Negotiation in the News: Greece’s bad deal gets worse

A brinksmanship approach to crisis negotiations backfires

By on / International Negotiation

Sometimes in negotiation, we bargain less as the equal of our counterpart than as a supplicant, hands outstretched in the hope that the other party will help us stay afloat. Negotiating as the weaker party requires a special set of skills as we strive to advocate for our needs without irritating the other party into walking away. During its negotiations over the summer with other eurozone nations for the funds it needed to survive its deepening financial crisis, the government of Greece had difficulty striking an effective balance between assertiveness and humility.

Austere negotiations

In the aftermath of the 2008 global financial crisis, Greece revealed that it had been understating its deficit figures for years, news that then prevented it from borrowing in the global financial markets. As it skirted bankruptcy in 2010, Greece received two international bailouts totaling approximately $264 billion from the International Monetary Fund, the European Central Bank, and the European Commission, according to the New York Times. With the funds going primarily toward repayment of Greece’s huge debt, the nation’s economy continued to shrink, and unemployment skyrocketed to 25% this year.

Having risen to power in opposition to the austerity of European-led recovery plans, Greece’s new prime minister, Alexis Tsipras, engaged Greece’s European creditors—the 19 nations that use the euro—in a new round of bailout negotiations this past summer. With “a style of bluster and attack that is just not how things are done among European leaders,” according to Neil Irwin of the Times, Tsipras and his negotiating team demanded a reduction in its debt—a so-called haircut.

When European negotiators refused, Tsipras surprised them by announcing that he would allow Greek citizens to vote on the austerity deal on the table. In public appearances, the prime minister urged his countrymen to vote down the European proposal, saying a no vote would help Greece gain leverage in the negotiations and get a better deal—even as European policymakers warned that a no vote would imperil Greece’s chances for any deal at all, according to the Wall Street Journal.

As Tsipras had hoped, Greeks rejected the European deal. But the outcome had repercussions that the prime minister apparently had not anticipated. Conveying defiance and instability, the referendum result put the nation’s financial system on the brink of collapse. Greece’s banks and stock market closed, and the negative press took a toll on the tourism industry.

Returning for a worse deal

As talk of Greece having to leave the eurozone grew, Tsipras headed back to Brussels, hat in hand. On July 13, following contentious round-the-clock negotiations, he and his team agreed to an austerity deal with European creditors that was worse than the one rejected by Greek voters and that the Times characterized as “an almost total capitulation.”

In exchange for up to $98 billion, the new bailout imposes higher taxes, cuts to government pensions, and a sell-off of $55 billion in state assets to recapitalize Greek banks and enable debt payments, according to the Times. The eurozone nations also agreed to consider easing repayment terms on Greece’s existing $300 billion in debt and to provide $30 billion for a short-term stimulus program to try to jolt Greece’s economy toward recovery. The Greek parliament quickly approved the deal.

Four lessons for coping with crisis

Economists continue to debate the best course for Greece—to remain in the European Union or withdraw; to focus on austerity or economic stimulus. But one thing is clear: The troubled nation pursued a flawed negotiating strategy as it struggled to manage the crisis. The following lessons emerge from Greece’s mistakes:

  1. Think several steps ahead. Tsipras appeared to view his decision to hold a referendum as a means of firming up his approval at home. Yet he failed to adequately think through what might happen if voters rejected the bailout deal: that Greece’s economy could tumble further, putting it in an even weaker negotiating position with Germany and its allies.
  2. Match your pace to outside events. When you are negotiating amid a crisis, pacing is key. At times you may want to try to encourage a slower, more methodical pace; at other times, you will need to keep up with rapidly changing events. The Greek government appeared oblivious to such pacing issues, conducting leisurely bailout negotiations with its creditors and pausing for a referendum even with its economy in free fall.
  3. Rationally assess your own power. A hard-line approach to negotiation that includes making rigid demands and attacking the other party’s views is rarely an effective negotiating strategy. It’s a downright disastrous choice when you have no appealing alternatives to agreement. When asking for favors, make it easy for the other side to say yes, both with your actions and your demeanor.
  4. Make a contingency plan. Tsipras and his team reportedly thought little about what would happen if bailout talks failed. Germany and other European nations, however, gave significant consideration to the possibility of Greece leaving the eurozone, according to the Times. Through such contingency planning, Europe became comfortable with its best alternative to a negotiated agreement, or BATNA, while Greece was left staring into the abyss.

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