The collapse of the Eurozone, even if still unlikely, is certainly not impossible. The Eurozone should never have happened in the first place in its present form, and only did so because the Eurocrats were so anxious to extend the European empire that they smeared out the convergence criteria and blithely ignored the obvious impoosibility that the likes of Greece could ever compete with Germany within the straitjacket of a single currency. Now that this artificially concocted package may fall apart under the weight of its own internal contradictions, what will be the fall-out for the UK?Worse than one might think – no wonder the Treasury was so keen the Eurozone should survive, and not for love of the EU. With another recession imminent in the UK’s prime export market, British exports will be hard hit and the balance of payments deficit will widen. Already, even before the current looming crash, the UK deficit on traded goods was a staggeringly bad £100bn a year. Once exports dry up to the market which normally absorbs nearly 60% of Britain’s trade in goods, this will widen disastrously.
Then there’s UK banks’ exposure to Eurozone bad debt. Whilst they hold only €14bn of Greek bonds, they also hold a much more worrying €75bn of Italian debt and €103bn of Spanish debt. Large losses on all of these could seriously destabilise several UK banks. Much more dangerously, the City of London, the world leader in financial derivatives, is heavily involved in the global credit default swaps market by which banks and investors hedge against sovereign bankruptcy. In that event, which is quite likely, bank funding could dry up quickly, resulting in a second credit crunch for borrowers. Furthermore, pensions and savings portfolios could be further hit in the swirling atmosphere of economic uncertainty.
One certain consequence of all this chaos will be that Cameron and Osborne will light on the European imbroglio as the perfect explanation for the deepening UK recession. Never mind that the UK economy had flatlined for a whole year before any possible Eurozone collapse, the Tory government and the Tory press will present a united barrage that austerity was the right policy and would have worked but for those incorrigible EU spendthrifts. Labour will have its work cut out to head off this lie, since the next election may well depend on getting the truth established. Better start now.