The economic appeasement of the Greeks will soon be over. For in sanctioning a second bailout to Greece, last week’s hapless EU summit served only to embolden politicians and protesting populations in Ireland, Portugal and elsewhere that they can continue living beyond their means indefinitely.
It is the abject failure of the European political class to face up to stark economic reality that makes the latest stage of the Eurozone financial crisis potentially so very dangerous. This latest episode has served only to buy several more months before the next solvency crisis becomes evident.
I observed on this website a year ago this week (The next financial crisis may already be upon us) that any sovereign default in the Eurozone risked being economically as profound as the collapse of Lehman Brothers in September 2008. Such an outcome now appears inevitable and the UK economy, with its continued reliance on the financial services sector, cannot hope to emerge unscathed.
Amidst all the talk of the UK successfully facing down German and French demands during last week’s negotiations, I fear the ECB’s bailout fund is something of a sideshow in all this. The UK taxpayer is now ever more exposed via the IMF to any sovereign bailouts in the Eurozone. Unpalatable though this may seem it is also probably in the UK’s best interests. After all, if Greece’s banks collapse the EU sovereign state then most immediately on the critical list is not one of the ‘Big Four’, nor even Portugal or Ireland. It is Cyprus. For the economy of that small nation has historically been even more closely interconnected with Greece than other Eurozone nations.
Let’s not underestimate the number of UK citizens in North London and beyond, part of the Cypriot diaspora here, whose financial affairs are inextricably bound with Cypriot banks. The UK’s exposure here can only be tempered by an urgent strategy for an orderly restructuring of Greek – and in time other sovereign – debt.
Even such an initiative will not get the UK off the hook. For the impact of penalising debtholders in any future Eurozone banking collapse (already agreed from 2013) or restructuring also stands to have a profound effect on the pricing of risk. In short one of its unintended consequences is that before long the cost of servicing UK government debt may rise substantially.
George Osborne frequently retorts that, ‘The UK has Portuguese levels of debt and German rates of interest’. Most commentators regard this as a ringing endorsement of coalition government economic policy. Rightly so – for the coalition government’s avowed policy, after a decade of uncontrolled debt and credit, to eliminate the structural deficit within a single parliament has reassured the financial markets. However, it would perhaps be wiser to see this statement of economic fact as an urgent warning of potentially troubled times ahead.
For this reason, Sajid Javid's piece on ConHome on Wednesday serves as a timely reminder of the urgent need for the entire UK political class to get a grip on the moral imperative to keep outstanding net government debt to sustainable levels for future generations.