PREDICTING THE OUTCOME OF THE EUROZONE CHICKEN GAME.

PREDICTING THE OUTCOME OF THE EUROZONE CHICKEN GAME. Simon Nixon in the Wall Street Journal (July 13) reported on a paper by David Woo and Athanasios Vamvakidis of Bank of America Merrill Lynch which predicts the outcome of the Eurozone chicken game. (Simon Kennedy at Bloomberg also reported on the paper). They analyze the game according to which of the 17 countries has the most to lose from different outcomes. They argue that Italy and Ireland have the greatest incentive to leave the Eurozone; Germany has the most to lose from an exit or a breakup. (They think Italy would gain the most from a devaluation and Germany would lose the most from the appreciation of its currency after an exit.) In the final staredown, they think that Italy will refuse to make reforms and that Germany will be unable to pay Italy enough to stay in the Eurozone. (Greece apparently has made a similar calculation that Germany has a great deal to lose from a breakup and will provide bailouts to keep Greece in the Eurozone). Of course, there are a lot of political factors that are not taken into account.