Greece’s economic future hinges on negotiations this weekend, as a deadline to reach an agreement with the European Union on its debt crisis by Sunday bears down.
With hardline prime minister Alexis Tsipras softening his tone in the past few days, a deal that gives Greece a break on its debt payments in exchange for an austerity package of tax increases and budget cuts may yet be in the offing. Tsipras has until July 9 to submit a new proposal for a bailout on the €320 million (about $352 million) Greece owes its creditors.
But how did the five-month-long negotiations devolve to this point — with Greek banks, closed since June 29, close to collapse and the economic world mesmerized by what could be the first country to leave the European Union and revert to its own national currency?
Although it appears Tsipras is gambling with his country's future, in fact he has been using well-known if high-stakes tactics that are especially common in international diplomacy, said negotiations expert Margaret Neale, Stanford GSB management professor.
Whether they pay off remains to be seen. The EU has little financial incentive to budge, says Thomas Lys, accounting professor at the Kellogg School of Management and Neale’s frequent collaborator. “Greece is a rounding error to the EU,” he says. “If I were a betting man, I would bet Greece will not remain in the EU.”
Neale and Lys combine economics and behavioral theory to bring insights to Greece’s negotiation strategy.
Why did Tsipras call for the referendum last weekend, which showed 60% of Greeks rejecting austerity measures?
The hardest thing in a negotiation is to convince your counterpart that you can’t accept what they’re offering because your reservation price — your bottom line — is very high, Neale says.
“When you tell your negotiating partner your bottom line, do they believe you?” she says. “For the most part, the answer is no. They believe what you tell them is your faux bottom line.”
The referendum on austerity measures gave Tsipras the standing to tell his counterparts that he can’t accept an austerity deal.
“He can now say, ‘I cannot accept a deal because the people have spoken.’ It’s a very smart strategy,” she says.
Lys says this is a strategy that played out — deliberately or not — in the recent controversial speech given by Israeli Prime Minister Benjamin Netanyahu to Congress. By welcoming Netanyahu, and indicating they reserved the right not to honor a nuclear deal with Iran, Congress perhaps unwittingly gave President Barack Obama leverage with Iran to press for a better deal.
“It put pressure on the Iranians,” Lys says. “Now there were certain deals that were off the table because Obama could say to the Iranians, ‘Congress is not going to sign off on it.’”
Why have the negotiations between Greece and the EU descended to this point?
One factor could be cultural. “In southern Europe, there's more opportunity for negotiating,” Neale says.
Lys adds, “In Greece and southern Europe, there is much more embellishment. So if they say 100, they may accept 40. The distance is not going to stop the negotiations.
“But in Germany, when they say 100, they may mean 98,” he says.
Many observers bet the sides will reach a deal by Sunday. But you think that’s less likely.
From the perspective of the EU, there’s little incentive to make concessions because Greece’s economy is so small and because a generous deal could send signals to other EU members, Lys says.
Even for Greece, the option of walking away from the table “may not nearly as bad as people think,” Lys says.
Tsipras’s strategy could be to push the EU creditors to see if he can get a better deal. If he can’t, exiting the EU and printing Greek currency are viable options, Lys points out. Economic pain is inevitable for Greece, but if the country exits the EU, the timing of the pain will be more in its control. In that event, Tsipras looks like a champion.
“At the end of the day, what does he care about?” Lys says. “He cares about getting re-elected.”
“In this case, a deal might not be in the best interests of everybody,” Neale adds.