(Kostas Tsironis/Bloomberg)

Over the last several weeks, European newspapers have been consumed with a debate over Greece’s role in Europe’s common currency, the euro.

Greece has suffered very badly in the financial crisis. In order to receive loans and a limited amount of debt relief, Greece has been forced to implement harsh austerity measures by other European states (especially Germany), European Union institutions and the International Monetary Fund.

Greece recently elected a left-wing government, which is looking to renegotiate the deal. But other European states are reluctant to help and are suggesting that Greece may have to leave the euro.

In the last couple of days, Greece seemed to be getting closer to a deal with the other involved parties, but now, people on both sides are balking. Radical members of the political party governing Greece are threatening to rebel at what they claim is a sellout to Germany. Germany’s Finance Minister, Wolfgang Schäuble is muttering about publicly opposing a deal which he sees as making too many concessions to Greece. Does this mean that a deal can’t be done?

Both sides have an incentive to play up domestic opposition

As last week’s Monkey Cage post argued, international negotiations can be thought of as two-level games, in which each negotiator is (a) trying to get the best deal possible at the international level, while (b) ensuring that she can sell the deal to the people back home on the domestic level. This means that negotiators at the international level have a very obvious incentive to emphasize how difficult it will be to persuade their domestic constituencies to accept a deal. Strong domestic opposition makes it hard for the negotiator to make any concessions to her international counterparts, hence forcing her to bargain hard. Clever negotiators will manipulate their opposite numbers’ perceptions to win concessions and to resist compromises that they don’t want.

Domestic figures will often have similar incentives to seem as obdurate as possible. By making it appear as though they will not accept anything other than a very favorable deal, they can help their negotiators and make it more likely that they will indeed get a better deal. Of course, they may also risk failure if they appear too obdurate, thereby making negotiators from other countries think that there isn’t any acceptable deal on the table.

Canny negotiation involves figuring out the location of the “brink” beyond which the other side will not go and making demands that teeter upon it. If you get this right, you can win the maximum amount of concessions. If you get it wrong in serious negotiations like these, you risk breakdown and disaster. It also helps if you appear less vulnerable to disaster than the other side. Thus, Greek politicians have mused over whether or not it might be better for Greece to leave the euro, while German politicians have suggested that they might prefer a euro without Greece.

But both sides may be sincere

It’s also entirely possible that Greek opposition to the deal on the table is fundamental and sincere, and/or that Schäuble and other politicians will not accept a deal with significant concessions. If it weren’t possible, then the threats and counter-threats wouldn’t be believable. It may also be true.

Perhaps the different sides in the negotiation aren’t negotiating over a deal that they think they can reach. They are negotiating over who is going to get the blame when it becomes clear that no deal is possible.

The problem is that we don’t have any very good way of figuring out which situation we are in: a situation where one or both sides are posturing about the depth of their opposition, or a situation in which one or both sides are truly and sincerely opposed.

In game theory, this is called a “pooling equilibrium.” What this means (simplifying the argument grossly) is that the ways that actors are talking provide us with little or no information about their underlying dispositions. Greek negotiators and politicians would talk this way, regardless of whether they were just talking a good game to get their opposite numbers to back down, or whether they were truly, irrevocably opposed to the deal on the table. So too would German negotiators.

In short, we can be neither complacent that both sides are exaggerating their opposition, nor despairing that a deal is impossible. We simply do not have enough information — and likely no one does, since even if each negotiator knows her bottom line, she doesn’t know the bottom line of her opposite number, nor necessarily of the domestic opposition back home.

“Game theorist” has become an epithet

Everyone in the negotiations knows these implications of game theory. Thus, no one wants to be accused of using game theoretic logic, since this would suggest that their protests are insincere and they can ultimately be rolled. This explains why the Greek finance minister has sought to deny that he’s a game theorist, even though he has written a (quasi-skeptical) book on game theory. This is also why his opponents in the negotiations have kept on referring to his background as a game theorist and an economist.

Funnily enough then, both the accusation that one is a game theorist, and the denial that one is, have become just the kind of communication game that game theorists like to explore, and that they predict can have odd and perverse consequences.

We’ll see over the coming days whether there is a deal. However, if there is a deal, we’ll likely never have good information as to what negotiators’ true bottom lines were, and the extent to which they were bluffing or being sincere.

Read more about Greece and the euro at the Monkey Cage:

Arthur Goldhammer: The austerity referendum solves a problem for Greece’s leaders. It may solve a problem for Europe’s leaders, too.

Kathleen McNamara: The euro is an experiment in making a currency without a government. That’s why it’s in trouble.