By Iain Martin
7:00PM BST 19 May 2012
Pressure is building in Britain for an in/out referendum.
What does the European crisis mean for Britain?
The uncertainty over the future of the euro and the accompanying recession in parts of Europe could not have come at a worse time for the struggling UK economy. Estimates of how much of Britain’s global trade is with the eurozone vary. It is somewhere between 40 per cent and 50 per cent, perhaps higher.
Either way, our single largest trading partner being in crisis creates practical difficulties for British businesses trying to sell goods and services to Europe. It affects orders, investment, profits, growth and jobs in the UK. There is some good news. British banks are not directly overly exposed to stricken Greece, unlike the French and German banks and governments who lent far too much. The Treasury took precautions last year and asked UK banks to reduce their exposure. Britain also retains its own currency and our trade outside the EU is showing serious signs of improvement. During the crisis the pound has also recovered, making this a good year to holiday in Europe.
If Greece leaves the euro, how will the rest of Europe be affected?
Against a backdrop of gridlocked negotiations, and with evidence of runs on some banks in the eurozone, it looks as though it is all but over for Greece in the euro. In European capitals, contingency planning is under way.
f Greek withdrawal happens, and that could be within days, it will be very sudden. An emergency government in Athens will have to relaunch the drachma and probably impose something close to martial law to keep order. The real difficulty for Britain comes if there is then contagion, with panic spreading to bigger European countries such as Spain and Italy, which are also struggling with debts and uncompetitive economies. If that cannot be contained, expect the return of the “credit crunch” across Europe, which would make banking difficult, freeze trade and deepen Britain’s recession.
What is the likely cost?
According to UBS, the Swiss bank, even if Greece stays in the euro it will mean 60 billion euros of bailout money already lent to Greece by European taxpayers having to be written off. If Greece leaves the single currency, thus defaulting on its debts, estimates start at 225 billion euros of losses.
Robert Chote, the head of the Government’s Office for Budget Responsibility, warned last week that Britain might never recover from the resulting deep recession or depression.
However, even in current circumstances, that is an uncharacteristically melodramatic analysis. Britain, and Europe, have recovered from much worse, such as war, in the past.
Of course, what lies ahead is potentially chaotic and thus terrifying. But if the euro can be stripped back to its stronger core members and weaker countries such as Greece leave, to devalue, those nations will have some hope of eventual recovery. In contrast, it is difficult to see where growth and recovery are going to come from with the increasingly untenable status quo.
What will be the political impact in Britain?
The eurozone crisis could change the game. It vindicates Eurosceptics and is a humiliating defeat for the Europhiles who advocated British membership of the single currency. British public opinion is becoming more hostile to the EU and pressure is building for an in/out referendum, to settle the question at last.
David Cameron is usually good in the immediate aftermath of a crisis; following a eurozone meltdown or reorganisation he would have an opportunity to renegotiate a looser British relationship with the EU. But it is highly unlikely he would do that, particularly as he is in coalition with the Europhile Nick Clegg, who wouldn’t let him. And if the longer-term result of a Greek departure is the misery of a sustained economic depression, it will surely be hard for an incumbent prime minister to hold on to power.
Labour is already recording large poll leads, and some of its leading figures – such as Tony Blair, Lord Mandelson and David Miliband – have started to rally round the current leadership. They clearly sense that, contrary to expectations, events are conspiring to make an Ed Miliband premiership perfectly possible.
What if other eurozone countries are caught in the contagion and pressure is applied on Britain to contribute more money?
Britain will not join in any future European driven bail-out of the single currency. But if countries beyond Greece, such as Spain, are at risk of falling out of the euro, the sums required to prop up the European economy will be so vast that there will immediately be a call made by eurozone governments for funds from the International Monetary Fund (IMF).
The US, and other leading world economies including Britain, will comply, for fear of the consequences of refusing short-term aid to stricken Europe. If there is such a euro meltdown, forget the current argument over the Government’s so-called Plan A, involving austerity, or Plan B, the Opposition’s call for even more spending aimed at stimulating the economy. At that point Mr Cameron and George Osborne will need to come up with a Plan E (E for Emergency), to deal with the dire consequences of prolonged recession and global economic chaos.
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