Judy Asks: Is Greece a Danger for Europe’s Southeastern Flank?

Of course! But how dangerous? Unfortunately, the answer cannot be derived from economic fundamentals or the science of epidemiology. The dreaded contagion is a matter of psychology. While it is true that markets react to credible information, it is equally true that we can rarely predict precisely how. Can anyone really know how individual lenders, investors, and depositors in Spain and Portugal would react to a Greek exit from the euro? Much will depend on political leadership. But what should Europe’s leaders say to reassure nervous markets? The answer is less straightforward than many think. Imagine you find a sign in the bathroom of your favorite restaurant that reads: “Employees must wash their hands!” Should you return to your table relieved that the management is committed to good sanitation or leave the restaurant worried that the employees apparently need to be reminded to follow basic rules of human hygiene?

Greece’s financial woes are creating turbulence way beyond its borders. It is shaking the foundations of the euro and the upcoming elections are also a decisive popular vote on the euro. If Greece turned into a semi-failed state leaving the euro in haste, it would also spell further problems in the already volatile region where Greece is located and where several countries like Bosnia and Kosovo already are security challenges in their own right for the EU. Greece could become another one.

Greece was always an outlier geographically and when it entered the European Community (EC) in 1981, it had no other EC-member states bordering it. Now it has Bulgaria as an EU neighbor but the region is still populated by new and relatively fragile states like Albania and Macedonia. Thus, it would also matter for Europe’s borders and the Schengen-cooperation. Greece is the southern frontier of Europe and particularly France—although mainly by Sarkozy pandering to right-wing voters—has been skeptical as to whether Greece is capable of protecting Europe’s borders. Even without the political election rhetoric, it is a valid point that Greece might find it much harder to live up to European commitments on migration management as a bankrupt state.

Greece matters for the Balkan neighbors where EU membership and the euro—adopted pre-emptively by Montenegro and Kosovo—still remain the aspiration. Greek banks have proliferated in the region and a bankruptcy at home would create credit crunches beyond Greece’s borders and in the region. Remittances from seasonal Albanian workers in Greece are dwindling, depressing local incomes. Thus slicing Greece completely off the euro map, will matter more than just getting drachmas back in the streets of Athens. It will also mean a loss of credibility for the EU in Southeastern Europe.

Saving Greece from leaving the euro might then pay off for the other EU member states and particularly Germany beyond the purely financial calculus, but also in light of stabilizing Southeastern Europe.

Greece is not really a danger to Europe’s southeastern flank, but there are wider risks than are often recognized. Greece is a major player in its small region, and events there have a domino effect. Some 600,000 Albanian citizens work in Greece, sending home critical remittances; a major Serbian bank is Greek-owned; Macedonia is dependent on the stable functioning of Thessalonika port. Also, EU member Cyprus is deeply bound up with Greece. The haircut applied to the Cypriot banks’ 5 billion euros worth of loans to the Athens government has done great damage to the island’s financial sector already, but few yet want to think through the fate of the 22 billion euros it lent to the Greek private sector—the equivalent of the whole Cypriot GDP. For now, it is Russia that has stepped in, bankrolling the 2012 Cypriot deficit with a 2.5 billion euro loan.

There is a real danger of Greece slipping further out of Europe after it leaves the eurozone. Although the Greek public wants to remain in Europe, anti-European resentment is likely to grow. The recent statement by Christine Lagarde that Greeks are tax dodgers and the comment from Juergen Fitschen, the head of Deutsche Bank, that he regards Greece as a failed state has been met with anger and alienation in Greece and this trend is likely to grow. Greeks have had a propensity to blame outside forces for their problems since ancient times and Europe and certain European countries are likely to play this role. Greece's economic weakness will make it vulnerable to the blandishments and money of Russia and China as it will be seen as a spokesman for their interests within the EU. Throw Cyprus and Macedonia into the equation and the potential for alienation grows. Greece could become a spoiler in the Balkans and eastern Mediterranean. The danger of alienation is there but it is not inevitable that Greece will continue this slide. It is in Europe’s interest to do what it can to foster Greece’s economic recovery and to avoid the easy rhetoric of recent days. Most of all, European leaders need to emphasize the Europeanness of Greece to avoid its slipping back into the Balkans or, worse, into the Middle East.