Alex Orr: Eurozone crisis may yet snare UK – and Cameron

Published on Friday 21 May 2010 23:15

GLOBAL stock markets have tumbled this week and the euro has fallen to a four-year low against the dollar due to continuing concerns about Europe's debt crisis and the future of the single currency.

Marches and riots on the streets of Athens may seem of little relevance to us here in Scotland. However, the impact will be profound and this is why it is so crucial the 651 billion financial safety net put together by the EU and the IMF to stop the financial crisis in Greece, and calm markets, works.

The UK is, of course, not a member of the 16-nation eurozone. However, it would be naive to assume the economic situation facing it is of no relevance to us. Something like three million British jobs are dependent on our membership of the EU, which accounts for 60 per cent of our trade, making it our largest trading partner.

Our fates are therefore inextricably intertwined.

There is a clear fear that Greece's troubles in the international financial markets will trigger a domino effect, toppling the weak members of the eurozone, such as the so-called "Piigs" – Portugal, Ireland, Italy and Spain, as well as Greece. The potential collapse of the Greek economy and other indebted nations of the eurozone, leading to a second recession, would clearly have an impact on us, derailing economic recovery.

The ratings agencies, which assess whether or not countries, companies or financial products are worth investing in, have downgraded Greece, Spain and Portugal, the first of these to "junk status". This makes it harder for them to borrow on the international markets and this is, again, of significance. British banks alone hold some 40bn of debt in Portugal, Italy, Greece and Spain. If any of these nations were to renege on their obligations, the crisis could quickly rebound on the UK, with global investors refusing to buy our government bonds, known as gilt-edged stock.

If the contagion were to spread to Spain, this would potentially spark a crisis for Britain's high-street banks, with the biggest focus being on Spanish superbank Santander.

A collapse in the euro wouldn't be ideal, either, as part of the UK's economic recovery plan is to have a weak currency and, as outlined earlier, the eurozone is our most important export market.

But the problems go a lot deeper than this. If investors start to scrutinise countries' balance sheets more carefully before they invest in them, the UK has a problem as our public finances are in a mess.

For now, the UK has been given the benefit of the doubt as our debt maturity is longer than most. However, once the markets have picked off the weaker members of the eurozone, then we might well be in the firing line.

A convincing plan will therefore be required quickly from the new coalition government. And with the Germans proposing to radically rewrite the euro rules, this will require a renegotiating of the Lisbon Treaty and a potential headache for David Cameron's new government – a referendum in the UK.

&#149 Alex Orr is a board member of the European Movement, an all-party group campaigning for the EU to become more democratic and effective, and for Britain to play a full role within it.