The economic skies have rarely looked darker.   The determination of the coalition government to press ahead with major spending cuts this year (assuming that the appointment of the inexperienced Danny Alexander as Chief Secretary doesn’t change the direction of policy) looks more dangerous by the day, given how the international economic environment is steadily worsening.

The growing contagion in the Eurozone directly threatens the UK recovery even though (thankfully) we are not members of it.   Some 60% of UK exports go to the EU, including 50% to the Eurozone.   If the Eurozone breaks up – an increasing likelihood – the Tory Little Englanders won’t get the economic common market of their dreams, but a collapsing system of debt default, competitive devaluations, and widespread stagnation.   A significant loss of UK export markets would undermine bond-holders’ confidence that the UK, locked in recession, could soon escape the vicious spiral when caught between rising debt charges and deepening recession.

Spain today, Britain tomorrow?   Spain is already trapped in such a spiral since it has to refinance half its national debt every 3 years, and if Euro-denominated bond-holders demand a higher yield, even the EU’s recently provided E750bn bail-out fund may not last long if the contagion moves on from Greece and Spain to Portugal and Ireland.    That last desperate resort could see the European Central Bank printing Euros (quantitative easing EU-style) and using it to buy Eurozone government debts – not a happy precedent in following Latin American practice.

This will inevitably spark a showdown between the hardliners, led by Germany, demanding a revision of the Lisbon Treaty rules to enforce much greater fiscal and monetary discipline, and those (more far-sighted) who want a European Monetary Fund to oversee member states’ budgets and arrange short-term transfers between states plus, crucially, change the rules to ensure that countries running trade surpluses (par excellence Germany) expand their economies to relieve some of the pressure off deficit countries which are forced to tighten their belts.

Nor is it just our biggest export market that’s in trouble.   The US is far from out of trouble and no locomotive for early growth.   Its joblessness is still stubbornly stuck around 10% while at the same time it lectures Europe about debt, yet is offering no fiscal consolidation plan itself.   The overriding need both for the international economy and for the bond markets is growth, not deficit reduction, yet national governments remain obsessively fixated on the latter to the exclusion of the former.

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