Greek bluffers have shown hand too early
The future of Europe now depends on something apparently impossible: Greece and Germany must strike a deal. What makes such a deal seem impossible is not the principled opposition of the two governments — Greece has demanded a debt reduction, while Germany has insisted that not a euro of debt can be written off — but something more fundamental: While Greece is obviously the weaker party in this conflict, it has far more at stake.
Game theory suggests that some of the most unpredictable conflicts are between a weak but determined combatant and a strong opponent with much less commitment. In these scenarios, the most stable outcome tends to be a draw in which both sides are partly satisfied. In the Greek-German confrontation, it is easy, at least in theory, to design such a positive-sum game. All we must do is ignore political rhetoric and focus on the economic outcomes that the protagonists really want.
