ment’, and the according provision of the public good ‘political stability’—by
putting the exchange-rate regime deliberately at risk.
According to the logic of the Schelling conjecture (Putnam, 1988;
Schelling, 1960) the following is valid: The less voters are inclined towards
European matters and thus, the stronger they respond to aggravating un-
employment rates, the higher the new members’ leverage in bargaining for
transfer payments or similar compensations. Therefore, CEECs can dispose
of an effective brinkmanship strategy in ERM II—i.e. a deterrent threat elic-
iting the EU’s willingness to pay for political stability. The threat relies on
provoking an exchange-rate crisis scenario that entails considerable default
costs, which are a disadvantage to current members as well. The following
section consider the game-theoretic conversion of the preceding considera-
tions.
3
Game-theoretic analysis
This game-theoretic analysis determines the scope and limits of the
brinkmanship. By the same token, the analysis inquires into the Rubin-
stein (1982) bargaining solution for that conflict. It demonstrates to what
extent CEECs can pass costs of convergence on to the EU-15. The entire
game in the phase of ERM II consists of the brinkmanship and of the sub-
sequent bargaining game. Finally, the discussion results in determining an
equilibrium solution for the entire two-stage threat game.
The subsequent game G refers to the phase of CEECs as ‘members with
a derogation’, which is the period of ERM II. The brinkmanship game is
characterized by complete but imperfect information. The investigation
of strategic interaction—i.e. disputing the the distribution of investment
costs between current and prospective members of the EMU—occurs in two
steps. First, the brinkmanship is elaborated in the form of a sequential
game. Second, the subsequent bargaining for redistributing the costs of
convergence is analyzed.
The two players are the single CEEC
i
(denoted as player j = 1, whereas
i = 1, ..., n) and the EU-15 (player j = 2) with quasi-linear preferences
for the public good ‘political stability’. The players’ risk-preferences are
given by the factors γ
ij
. Both players haggle over sharing the costs of
convergence. These costs are the Maastricht costs of convergence denoted
as C
C
i
for a specific CEEC
i
.
The preceding discussion has also shown
that bearing the entire C
C
i
reflects each player’s maximum willingness to
pay for a successful passing through the phase of ERM II. The according
8
Convention