Leader: Hacking storm conceals dire economic news

FOR the past week, political attention in the UK has been almost exclusively focused on the phone hacking scandal and the massive blow dealt to the corporate ambitions and political influence of the Murdoch media empire.

This has worked to shield rising concerns over troubling developments that may have a far more profound effect on everyday life in this country. In the past week, European markets have been convulsed once again, this time by the spread of sovereign debt concerns to Italy, the second largest economy in the single currency area. Of altogether greater concern is the intensifying stand-off between Republicans and Democrats in the US which could push the world's biggest economy into formal default. Such an even would trigger a financial crisis on a scale far greater than that unleashed by the collapse of Lehman Brothers, which brought two of Britain's biggest banks to their knees.

The western world is in the throes of a convulsive change: from an era of credit expansion to one of debt reduction and painful cuts in the budget deficits of governments.

The Italian parliament has now been obliged to accept a €43 billion (38bn) austerity package, stiffened by warnings that failure to approve these measures would push the cost of the country's massive debt to unsustainable levels.

What does this all mean for the UK? How can other counties' debt burdens be of concern to us? There are several direct conduits running to the heart of this country's economic health and wellbeing. The first is through a diminished European appetite for UK goods and services: Italy is now the fifth Euro economy to fall victim to austerity budgets with their consequent squeeze on incomes, living standards and jobs.

The second is through the banking system and the effect that continuing uncertainty over the creditworthiness of European financial institutions and governments will have on the balance sheets of banks here and their ability to recover from a crisis that brought a severe curtailment of lending. The third is through substantially higher contributions to international agencies such as the IMF. Finally, and arguably most corrosive of all, is the effect on household and business confidence.

Concerns over a US default on its colossal $14.3 trillion debt pile were heightened yesterday by a statement from ratings agency Moody's that it may cut its triple A rating, citing the "rising possibility" the US could default on its debt obligations.

This, together with reports that talks within Congress had ended stormily, sent the price of gold to a record high of $1,594.16 an ounce. Agreement has to be reached on raising the country's debt limit by 2 August. Across Europe, an era of politics fuelled by debt finance has come abruptly to an end. And in America the time for reckless political posturing is now running out.

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