Where do we go from here? Greece, the Eurozone and the future of the British Economy

I was never a fan of Mr. Brown as either Chancellor or Prime Minister, but he must be given enormous credit for one decision and that was to persuade Mr. Blair to drop the idea of Britain joining the Euro. I agree with the general consensus amongst political commentators and financial journalists that this will now never happen (or, at least, not in my lifetime).

As any first year Economics student knows, a sovereign nation must have control of its own interest rates both to control inflation and more importantly, right now when growth is so hard to come by, to be able to devalue its currency to make its exports more attractive; the Euro, therefore, was fatally flawed from Day 1 because the participant nations lost this ability. It clearly cannot survive in its current structure without some form of political or full fiscal union. What is certain, it seems, is that if Germany doesn’t yet again ride to the rescue it is difficult to see how Greece can survive without exiting the Eurozone. Even that will bring its own huge problems, so this really seems to be a no-win situation.

We must all be aware of the risk to the British economy of any Greek exit from the Euro. First of all, any debt held by British banks would be converted to a new Drachma which most experts believe would immediately devalue by at least 50%. This in itself wouldn’t push any British bank ‘over the edge’, but the losses will have to be sustained and the hole in their balance sheets will have to be filled, and even without the new capital requirements being imposed on them by the EC this will further restrict the banks’ ability to lend to small and medium sized businesses, who are currently bearing the brunt of the dearth of capital available for growth.

The challenge faced by the British Govt. is ‘many-fold’. In the U.K. alone, one of the reasons for the slow-down in High St. spending is the fact that many people are using the historically low interest rates to pay down debt, and therefore they are not spending. This is the result of the Bank of England artificially keeping interest rates low to encourage growth and weaken the £ Sterling, which helps exports (see above).

Overall, it seems like the Govt’s strategy of reducing the ‘deficit’ is correct because until we can get a balance of payments surplus and higher tax revenues we cannot start to make in-roads into the massive debt accumulated by previous Governments of both colours, and this is vital for the long term health of the country if we are not to burden our children and grandchildren with unnecessarily high taxes for decades to come! Unfortunately, the electorate can be fickle and, whatever they may be doing right for the long term, if Mr. Cameron and Mr. Osborne cannot demonstrate some ‘green shoots’ of recovery before the next election they may not be given another 5 years to pursue their strategy. However, it’s difficult to see what they can do with so many extraneous pressures over which they have little control.

However, on a positive note, our corporate clients seem to be surviving, indeed many are actually growing despite a hostile climate. The spirit of the entrepreneur is still alive and flourishing in Britain, and it is on this - more than anything - that we should pin our hopes for the future.

Posted In : UK, Europe, Market Commentary, Economy