One forecast suggests the UK economy could comfortably survive a Greek exit from the euro. But a disorderly exit might result in a “horrific scenario” for this country.
In a report published today, the CEBR says bluntly: “We do not think that a break-up would be anything like the disaster that has been argued. Many of those who are exaggerating the impact of euro break-up are merely trying to excuse their abysmal track record in forecasting the economy this year.”
It says it is not predicting a break-up “in the immediate future… but it seems unlikely that it will survive very long, because of the political unpopularity of taking austerity measures seemingly to please foreign leaders and rescue foreign bankers”.
Growth will actually be faster than if the eurozone survives in its current form. CEBR
If Greece left, output across the eurozone would fall by 2 per cent in 2012, meaning no growth next year. Britain, which has less exposure to Greek debt than France and Germany, would see a fall of 0.5 per cent in 2012, bringing growth “precariously close to a standstill”.
There would be a fall in business investment, pushing Britain back into recession. But the alternative would be worse. “If the eurozone is to be preserved, one of the costs will be 10 years of austerity. If it breaks up, the immediate pain is much more intense, but then there is a more stable basis and we would expect that within about 30 months growth will actually be faster than if the eurozone survives in its current form.”
Over the longer term, Britain would not suffer at all. “After five years we would expect the UK to be at least as well off if the euro breaks up as it would be under the alternative scenario of holding it together.”
Economist Tim Ohlenburg, from the CEBR, told Channel 4 News: “It would certainly mean that Greece would have to default on its debts because these are denominated in euros.There would be a depreciation of about a third, inflation and a slump.”
But Mr Ohlenburg compared Greece to Argentina, which in 2002 ditched its policy of pegging the peso to the US dollar. “There was a sharp decline in living standards, but Argentina has recovered very well and is growing at a decent rate.
“It was a mistake for Greece to enter a currency union when the economy was not set up to compete. For the Greek economy, it is much easier to restructure outside because at a stroke it would become more competitive and have a much better chance to grow.”
The National Institute of Economic and Social Research (NIESR) has just published its growth forecasts for the world’s economies, and what happens in the eurozone is key.
It imagines several scenarios. In one of these, a Greek default spreads to Portugal and possibly Ireland and Italy. This “would make a more generalised banking crisis likely”, and to avert this, the European Central Bank “might need to commit to acting as lender of last resort for vulnerable governments”.
It can easily go to quite a horrific scenario. Simon Kirby, NIESR
Under another scenario, Greece exits the euro, devalues and defaults on its debts. It pays less interest on government debts and output rises, “perhaps quite sharply”, as it did in Argentina.
But the NIESR adds: “On the other hand, there are very large downside risks (in particular, the difficulties of full currency redenomination, and the possibility of forced EU exit) that were not present for Argentina. “
NIESR economist Simon Kirby told Channel 4 News it was feasible that a Greek exit from the single currency could be contained, as long as the eurozone managed to convince the markets it could cope.
“I think it’s possible if Greece turns round and says it’s leaving the euro, but that will depend on the bailout programme and resources the euro area is prepared to commit to other countries. As long as the effects on the euro area aren’t too large, the effect on the UK won’t be too bad.
“The alternative scenario would be that Greece exits and the financial markets do not believe that the programmes put in place will enable other countries to remain in the euro area. You start to see expectations of other countries leaving the euro. Within those countries, residents would remove deposits from the banks and move them to other countries.”
If there was a “disorderly” exit from the euro, “there’s a risk the financial markets will ponder who next… the markets could demand such a high yield on debts, they would have to have a bailout”.
Mr Kirby added: “If countries were defaulting on their debts, it would be harmful for the UK. It could put the entire banking system under strain. Business and consumer spending would fall, unemployment would rise. The banking system getting into trouble would mean another credit crunch. It can easily go to quite a horrific scenario.”