It’s the nation at the extreme southeastern end of the European Union, the one that borders Turkey and the gateway to central Asia.
It’s Greece, the cradle of western civilization. Although other nations within the E.U. can claim proximity to Asia – for instance, Bulgaria also shares a small border with Turkey, and the small island of Cyprus is geographically east of Greece – none can rival Greece’s claim as the birthplace of European culture and democracy.
Thus, the entire E.U. held its breath this week as Greece teetered on the edge of national insolvency. If it should collapse in a heap of debt, the entire euro zone – and perhaps the E.U. itself – might well collapse with it.
Fraying At The Fringes
The E.U. was originally an exercise in economic unity, a relatively small free trade zone of steel and coal producers that was established by a handful of formerly warring nations in western Europe. Its founding nations had seen their economies destroyed during the Second World War; they hoped that, by binding themselves together, they could prevent such catastrophes from occurring again. In other words, the E.U. was never originally intended to stretch across an entire continent and encompass 27 nations.
But the dream of a United States of Europe flourished, and the E.U. grew. Decades after the birth of the trade bloc, many of its nation states agreed to relinquish their national currencies and monetary policies by adopting a common currency, the euro.
The E.U. experienced great success during the economically flush decades of the ’80s, ’90s, and ’00s, celebrating the absorption of many former Soviet dominated nations, the reunification of greater Germany, and the emergence of a transcontinental system of government. However, the 2008 collapse of the global economy brought troubling signs that nations at the geographical fringes of the Union – such as Iceland, Spain, and now Greece – might represent the canaries in a coal mine of a troubled geopolitical organization.
Iceland? A European State?
In a sense, the E.U. is already confronting huge challenges in managing economic problems within its own borders. The collapse of real estate values in Spain, for instance, as well as the monstrous increase of government deficits in Greece, would pose barriers to prosperity in any corner of the world.
But Iceland? Why is Iceland a European concern? Iceland is not a member of the E.U.; it is an independent island nation in the frigidly cold waters of the northern Atlantic Ocean. It isn’t even particularly close, in a geographic sense, to the continent of Europe.
In fact, Iceland lies beyond the shores of the isles of Britain and Ireland, which themselves represent economically troubled members that reside at the western fringe of the E.U. But Iceland may represent an even greater economic threat to the Union than these other member states, even as it flirts with the option of joining the Union outright.
A Matter Of Debt
But why is the E.U. so concerned about Iceland? Can it be because of political, cultural, and social habits that Iceland shares with the nations of Europe? Perhaps that is secondarily true, but more than likely, it is primarily due to the extent to which Iceland’s debts have wrecked the portfolios of European investors.
To put it simply, many Europeans invested their funds in the high interest offerings of Iceland’s high flying banks during the ’00s. And while the Icelandic economy roared, those investments paid off handsomely and focused global admiration and affluence on the small island nation. But when the world economy collapsed, the Icelandic banks collapsed as well, bringing down the entire island’s economy with it. Thus, although economic hardships in Reykjavik are usually not noticed in London or Paris, the defaults by Icelandic banks were sorely felt by investors in these great European cities.
In a sense, all of the economically troubled nations on the fringes of the E.U. share similar debt related burdens that threaten the region’s economic health. For instance, the decline in Spanish real estate values has caused much angst throughout the E.U. because investors throughout the continent have invested in Spanish property mortgage securities. Likewise, investors throughout the region have invested in Greek debt and now fear that a government default will deflate their own portfolios.
No Way Out?
So how will the E.U. address the debt conundrums that threaten its financial interests in places like Greece and Iceland? Because economic punishment for poor financial performance may reduce the likelihood of repayment even further, the E.U. is opting to assert its interests with a relatively gentle touch.
Thus, European finance ministers may be urging Greece to reduce its government budget deficits, but they are not yet calling for the nation to remove itself from the Euro currency zone. And European government ministers have even invited Iceland to join the E.U. in exchange for Iceland’s agreement to cover losses incurred by Icelandic banks, although Iceland’s president recently vetoed one such plan.
The great fear, of course, is that fiscal and monetary chaos at the outer fringes of the E.U. may spread to the economic heart of the Union itself. Such an event, if it occurs, may lead to greater shifts of economic power towards the emerging nations of the Eastern Hemisphere.