2 Jun 2012

Greece, the Eurozone and the implications for the UK

Written by Christopher Pembridge

The saga which has been continuing recently on the political stage seems not to have an end in sight. It is marred by statistics so far removed from everyday life that the majority of ordinary people can barely comprehend what on Earth the scale of the European debt problem actually is.

The finest academics in the world, past and present, are split on how best to solve economic problems such as those faced by Europe today. Essentially, there are two main stances: smaller government with less public spending, the chosen method of our own Treasury, or a splurge in government expenditure in this time of hardship, the favoured theory of the late, great, John Maynard Keynes.

It can only be called na├»ve to be so firmly attached to one side of the spectrum that you refuse to look at the merits of the other. Indeed, it would be fantastic if the Greek government could tomorrow stimulate their economy with expansionary fiscal policy (jargon for spending more with borrowed money.) Unfortunately however, in a rather short-sighted manner, that’s what they’ve been doing for the last however- many- years before the crash of 2008; a time when they didn’t particularly need to, but wanted to, because the growth built on cheaply borrowed money seemed easy and attractive. This is a problem with the modern state in general: the reason why countries counter-intuitively run deficits even in relatively stable periods, and it is one which is not easy to find a comfortable end to. Namely, I’m referring to the fact that when a treasury shouldn’t borrow, at times of economic prosperity, it is extremely tempting to do so. There is no immediate peril of a high debt to GDP ratio when GDP growth is looking promising; it’s a statistical smokescreen. However, the ‘boom and bust’ comes into play and the times of prosperity are always followed by a period of recession, and if a treasury has racked up a giant debt in the good times, then there’s less room to borrow when the economy could use some stimulus.

Currently, not only in Greece, but also in crisis states such as Portugal and Ireland, national governments have become the puppets of the EU’s grand scheme to hold together the Euro with borrowed glue. The problem is that the people in these countries are just like you and me: they hold the government accountable (whether this is justified or not) for the recessions they are facing, and begin to favour politicians who would abandon austerity and instead grant their hard-pressed people some relief.

France’s debt is around 87% of GDP and would only rise higher, at least in the short term if the country abandons anything which can remotely be called austerity. With financial markets extremely concerned about Euro-based countries being unreliable debtors, this could threaten a situation where France is added to the list of those struggling to borrow money. When Europe’s second largest economy becomes blacklisted, there really is no way in which the Euro, abandoned by the French as too inhibitive and undervalued, could survive, even if German politicians wanted it to.

In this country we have become extremely used to living beyond our means. It is hard, politically, to wean the people off this attachment to paying less in taxes than they receive back in services, but it is something which must be done. The UK must accept growth figures around the zero mark for the foreseeable future whilst the budget is balanced. (Yes, budgets can be balanced and even reduced without high growth, despite what the Labour party proclaims). Short term zero growth and austerity is an evil, but so is fake growth founded on party politics and debt which eventually will collapse around us. In my opinion, the former is the lesser of the two evils. China’s growth is not founded upon public spending, and neither should ours be. The sooner those supporters of benefits for all see that, the sooner we can get out of this very modern problem of risking state bankruptcy, together.

In the grand scheme of things, if this occurs in the up-and-coming Greek elections, it is quickening the inevitable demise of the tiny country’s fragile, distorted economy. Greece will default as there is, of course, no desire to carry on repaying what they owe. The only relevant question is whether that happens this year- at the cost of €240 billion to the EU in write-offs of their bailouts; or in ten years’ time- at an unknown cost, after years of stagnation. The Euro will probably survive this event, with the Greek exit having a noticeable but not catastrophic effect on British, French and German economic statistics. However, France’s recent election of Francois Hollande and his socialist policies could be a precursor to a situation which would plunge Europe back into depression.

However fortunate Britain may feel itself to be, sitting on the side-lines of this European mess, there is no avoiding the fact that this would horrifically affect our export market. Deep recession in the UK may follow and the government would be unable to cut the deficit without even further spending cuts and tax rises. Such a situation would likely prompt the people of this country to elect a Labour government promising to do exactly what financial markets don’t want us to do: borrow more in order to plicate the people.


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