Prime Minister Papandreou has used his country's fragile state to his advantage in negotiations with the EU
If you want to learn how to dig yourself out of a deep hole, watch Greek Prime Minister George Papandreou. The 57-year-old socialist is urgently seeking some kind of financial backstop from other European governments while trying to placate farmers, labor unions, and civil servants on the one hand and jittery foreign investors on the other. As the son and grandson of past Prime Ministers, Papandreou is the closest thing to royalty in a country that abolished its monarchy in 1974. Yet his regal air hasn't been the least bit compromised by the fragility of Greek finances. His serenity comes from a shrewd understanding of the principles of negotiation: Greece's very weakness lends it strength, because when your back is already to the wall, you can't be pushed any further.
Every televised riot and bonfire in Athens strengthens Papandreou's argument that Greece can't handle any more austerity without a breakdown of society. As a result, other European nations that fear a Greek default have concluded that they must take more responsibility for preventing it from happening. "Papandreou has a game plan," says Simon Johnson, an economist at Massachusetts Institute of Technology who observed his share of gamesmanship as a former chief economist of the International Monetary Fund. "He is doing this very well."
The first rule of negotiation—which Papandreou has clearly mastered—is to know the "BATNA"—or "best alternative to a negotiated agreement." If the alternatives to a negotiated settlement are good, you have no incentive to budge from your position. If the alternatives are undesirable, your motivation to cut a deal increases.
Greece has a weak BATNA. If it stops cooperating with the European Union and doesn't slash its budget deficit, it will lose the confidence of investors and most likely become unable to roll over its foreign debts. If it defaults, interest rates on any new funds it needs to raise would be sky-high, if available at all, stunting growth for years to come.
Having a weak BATNA doesn't debilitate a good negotiator, though, because the other side's alternatives are equally relevant. A default by the Greeks would cause big losses for German and French lenders and, more important, fan fears of possible defaults by Portugal or Spain. If the market value of loans to those countries fell markedly, the balance sheets of some banks in Northern Europe would be severely damaged, says MIT's Johnson.
In other words, Greece is a teetering domino that Europe desperately wants to keep upright. Harvard Law School Professor Robert H. Mnookin, chair of the school's Program on Negotiation, says Papandreou is playing the same "save us to save yourselves" card as former South Vietnamese President Nguyen Van Thieu, who extracted concessions from the U.S. during the Vietnam War by warning repeatedly that without increased U.S. help his country would fall to the Communists (which, of course, it did).
Papandreou's frequent hints that he might seek assistance from the IMF if he can't get what he needs from Europe can be seen as an attempt to make his BATNA appear stronger, says Zacharias Maniadis, a Greek economist at Bocconi University in Milan. Europe, especially Germany, wants to solve the Greek crisis without IMF interference.
Of course, in diplomacy, as in threatening to turn the car around on your squabbling kids, a gambit is only effective if it's believable. The other Europeans could call Papandreou's bluff by telling him to go ahead and ask the IMF for help. Olivier Jeanne, a French economist at Johns Hopkins University who used to work for the IMF, says the fund would not intervene in Greece without an invitation from the European Union. Even if the IMF did step in, Jeanne says it probably wouldn't offer kinder conditions than those set by the Europeans.
While Greece's economic weakness gives it an edge at the bargaining table, Papandreou can't push that advantage too hard. After all, Greece still needs to borrow. If foreign investors fear that Athens will stiff them someday by crying poor, they won't lend, says Mark L.J. Wright, a University of California, Los Angeles economist. Cautious investors insisted on a yield of about 6.4% to buy around $7 billion worth of Greek debt on Mar. 4, more than double the yield on comparable German debt. That's why Papandreou hasn't overplayed his weakness card.
There are fewer drawbacks to another Papandreou strategy, his vilification of what he calls "unprincipled speculators." He can help German Chancellor Angela Merkel sell a bailout to the German people if he can shift attention away from Greek profligacy, says MIT's Johnson. He says Merkel needs to "construct a narrative" that "we saved Greece because the evil American speculators blah blah blah...."
Game theory explains why the two sides haven't yet cut a deal despite the high costs of delay. The fact is, Germany's Merkel is no pushover. She and other European leaders know they have maximum leverage over Greece now, when they are free to bestow or withhold support. Once support is given, the leverage is lost. Eventually, though, most experts believe some kind of deal is bound to be struck simply because the costs of a Greek default would be intolerable to all parties. That explains George Papandreou's regal calm.