The Never-Ending Woes of the Eurozone

The never-ending Eurozone crisis has reached a new low today with the cost of borrowing for Spain rising to almost record levels, just a whisker below 6.7%. Tomorrow is also going to be an important day for the Eurozone, the Irish are going to the polls tomorrow to vote in a referendum on the new EU fiscal compact treaty. If the Irish reject the treaty, it will send shockwaves throughout Europe likely destabilising Greece and Spain even more.

More discussion has focused on the likelihood of Greece leaving the Eurozone. The Economist Paul Krugman who has written a book on, what he calls, an economic depression is becoming increasingly visible. He claims that a Greek exit would be “awful” for the world economy and that Greece may never recover, he believes that the austerity imposed on Greece and other Eurozone countries simply is not working. In the UK he is calling for the government to use the record low borrowing costs to borrow money to fund infrastructure projects and help to boost the economy.

Krugman has claimed that the crisis will send the world economy into chaos and he believes that if the leaders of Europe want the euro to survive there must be some form of political union. Although this appears unimaginable it does make sense, a political union would make it easier to spread the wealth around and allow Greece and Spain to become competitive again.

So what are the risks for the UK? Well we have very little exposure to Greece itself, but the fear of contagion if Greece defaults or leaves the Eurozone puts us at bigger risk. The exposure to Italy and Spain for Barclays, RBS and HSBC is about €10 billion each, but RBS’ exposure to the Eurozone as a whole is €70 billion. If Greece defaults and leaves the Eurozone it will have catastrophic consequences for the Eurozone. Krugman believes that unless Merkel and the Germans concede defeat and allow the Greeks to have more lenient austerity a Greek default is inevitable. 

US economist Paul Krugman