The Reemergence of Geostrategic Risks

In the post-cold war era, otherwise known as Pax Americana, geostrategic risks were considered a thing of the past. Francis Fukuyama’s best seller “The End of History” captured the times. U.S.-Russian relations seemed destined for a permanent rapprochement, while the formerly communist countries of Eastern Europe modernized their economies and joined western institutions such as the EU and NATO. Meanwhile, China’s opening to the world was continuing apace.

But this benign international environment ended with a thud over the last few years, as geostrategic issues again dominate the headlines. Russia’s relationship with the West soured quickly with the former’s invasion of Ukraine and annexation of Crimea. And China seems determined to reassert itself both regionally and globally, challenging U.S. hegemony in both spheres. Fraught relations with Russia and China are tectonic shocks to the international landscape, making benign neglect of geostrategic risks untenable.

Country Risk Definitions

Here are some basic country risk definitions for one’s edification.

Country risk: A collection of risks associated with investing in a foreign country.

Political risk: The risk that an investment’s returns could suffer as a result of political changes or instability in a country.

Sovereign risk: The risk that a foreign central bank will alter its foreign-exchange regulations thereby significantly reducing or completely nulling the value of foreign-exchange contracts.

Credit risk: The risk of a government becoming unwilling or unable to meet its loan obligations.

Economic risk: The risk that macroeconomic conditions will affect an investment.

Geostrategic risk: The risk that international events, such as wars or diplomatic initiatives, will damage business or financial interests.

Grexit Strategic Risks Trump Economic Ones

With Greece comprising just two percent of the European Union’s economy, one might wonder why policymakers are so troubled by the prospects of a Greek exit. The simple answer is that strategic risks greatly outweigh economic and financial ones.

On the economic front, EU countries are not overly reliant on the Greek market for their exports, so the economic loss would be marginal. Additionally, European banks are more insulated from a Greek default than they were in 2010, as most of the debt is held by foreign governments, the ECB and IMF. Financial contagion would be averted.

The strategic risks, however, may be pronounced. First, entry into the euro zone was considered permanent and inviolable. Smashing through this assumption would set a terrible precedent by rupturing this principle of inviolability. Fears that other highly indebted nations such as Portugal and Spain could exit during a future crisis would no longer seem irrational. This could adversely impact the euro’s strength and usage as an international currency.

But the more acute worry is strategic. A Grexit could damage the EU and NATO since Greece would remain a member of both. Having a disgruntled, resentful, economic basket case within the EU would prove cancerous, as it would inflame political divisions already present within the 28 nation bloc. An imploding and resentful Greece would also be susceptible to Russian influence, likely hindering NATO’s ability to act and threatening its unity. These strategic issues cannot be underestimated and make a Grexit truly worrisome.