Looking Beyond the Economic Impact of a Greece-less EMU

February 9, 2015Global Challengesby Marc Chandler

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There are geo-strategic implications of a 'Grexit'

The discussion about Greece and its future in the monetary union, or like Greenspan opined, the lack thereof, has focused on economic issues to the near-exclusion of all else.  This is myopic.  There are important geostrategic interests at stake.

Historians continue to debate what country lost at Yalta, the territorial settlement at the end of WWII that recognized a Soviet sphere of influence in eastern and central Europe.  Will they one day debate who lost Greece?

Greece is an important NATO member.  If forced out of the monetary union, and by extension the EU, it would increase the risks it leaves NATO.  Could this turn into Europe's Cuba?

Syriza has hinted at leaving NATO from time to time.  Its delegates vote sympathetically to Russia in the European Parliament.  While the Defense Minister Kammenos plays emphasize its NATO commitments, the Deputy Defense Minister Isichos is more enigmatic, saying that leaving NATO is not among Greece's first priorities.

The context of this is very significant.  First, although the EU has moved to qualified majority voting on some issues, sanctions against Russia require unanimity.  Second, the confrontation over east Ukraine has escalated.  The increased hostilities have spurred calls from some in the US Congress to send weapons to Ukraine.  European officials are largely opposed, but the US pressure appears to be forcing a solution be found.  Obama and Merkel will discuss this today.  On Wednesday Germany, France, Russia and Ukraine are set to meet in Minsk to try to find a settlement.

Germany and France reportedly are prepared to endorse a 50-70 kilometer demilitarized zone and greater autonomy for east Ukraine.  Russia reportedly is demanding a new federal constitution that concedes broad powers to the Russian-backed rebels.  Russia already occupies part of Georgia and supports an "autonomous" region in Moldova. 

Meanwhile, there has been much confusion over Cyprus, which itself is not a NATO member, but has military facilities for France, Germany, and UK.  Some reports, ultimately relying on Russian reports, claimed that Cyprus offered Russia air and navy bases.  The same media that is so ready to question US media reports took the Russian reports at face value.  Nor have they printed corrections (yet) following the clarification by the Cypriot government.

Cypriot Foreign Minister Kasoulides.  He indicated that Cyprus is only contemplating non-military and humanitarian services, such as allowing Russia access to its facilities if it needed to evacuate its citizens from the Middle East. Cypriot President Anastasiades will visit Moscow later this month to formalize a renewal of existing agreements.  In particular, Russia had previously sold Cyprus military equipment.  The agreement involves contracts for maintenance and spare parts

This clarification underscores the geostrategic importance of Greece.  Despite the earlier claims, Russia has yet to cross the threshold that allows it to project power into the Mediterranean.  Russia's use of Syria to project power into the region has is being threatened and earned the wrath of Saudi Arabia.  Some claim that Saudi anger toward Russia over support for Assad is part of the calculus of not cutting back on OPEC oil output.  

Most observers weighing in on the issue of Greece have emphasized economic and financial linkages.  The official creditors suggest that Europe is in the best position for a Greek exit.  The banks are stronger.  There are backstops, like ESM and OMT in place.  At the same time, Greece's primary budget surplus means that it is not borrowing any longer for domestic purposes.  It is only borrowing money to services its existing stock of debt.  

Such economic determinism does not do the situation justice, and, in fact, leaves policy makers and investors vulnerable to unintended, but foreseeable, consequences of a Grexit.  One need not go as far as positing Greece leasing ports and/or other facilities to Russia.  The simple neutralizing of a NATO asset would itself alter the balance of power in the region.  Greece is one of the few EMU countries that meet its NATO commitment for military spending, and as we have previously noted, it is an important customer of German and French armament dealers.  It is also one of the sources of its debt.

Geostrategic Implications of a Grexit is republished with permission from Marc to Market

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