Henry Farrell has written a very useful post describing the eurozone crisis in terms of Schelling's conception of brinksmanship as a negotiating ploy. I am in broad agreement with everything he says about the theory of strategic interaction itself, and in particular this part:
There is a fundamental internal contradiction in Kirkegaard’s argument. You can’t simultaneously claim that we are in that happy world where we can effectively disregard the possibility of disaster, and tell us that actors are using brinkmanship to convince Greece that it needs to undertake internal reforms. Either we are in a world where there is a real risk of disaster, which is what allows Germany and northern European states to engage in brinkmanship. Or we are in a world without such a risk, in which case there is no space for brinkmanship. You can’t have your theoretical cake and eat it too.I'm a big fan of incorporating concepts generally applied to "high politics" -- guns and bombs -- to IPE, and it is easy to conclude that the tactic of brinksmanship may have its uses in situations like these. While I agree with Farrell's take on the theory itself, I'm not sure how well it applies to this particular situation for the reason he lays out: either there is a "real risk of disaster" or there isn't. I don't think there is.
In brinksmanship situations the risk of disaster must be mutual. To stick with Schelling's example -- two men, chained together, dancing ever closer to the edge of a cliff -- the risk must be that both parties will tumble over into oblivion. In a nuclear exchange between the U.S. and U.S.S.R. that was a very real risk; in the E.U. debt negotiations I am not sure that it is. The risk is that Greece tumbles over the cliff, while the rest of Europe watches them fall from above. That is not to say that Greece's collapse would have no adverse consequences for the rest of Europe, but there is nothing close to symmetry: Greece needs Europe much more than Europe needs Greece. If this were not the case, the terms of the proposed bailout -- which, in addition to another round of exceptionally austerity, now includes the virtual abolishment of the democratic process in Greece -- would be nothing like they are.
Throughout this process Greece has had two big plays: default -- which would hurt European creditors, including many banks in northern Europe -- and exit from the eurozone -- which would damage the credibility of the European political project. Both have become less worrisome to northern Europe over time. In the first case, the cost of bailing out Greece now exceeds the cost of bailing out the banks, particular if the ECB continues to make funds available to major European financial institutions. Moreover, European banks have known for a long while now that some form of default was coming, and have (I hope and expect) already made preparations for it. This doesn't mean that a Greek default would be painless, but given the enormous sums of money already committed to Greece and the €200bn now being proposed, shoring up the banks would almost surely require less of a fiscal commitment from other European countries. Moreover, it is more likely that that money will be recouped in full from the banks than from Greece, whose politics are unstable. If done correctly a European "TARP" could even end up breaking even or turning a small profit, as it has in the U.S.
Which brings me to the second potential worry. The exit of Greece from the eurozone would not harm the real economy very much -- Greece's GDP contributes only 2% to the eurozone total -- but could potentially damage the progress of the political union. This is a real concern, but the alternative now appears to be the abolishment of the democratic process in Greece altogether. European leaders are now negotiating with an unelected Greek government, and as a precondition for the release of funds are demanding adherence to the bailout terms from all political parties in the country. Previously they had asked for approval of future Greek budgets. This usurpation of Greek sovereignty, and the derogation of the democratic process within that country, should be as much of an affront to the European political process as the exit of one its least consequential members -- which cooked the books to join the union in the first place and may have never been in compliance with its obligations. Anyway, if a major worry in Europe is the dominance of Germany on the continent, then giving them and their friends such authority over the politics of a member state is not likely to be reassuring.
Another concern has often been expressed: that a Greek default will lead to "contagion". This fear rests on a misunderstanding of what contagion is. If a Greek default led to insolvencies in the banking sectors of other European countries, which then led to the inability of those banks to repay their counterparties in other countries, then this would constitute contagion and might be a real worry. But given the fact that European banks have been preparing for this possibility, given that European governments have already earmarked hundreds of billions of euros for bailout funds, given that the European central bank is finally (sort of) acting like an actual central bank, this should be less of a concern than at any point in the past few years.
The fear that a Greek default will have a negative effect on Portugese bond rates, say, is not about contagion. If investors observe new developments in the European political economy and revise their attitudes towards the riskiness of bonds, that is not contagion. It's simply a rational response to changed circumstances. The European authorities can deal with this in a number of ways, but the most important thing is that no country in Europe is in as desperate of a situation as Greece, or has a real economy in as poor of shape as Greece.
European leaders may believe that Greece -- which now (astoundingly) has a primary budget surplus -- is still capable of generating growth sufficient enough to repay their creditors and remain in the eurozone. If that's the case, then harsh terms on bailout funds are counter-productive. Yet what we observe are the harshest conditions demanded to this point in the process. Given all of the above, it is almost impossible to come to any other conclusion than that European leaders are trying to force Greece out in a way that they can then claim that it was Greece's choice, not theirs.
That is not brinksmanship. That is something else entirely.
UPDATE: See Daniel Davies's "Choose your own adventure" view of the situation, which maps out the difficulties and options nicely and thoroughly.
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