IMD International

Playing games in Europe

Putting theory into practice proves difficult for Varoufakis and Cameron

May 27, 2015

For anyone with even a passing interest in the theory of decision-making and negotiating, at present the political classes of Europe offer enthralling viewing. While today's politicians may pale in comparison to their predecessors, what they lack in leadership ability they make up for in entertainment.

A great frustration of academics in the decision sciences is that few practitioners, whether businesspeople, or lawyers or indeed politicians, have embraced their work. For all the volumes that have been written, there has been little impact on how decisions actually get made; on how negotiations are handled. Imagine, then, the delight that reverberated around ivory towers when Yanis Varoufakis, professor of economics and expert and author on game theory, was appointed Greek Finance Minister.

Prior to entering the political fray, Varoufakis had written and blogged on the subject of game theory as it applied to the Greek situation in 2011-2012. He attributed the concept of an "incredible threat" to the stance taken by Greece's European creditors and the IMF. That is – the threat to manage events such that Greece would have to leave the euro was simply not credible as the self-inflicted damage to the Eurozone would be immense, potentially bringing down the euro, and it would be far greater in total than the consequences for Greece. And, at the time of his writing, he may well have been right.

Earlier this year, in his early days as finance minister, he became the personification of John Maynard Keynes's old quote: "If you owe your bank a hundred pounds, you have a problem. But if you owe a million, it has". While at pains to point out to his counterparts the difficulty they were in given Greece owed them so much cash, the circumstances had changed. In brief, the threat was no longer "incredible". In fact, given the sounder footing of the euro and Eurozone more generally, and the much lower likelihood of collateral damage from a Grexit, the asymmetries had reversed.

With Varoufakis sidelined from the Greek negotiating team, perhaps he has more time to reflect on another quote attributed to Keynes, when he was accused of changing his position on a matter: "When the facts change, I change my mind. What do you do sir?"

Another politician haunted by his own words from the past lives, both geographically and ideologically, on the other side of Europe. During his first speech as leader of the Conservative party in 2006, David Cameron told his party members they had alienated voters by "banging on" about Europe. His point was that the average UK voter cared much less about perceived EU infringement in UK matters than the average Conservative party member.

It is ironic that his second term as Prime Minister will be dominated by the in-out referendum on EU membership he promised his electorate. The pre-election promise he made in order to attract voters who were vulnerable to more radical right-wing anti-EU elements apparently was effective – he won an overall majority that the most maniacal optimists within his own party would not have considered. It was perhaps too effective. Had he not secured a majority it is conceivable he wouldn't have had to go through with the referendum. Now, he is forced to carry out that promise which has outlived its original purpose of re-election and continuation as Prime Minister.

Not only did Cameron promise to hold a referendum, but he also committed to "renegotiate" the terms of the UK's membership of the EU. Essentially, Cameron declared he would extract concessions for the UK, with the threat that the UK may leave the EU if they were not forthcoming. However, it is useful to consider the words of Varoufakis, and whether this threat is credible or not. Given it is a public vote, anything is possible, therefore it is credible. But, is it likely?

Bookmakers have assigned odds of 2/1 against the UK voting itself out of the EU. This translates approximately to a 33% likelihood – not unsubstantial, but low, and consistent with less reliable polling data. It may be that this factors in the possibility of Cameron returning from Europe triumphant with a sack of terms and conditions to please everyone. More likely, it reflects the electorate's desire to stay in the EU whether the terms change much or not.

Given this, Cameron's hand in negotiations is somewhat restricted. The threat of "concessions or else" is unlikely, at present, to generate much concern. He is likely to generate change that his European counterparts would gladly see anyway, and probably not much else.

John Walsh is Professor of Marketing at IMD and directs Building on Talent (BOT), a program for high-potential managers early in their career looking to take on greater responsibility.

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