Understanding the Ramifications of State Fragility
Published August 12, 2015
By Logan Cuthbert
Fund for Peace – Global Square Blog
The term “Grexit”  has become a mainstay of political and economic discourse in recent times, becoming a necessary shorthand for one of the most significant challenges facing Europe in recent decades. The Grexit example demonstrates a number of important concepts: first, that in our highly globalized world, the struggles of one country of 11 million people can have wide reaching implications, particularly to its neighbors; and second, that metrics such as the Fragile States Index (FSI) are just as applicable to advanced countries as they are to the most fragile in understanding weakness and charting their trends over time.
Greece has found itself in a very public economic predicament since 2009 when it announced that it had under-reported its debt and had been doing so since 2001, prior to its entrance into the European Union (EU). The statement occurred just after the 2008 Global Financial crisis that sent shockwaves through economies worldwide. In response, Greece had its first bailout in May 2010, with the EU and the International Monetary Fund (IMF) formally lending €20 billion of an agreed €110 billion loan to the country. Greece had a €300 billion debt and had to borrow, with austerity measures, at an 8.4% interest rate. In 2012, the EU gave Greece €39.4 billion out of the agreed €130 billion, and the IMF approved a €28 billion arrangement with a caveat of further austerity measures, despite the Greeks’ discontent with these spending restrictions. In 2014, Greece’s unemployment rate reached a record high of 28 percent, the highest in the EU, and the anti-austerity Syriza coalition won the European election. This year, Prime Minister Alexis Tsipras of Syriza won the Greek parliamentary election, negotiating a four-month extension on payment to the IMF in return for lesser austerity measures. In implementing these reform measures, Greece became the first developed country to miss a payment to the IMF in July. This led to the national referendum in which Greeks overwhelmingly voted “oxi”, rejecting further austerity measures and other conditions for another bailout by the Eurozone. This vote was heavily pushed for by Prime Minister Tsipras as well as by the now-former Finance Minister Yanis Varoufakis, who resigned just after the polls revealed his desired result.
Despite the street celebrations of the majority of Greeks who voted no, this vote will have serious repercussions for not only Greece but also the EU and the rest of the world. In early June, the banks placed limits of €60 withdraw per person per diem to avoid a depletion of bank funds by worried consumers. Previously, there was speculation that the European Central Bank (ECB) could exit the country just as the IMF refused to do further business with Greece. If this had occurred, the Greek government would have had to support its own banks. Without any euros, Greece would have had to start printing its own money to stay afloat, essentially leaving the euro. Currently, there is no precedent for an EU country leaving the euro; according to the Treaty on the Functioning of the European Union (TFEU), countries who adopt the euro do so irrevocably under Article 140 subsection 3. Under the “flexibility clause” Article 352(1) of the same treaty, the EU could possibly remove Greece from the Eurozone and allow it to stay a member of the union, but the issue remains in the necessity of a unanimous decision by the commission to change the rules. Fortunately, the Eurozone leaders reached an agreement on 13 July to offer Greece a third bailout of €82bn-€86bn and Greece, the IMF, the ECB, and the European Stability Mechanism solidified a technical deal in early August; elsewise, Greece’s situation could have led to huge legal issues as well as monetary problems in the country, the EU, and the wider global markets. The technical agreement will go before the Greek parliament this week, and a deal must be reached before 20 August in order to make the €3 billion debt repayment to the ECB. Unfortunately, because Tsipras agreed to these deals and the mandated yet publically-detested austerity measures, Greece may continue to face instability, albeit on the social and political fronts instead of the economic ones.
Greece has been ranked in the ‘Less Stable’ category by the 2015 FSI, but it had dropped three places from the 2014 index and scored a 6.5 in the Poverty and Economic Decline category. Of course, the FSI cannot predict the future; it merely reviews trends and gives a starting point from which analysts can reflect upon each country’s individual progress and make changes where necessary. Perhaps this crisis and referendum could not have been wholly avoided, but delving more closely into indicator trends could help states determine their weaker areas and come up with viable solutions to improve their situations.
Greece’s fragility appeared to only affect Greece, but when there were talks of Greece leaving the euro, it became clear that one country’s fragility can and does affect other countries around the globe. If Greece could have defaulted and left the euro with minimal repercussions, there would have been unprecedented ramifications for the EU in general, specifically in countries such as Portugal, Spain, and Italy, who are also in debt and could have seen the potential Grexit as a way out. While Greece’s insecurity obviously affects the stability of the Nobel Peace Prize-winning EU itself, it also prompted global complications. One state’s fragility affects the rest of the states’ fragilities in this increasingly interconnected world.
It is important to view this Greek crisis as a lesson: state fragility is everyone’s issue, and monitoring fragility and creating innovative solutions to curb it where possible will make the global community a more stable, peaceful environment.