There is much in the news about Grexit at the moment and the big question is whether this would destroy the Euro. I don’t think so. The fear is that if Greece is forced out, then the focus will turn to Italy, Spain and Ireland. However, each of these countries has made good progress over the last couple of years and are not in the extreme situation that the Greeks find themselves in. Italy and Spain have better diversified economies and have benefited from the weakness of the Euro over the recent past.
As far as the UK is concerned, any crisis relating to Greece exiting the Euro will have little long-term impact. The Bank of England estimates that Britain’s total financial exposure to Greece is £7.7 billion. The government has provided £720 million of support for Greece via the International Monetary Fund and the Bank of England has provided £55 million of support via the European Central Bank. British banks have the largest exposure to Greece, estimated at £5.3 billion. Of this, it is thought that HSBC is most exposed, but the amount is insignificant relative to its capital base.
The UK view that monetary union means fiscal union has been proven right
The main impact of a Greek exit from the Euro would be falls in stock markets, which would affect pension funds and other savings, and a fall in the Euro, which would make life more difficult for our exporters. However, such crises are often short lived in terms of their impact on markets and it is likely that prices would recover fast as long as the contagion did not extend to Italy and Spain.
In terms of the long-term future of the Euro, the British have always been firmly of the view that you cannot have monetary union without fiscal union and that has been proven. There is then the question of whether you can have monetary and fiscal union without political union. If Germany really wants the Euro to work over the long term, then a move to a truly federal Europe is probably necessary. However, the inclusion of weaker countries makes this difficult to achieve. Looking back, it would have been more sensible to have a Eurozone that included Germany, France, the Benelux and Scandinavian countries only. Britain may even have joined under that scenario. What was created was doomed to failure and it will be difficult to work out a route to preserve the Euro without further political union if Greece exits.
Every business I speak to says we should stay in the EU
In the meantime, the UK will be focused on whether it should leave the EU over the next 18 months (or however long we have to wait for the referendum). Every business that I speak to is firmly of the view that we should stay in. Free access to a market of 500 million people is essential to the future of our economy although some reform of the EU is clearly necessary. David Cameron will have a new ally following the Danish election and it is likely that others will join the cause in the coming months.