Acting the goat with the Greeks

Innumeracy at the top of European politics beggared Greece and may now vitiate Brexit negotiations

Cosmos


Getting the goat: In the Monty Hall paradox, opening one of the doors changes the circumstances (Darklich14 CC BY 3.0)

In his recent book Adults in the Room, (Bodley Head, £20) Greece’s former finance minister Yanis Varoufakis inveighs against EU apparatchiks, such as Jeroen Dijsselbloem, the unyielding chief of the eurogroup of euro area finance ministers. Their attitudes excluded the possibility of a negotiated, mutually beneficial outcome to the Greek debt crisis, already hostage to two bailouts that got French and German banks off the hook for unwise loans to Greece. Varoufakis writes, “Negotiating with them, trying to reason with them, was like negotiating a peace treaty with generals hell-bent on continuing a war safe in the knowledge that they, their sons and daughters are out of harm’s way . . . Why did Greece’s creditors behave as if they did not want their money back?”

Part of the answer is that German and French banks were now far better protected from a Greek default, so helping the Greek government collect tax, and correct a banking system that rewarded the oligarchy, were of relatively low importance. Varoufakis illustrates the banking problem with a story about Aris and Zorba, phrased initially in terms of two poor Irishmen who persuade a local publican to lend them a barrel of whiskey. They want to sell its contents by the cup at a fête in the neighbouring town, but rolling it along the road they pause for a break under an oak tree. One offers the other a shilling if he can take a cupful. His partner now has a shilling to spend, and does likewise. So it goes on — and on. Varoufakis rephrases this in a Greek context where Aris’s bank needs money, which Zorba lends to Aris’s offshore companies. In turn, Aris’s bank lends a similar amount to Zorba’s offshore outfits, and their families then use the offshore money “to buy new shares in their own banks, thus fulfilling the regulator’s requirement that new capital be raised and thereby qualifying for the real money that the poor taxpayer was borrowing from the troika”.

Rather than suffer the hangover the whisky-quaffers endured, along with their debt to the publican, Aris and Zorba end up owing nothing because the debts are written off soon after being granted — yet more non-performing loans among what is now €100 billion, or 45 per cent of overall lending, according to the FT.

Unfortunately many of the big players in the EU, such as Dijsselbloem (who was forced to correct a proud claim by the European Investment Bank that he had an MA in business economics from University College Cork) seem to have been largely innumerate, rather like the clever classicist who told me Brexit had only a 5 per cent chance of success. Had he tested the probability of “success” in numerous parallel universes? Of course not.

Numbers can be invaluable, but only when obtained in a rational manner and not invented to back up an emotional opinion. Even such paragons of exactitude as mathematicians have to be careful here, as the following problem illustrates.

You win a prize, and are presented with a choice of three doors. One hides a new car, the other two hide prizes of much lower value such as a goat. After you choose a door, the host opens one of the other two doors, showing a goat. This leaves only two unopened doors, and he offers you the chance to change your mind. Should you switch? I have known mathematicians insist you should stick to your guns, but the correct answer is to change. Here is why.

Play the game 30 times. Ten times out of 30 you choose the car, 20 times you choose a goat, so ten times out of 30 you should stick. On the other 20 occasions you should change doors. So, on balance, you change. Canadian-American game show host Monty Hall, who invented the problem, and died this year, complicated it slightly because he didn’t always open one of the other two doors — he might just open the door you chose, which naturally affects the calculations. But knowing how often he did this — when you originally chose right or chose wrong — allows a simple calculation of the best strategy. Those who want to stick with their original choice of door may put up bogus probability arguments, but are not acting rationally. They have not understood that opening one of the other two doors has changed the circumstances — a lesson the Troika seemed determined to ignore with a new Greek finance minister who wished to change the culture of clientelism and bogus accounting. Their reaction was strangely emotional, which is odd because Varoufakis was not necessarily dealing with politicians but functionaries, who might be expected to crunch the numbers but were more concerned with pleasing their political masters. This is a worry for Britain’s Brexit negotiations. If Varoufakis’s experience is anything to go by, one cannot expect the EU to act rationally, look at the numbers, and do as Keynes is reported to have said, “When circumstances change, I change my mind. What do you do sir?”

Apparatchiks may burrow into detail to provide politicians with what they think they want, but miss the big picture. This affected those working to please major players such as Wolfgang Schäuble, who initially wanted Greece out of the eurozone, but it also seems to have affected the IMF. On Easter Sunday 2015, Varoufakis met its head, Christine Lagarde, and asked her what she would do if she had power over legislation in Greece. She immediately mentioned the racket in which Greek pharmacies enjoyed a monopoly on baby foods and cosmetics. In response he astonished her with the much bigger racket perpetrated by the Greek bankers, “Aris, Zorba and their ilk, which kept them in control of the banks that they had bankrupted, all with the active support of the eurogroup”.

Corruption and innumeracy in spades, with bad loans of €100 billion, precisely one of the figures the EU expects Britain to pay to get out of an organisation whose opacity is not tempered by true democratic accountability — rather like the Soviet Union.