Eurozone break-up would benefit UK, CEBR
Economist warns that on/off Greek referendum has forced Europe to look over the edge and confront a potential eurozone breakup.
A eurozone break-up will hit the UK in the short-term but the country could be better off five years down the line, according to the Centre for Economics and Business Research.
The think-tank’s central expectation is that the eurozone will not break up in the immediate future.
However, CEBR’s rough assessment is that the cost of immediate breakup would be a contraction of gross domestic product of at least 2 two per cent for the eurozone as a whole in 2012, compared with CEBR’s central eurozone forecast of zero growth.
The CEBR warned there are three impacts on the UK - monetary, competitive and growth effects.
Douglas McWilliams, chief executive at the CEBR, warned that at first glance, the monetary impacts from Greece leaving the euro and defaulting appear manageable.
He said: “UK banks hold just £2.1bn of Greek sovereign debt, compared with £14.1bn and £9.3bn in Germany and France respectively.
“However, adding Portuguese and Italian defaults to the mix - which seems likely after an initial Greek default - would leave UK banks exposed, leading to bank recapitalisation, increased public debt, and reduced lending to the private sector.”
Mr McWilliams claimed that this could potentially create a two-tier eurozone, with a currency for Northern Europe economies and a currency for Southern European economies.
He said: “This would make our exports more competitive relative to Germany and less competitive relative to Southern Europe.
“In theory these net out but they will certainly be disruptive as competitive advantage shifts around.”
Mr Mc Williams highlighted that a 2 per cent eurozone GDP hit translates into an impact of about 1.5 per cent on UK exports in total, which would reduce UK GDP when it happens by about 0.5 per cent.
He said: “For 2012 this would bring growth precariously close to a standstill. A sharp downturn in business investment would push the UK back into recession.”
Mr McWilliams warned if the eurozone is to be preserved, one of the costs will be 10 years of austerity.
He said: “If it breaks up, the immediate pain is much more intense but then there is a more stable basis and we would expect that within about 30 months growth will actually be faster than if the eurozone survives in its current form.
“After 5 years we would expect the UK to be at least as well off if the euro breaks up as it would be under the alternative scenario of holding it together.”