Two deadlines loom on June 30:
1) Agreement between Greece and the EU, the European Central Bank (ECB), and the International Monetary Fund (IMF) on an extension of the program of continuing loans in exchange for structural reforms; and
2) Agreement between the P5+1 countries (the permanent members of the U.N. Security Council plus Germany) with Iran on restrictions on its nuclear program and their verification in exchange for a lifting of bilateral and multilateral sanctions.
We have just witnessed the collapse of the Greek debt negotiations. There are important lessons to be learned from the breakdown of the talks which Iranian Supreme Leader Ali Khamenei should take directly to heart, and act upon, if a deal between the P5+1 and Iran is still to be achieved.
In the Greek debt negotiations, the positions of the two sides were very close, and indeed a deal might have been reached on the basis of the major concessions Alexis Tsipras made in a counter proposal earlier this week. But the European and IMF creditors overplayed their hand, insisting on still further concessions in a dynamic in which the future of Greece and even the Euro zone fell hostage to personal anger, wounded feelings, a sense of national and personal humiliation, and ultimately something bordering on psychological collapse on the part of Tsipras.
The sticking points were ridiculous in the broader scheme of things:
Should the VAT at restaurants be raised to 23% as the creditors wanted, or held to 13% as Greece proposed? Should the 30% discount on the VAT granted to the Greek islands be abolished as the creditors demanded? Should the corporate income tax rate be raised to 29% as Greece proposed, or be held to 28%? In what year should the proposed pension reforms, raising the retirement age from 60 to 67, be implemented, 2018 or 2022?
These are issues which could have been resolved with good faith negotiations, trust and goodwill in the room. Unfortunately, both sides came to feel that the other side was not bargaining in good faith. Trust had broken down as a result of the negotiating tactics including personal attacks of Tsipras and his government over months of negotiations, and what the Greeks perceived to be the unyielding position of the creditors to demand further austerity without embarking on a path that might lead to growth and an eventual way out of the crisis, and hope for the future.
Facing rebellion among his ranks, and apparently smarting from a highly emotional confrontation in the corridors with EU Council President Donald Trusk on Friday, Tsipras appears to have felt humiliated and to have suffered some kind of emotional or psychological collapse, calling an emergency meeting of his cabinet Friday night, and then announcing in a 1:00 a.m. TV broadcast to the nation that he was calling a snap referendum on the creditors’ last proposal.
For the creditors, calling the snap referendum was the ultimate act of bad faith. They declared the negotiations were over, the deadline of Tuesday, June 30 would not be extended, and they were now working on a “Plan B” to protect the Eurozone and its financial institutions from the fallout of a Greek default by Wednesday. The ECB, for its part called a meeting for Sunday to decide, among other matters, whether it would extend its support of Greek banks past Tuesday. Without such support, the Greek banking system is expected to collapse beginning next week.
In the last days, Tsipras and Finance Minister Yanus Varoufakis made several grave miscalculations, assuming that the creditors would extend the June 30 deadline to after the July 5 referendum, and that the IMF would not declare them in default, triggering default provisions in a number of debt instruments and even making continued ECB support of Greek banks problematical.
Varoufakis is reported to be an expert on game theory, and recent actions by the Greek government appear to be consistent with the classical game of “chicken” — memorably portrayed in the drag race in the movie “Rebel Without a Cause” with James Dean.
Yet there are two fundamental problems with approaching multiparty negotiations as if they can be represented by the game-theory model of “chicken”.
The first is that the “chicken” model is a two-party game, based on the assumption that each of the parties will act with perfect rationality. In other words, “chicken” is a two-party game based on a rational choice model. Here, however, we are looking at multi-party negotiations.
The second problem is that the actions of the governments that constitute the creditors are the product of complex governmental decision processes and bureaucratic politics, both at the national and at the international institutional level. Similarly, the actions of the Greek government are the product of governmental processes and bureacratic politics, and not the actions of a unitary rational mind.
See the classic studies on the rational actor fallacy:
(1) Graham Allison and Philip Zelikov, Essence of Decision: Explaining the Cuban Missile Crisis (2d ed. 1999); and
(2) John D. Steinbruner, The Cybernetic Theory of Decision: New Dimensions of Political Analysis (1974, 2nd paperback ed. with a new preface 2002)
Consequently, using game-theory approaches to guide decisions is fatally flawed. The negotiations are not a one-time occurrence. Rather, pushing matters to the brink, as one might do in a one-time two person game to “win”, can have disastrous effects on the trust that may be necessary to maintain relationships and successfully conclude future negotiations.
There are lessons here to be drawn by Iran. Supreme Leader Ali Khamenei’s recent and repeated statements that Iranian military facilities are not to be subject to inspection for verification of compliance with the terms of any nuclear deal with the P5+1 are tantamount to statements that there will be no nuclear deal. The Iranian parliament’s recent passage of a law prohibiting such inspections offers a similar sign.
However clever these moves may seem as putting pressure on the P5+1, or managing disparate interest groups and political forces inside Iran, their net effect may be to undermine the essential trust upon which any nuclear deal must be based.
Already, senior U.S. officials who have been involved developing and implementing policy towards Iran have spoken out, loudy, about what is required to secure an adequate deal with Iran, and the importance of being able to walk away from a bad deal.
In recent weeks U.S. government reports have revealed that Iran continues to support terrorist activities, and that its observance of fundamental human rights remains abysmal.
In these circumstances, Iran as well as the United States would do well to bear in mind the Greek tragedy that is now playing out in the Greek debt negotiations.
Negotiations are not a two-party rational choice game of “chicken”, or a two party negotiation in an Iranian bazar. Governmental processes, such as action by Congress, can block implementation of any deal. Politics in the 2016 presidential election could produce a shift in the U.S. position.
As in the Greek debt negotiations, if Iran or even the P5+1 overplay their hand, if they negotiate in a manner that undermines the trust required to reach and implement any agreement, forces may be unleashed that kill the deal or its implementation.
The failure of the Iran negotiations, like the failure of the Greek debt negotiations, would be particularly unfortunate given the fact that, in both cases, a deal has seemed within reach.
Human beings, not rational-actor machines, will determine whether a nuclear deal is reached with Iran. Iran would be well advised to act in a manner that builds confidence and trust on the part of the P5+1 countries.
Otherwise they could find that when trust and confidence are needed to bridge final differences, they are nowhere to be found.
The Trenchant Observer