worthwhile. Furthermore, the risk of catastrophe is increasing over time, as e.g. Greek citizens start transferring their deposits to non-Greek banks. Nor does the claim that Tsipras’s threat “is not very credible” sit well with the argument that it might make sense for Germany to pay up. If the threat is non-credible, Germany simply has to sit back and call Tsipras’ bluff. This said, if Matt is overly sanguine, the pattern of bluff and counter-bluff suggests that Tyler Cowen is wrong to think that the politics make any deal impossible. If there weren’t any possible resolution, there wouldn’t be any incentive to engage in crisis bargaining. What we’re seeing suggests that the players on both sides think that there is a real chance of catastrophe, but also a real chance of a deal.

At a guess, Greece has considerably more bargaining leverage than it might seem to at first. One useful index of bargaining strength is relative levels of sensitivity to breakdown/catastrophe/failure to reach a deal. It’s plausible that Greece is relatively indifferent to breakdown at this point – years of grinding austerity inside EMU seem barely preferable to the costs of exiting the euro. In contrast, Germany could see the collapse of the euro (and consequent very serious economic costs) if a Greek exit leads to the collapse of confidence in Spanish, Irish, and worst of all, Italian banks. If I were to lay a bet on which side is likely to fold first, I’d be putting my money on the Germans.

[Cross-posted at The Monkey Cage]

Henry Farrell

Henry Farrell is an associate professor of political science and international affairs at George Washington University.