Eurozone crisis: Greek exit ‘would cost 50,000 Scottish jobs’
A GREEK exit from the eurozone would throw 50,000 people in Scotland out of work as the shock-waves of the move wreaked havoc on the country’s hopes of recovery, a leading economic forecaster has warned.
In the starkest analysis yet of the crisis in the eurozone, the Fraser of Allander Institute said that, despite not being in the euro, Scotland would still suffer from a so-called “Grexit” as exports slump, confidence drains and bank lending is further constricted. In the less likely event of a total eurozone collapse, the impact would be even greater, with as many as 144,000 jobs lost over a three-year period, more than the cost of the 2008 financial crash.
The institute’s director, Professor Brian Ashcroft, said that, given the struggle the economy is already facing to recover from that crash, a fresh blow from the eurozone could mean “two decades of lost growth”, with output only returning to pre-2008 levels at the end of the 2020s.
He said the clear solution was for Germany and the European Central Bank to put their economic muscle behind the weaker eurozone nations and banks to stave off the fear of bankruptcy and collapse across the continent.
However, ahead of yet another key EU summit at the end of the month, there remain grave doubts about whether such a comprehensive package can be agreed, given German reluctance to bail out un-reformed southern European nations.
Two EU rescue funds may be used to help buy up the debts of the two biggest countries in trouble, Italy and Spain. But European Commission officials yesterday warned that such a move should only be considered a “financial paracetamol”, taking the pain away for a while, without solving the root problems.
Analysts warn that, given the massive tensions and disparities between the nations of the eurozone, a total or partial collapse is still a real possibility, perhaps by the end of the year.
That warning came despite the swearing-in yesterday of the pro-bailout Greek prime minister Antonis Samaras, who is expected to form a government today. It also came on the same day that encouraging job figures were published, which showed the number of unemployed Scots fell by 14,000 between February and April.
The new Economic Commentary by the Fraser of Allander Institute, based at Strathclyde University, is the first to assess the impact of a euro break-up on Scotland, using existing data to estimate the effect on the country over three years. Its analysis assumes no countervailing measures by the UK government are taken.
It concludes: “A Greek exit leads to a drop in GDP in Scotland of 1.2 per cent and a loss of just under 50,000 jobs. The consequences of the break-up of the euro would be a major economic event for Scotland although we are not in the euro. With an estimated drop in GDP of 5.3 per cent and loss of 144,200 jobs, the event would be comparable in scale to the effects of the recent great recession.”
Given a Scottish workforce of 2.5m, that worst-case scenario represents almost one in 15 workers losing their jobs. Prof Ashcroft said: “It is very sizeable and very frightening, and we may have under-estimated it. This would come on top of a situation where we are still trying to recover from the major shock in 2008 and 2009.”
He added: “This could mean not just a lost decade but a lost two decades to get back to where we were in 2008.”
The commentary says that, in the medium term, the most likely scenario will see the eurozone “muddling through”, with further sticking-plaster measures considered. However, the real solution would require a full fiscal union and sizeable cash transfers from rich countries to poorer ones. The report said this remained unlikely, given the stance taken in Germany and other better-off nations.
In Mexico, as the G20 summit came to a close, US president Barack Obama expressed his belief that a solution would be found soon.
“I am confident that, over the next several weeks, Europe will paint a picture of where we need to go,” he declared.
A joint statement at the end of the summit declared that euro-zone members would take “all necessary measures to safeguard the integrity and stability of the area”, including a “more integrated financial architecture”.
Both US and UK delegates dropped fresh hints that the detail on a new deal would emerge by the end of this month, in time for the next EU summit. Prime Minister David Cameron said that “significant agreements” had been made. US Treasury secretary Tim Geithner told reporters: “You’re going to hear more from the European leaders in the coming days about the specific proposals they’re going to put in place.”
German chancellor Angela Merkel is expected to fly to Rome tomorrow for a meeting with French president François Hollande, Spanish prime minister Mariano Rajoy and Italian premier Mario Monti.
However, the European Commission played down the long-term impact of any possible new plan. Reports yesterday suggested they may be working on a new scheme to use up to £600 billion of funds from the new European Stability Mechanism to buy up Italian and Spanish debt. It is hoped this would drive down the cost of Spanish and Italian bonds by showing that the eurozone was prepared to stand behind the debts of its members.
Amadeu Altafaj, spokesman for the EU’s eurozone commissioner Olli Rehn, said such a plan “could be useful to calm markets”. However, he added it would only work “for a certain time”. “It would be financial paracetamol,” he said. “It could soothe tension, pain and malaise… but it does not heal the root causes.”
In Greece, the newly elected Mr Samaras is likely to call on Germany this week to request an easing of the terms of Greece’s bail-out conditions, which resulted in job losses, pay cuts and reduced welfare payments. However, many analysts say that, despite the new government being formed, the underlying financial problems afflicting the country will still see it forced to return to the drachma.
Alan Brown, senior adviser at Schroders Investment Management, said: “I think we’re likely to be close to the point – Greece is likely to be out within a year.”
Even without a eurozone collapse, the Fraser of Allander report warned yesterday that the Scottish economy faced a long road back to recovery, having still to regain the lost output from the 2008 financial crash.
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Sunday 26 May 2013
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