Puzzled out? The unsurprising outcomes of the Greek bailout negotiations

ABSTRACT

While to date the Eurozone debt crisis is one of the most important and consequential events in world politics of the twenty-first century, the actions taken by states to negotiate a cooperative resolution do not seem particularly puzzling. In this article, we employ the analytic explanation approach to process tracing to test whether the most protracted and high-profile case – negotiations between creditors led by Germany, and Greece as debtor state – indeed validate three central hypotheses of basic cooperation theory regarding the sources of bargaining strength. We conclude that while bargaining leverage did emerge primarily from the ability to withstand non-agreement, the weaker Greece was able to achieve marginal concessions reflecting terms that departed from Germany’s initial win-set. This leverage stemmed however not from a threat based on domestic political constraints, but from the realization that Greece’s structural economic weakness rendered the strictest austerity measures untenable. The policy implication is that the credibility of the weaker side’s negotiating signal arose not from domestic politics, but the impartial assessments of international technocrats and private rating agencies.

KEYWORDS:

• Bargaining
• credible signaling
• cooperation
• debt crisis
• Eurozone
• two-level games

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes on contributors

Darren J. Lim is a lecturer in the School of Politics and International Relations at the Australian National University.

Michalis Moutselos is a research fellow at the Max Planck Institute for the Study of Religious and Ethnic Diversity.

Michael McKenna is a researcher in the School of Politics and International Relations and a student in the Master of Computing program in the College of Engineering and Computer Science at the Australian National University.

ORCID

Darren J. Lim http://orcid.org/0000-0003-1565-8510

Michalis Moutselos http://orcid.org/0000-0002-8454-1124

Michael McKenna http://orcid.org/0000-0002-8124-591X

Notes

1 Successful debt crisis negotiations do not yield positive payoffs; both sides must pay costs in a cooperative outcome. Preventing contagion requires creditors to finance costly bailouts and debt forgiveness. Debtors avoid financial collapse, but must accept painful austerity measures. Such costs are still less than the catastrophic risks of non-agreement, such as debtor default, large investment losses and contagion for creditors, and second-order effects like a currency union collapse.

2 It also requires sensitivity in the empirical analysis to the possibility that departures from the German position were a function of intra-creditor bargaining – which indeed was the case at least once vis-à-vis the IMF in 2015.

3 Germany’s stated interests were ‘negotiating in the European interest, and demonstrating our commitment to Europe in defending the stability of the euro’. A mechanism must ‘be triggered only once Greece had exhausted its capacity to raise money on the international capital markets’: Peel et al. (2010).

4 Also see, Wolfgang Schaeuble’s (2010) speech before German Parliament.

5 The then Finance Minister later confirmed the existence of a contingency plan in the event negotiations faltered (see official statement at https://yanisvaroufakis.eu/2015/07/27/statement-by-yanis-varoufakis-on-the-finmins-plan-b-working-group-the-parallel-payment-system/) and backed by his then advisor James K. Galbraith.

6 Throughout, Berlin has insisted on IMF support because bailouts are politically more acceptable in Germany if seen as an international undertaking.