Euro sceptics enjoyed an über helping of schaden freude last week as Greece, according to press headlines, teetered on the brink of bankruptcy and put the euro in peril.
The problem is that Greece has been living way beyond its means and this might trigger a sovereign debt crisis. That wouldn’t be good news for the euro and Europe, which is our biggest trading partner, so it wouldn’t be good news for us either.
Obviously schaden freude can be an expensive as well as a short lived experience but at least all that bad news took the heat off other data which showed that our trade gap grew by £0.5bn in November compared with October to reach £7.3bn.
Perhaps sterling hasn’t fallen quite far enough, though on the brighter side the situation might improve when the government’s £2000 car scrappage scheme comes to an end and the demand for small foreign cars dries up.
Comparisons with Greece are of course unfair.
Greece has already experienced the economic benefits of hosting the Olympic Games while the UK has yet to reap that economic stimulus.
The UK is not in the euro, so for the time being we can continue to devalue our currency and carry on spending our way out of the recession, at least until the general election.
Besides, while Greece’s budget deficit as a percentage of GDP is not that much different than our own, its total debt as a percentage of GDP stands at 124%.. The equivalent figure for the UK is a far healthier 62%.
Swingeing cuts are now on the agenda for Greek consumers while a similar prospect for the UK moved towards the inevitable over the weekend when a group of leading economists published a joint letter, calling for a credible medium term fiscal consolidation plan to make a sustainable recovery more likely.
In the absence of a plan to reduce the deficit their letter stated: “there is a risk that a loss in confidence in the UK’s economic framework will contribute to higher long term interest rates and or currency instability, which could undermine the economy.”
The cuts, they recommended, should be implemented in the 2010/11 fiscal year which presents an interesting challenge for the chancellor whose options for a pre-election budget must be constrained by inflation running at 2.9% in January and the economy growing by 0.1% in Q4 of last year.
Back in the 1970s that would have been called stagflation (inflation without significant growth) but according to the governor of the Bank of England, “the tailwinds of an enormous policy stimulus and the depreciation of sterling are meeting the headwinds created by the balance sheet adjustment of the damaged banking system. Spare capacity will press down on inflation in the medium term”.
Indeed, according to windy King inflation is only a “near term” problem. Thus he conceded last week that the January figure for CPI inflation was likely to exceed 3% and that would trigger an open letter to the chancellor. On both previous occasions when this happened, he recalled, “the MPC said that inflation would come back down. On both previous occasions it did. And the Committee expects that to be the case this time too.”
Third time lucky then for Mervyn King and his MPC crew and we can all move on to what a growing band of economists are calling “a slow credit-less recovery”. However, with the deleveraged banks and building societies trapped in a battle for retail savings it is difficult to see where the stimulus to the economy will come from. I hate to admit it, but all seems Greek to me.