UK at “extreme risk” from eurozone crisis
By Conor Brennan
A report released today by Maplecroft ranks the UK as the country most exposed to the Eurozone crisis. Covering 169 countries outside of the Eurozone, the report places the UK in the top “extreme risk” category. Maplecroft came to this conclusion on the basis of its “high level of economic integration with the countries using the Euro, together with its lack of domestic resilience to an economic slowdown.”
The UK also comes top of the risk chart because foreign direct investment (FDI) from the Eurozone accounts for 20% of the UK’s GDP and British banks are exposed to £380 billion in Eurozone bank and sovereign bonds. That represents 27% of UK’s GDP. They say that exposure could “enhance solvency problems for financial institutions.”
Maplecroft conclude that the situation is “compounded by a large and unyielding fiscal deficit of approximately 8% of GDP and net public debt over 80% of GDP, making the UK’s capacity for a fiscal response to further economic crises in the Eurozone severely limited.”
Figures also released today by the Office for National Statistics shows UK GDP shrank by 0.7% in the second quarter of 2012. This puts the UK in recession for three straight quarters and the deepest for 50 years.
The UK government has sought to blame this on the Eurozone crisis. If that is right, and views on whether it is differ, the UK has direct influence over these external factors.
Future negotiations in Europe regarding debt mutualisation and a European banking union give the government an opportunity to outline how they wish the EU to address the on-going crisis. David Cameron, the Prime Minister, has stated his readiness to use his veto once more for “the national interest.” The national interest, in this case, is not accepting European supervision of banks or contributions to a common European deposit guarantee system. Mr Cameron should not be afraid to publicise the benefits of a scheme which will play an integral role in recovery of the Eurozone and consequently the British economy.
Over 50% of foreign direct investment to the UK comes from EU member states and the single market adds €600bn a year to our economy according to the UK government. There is no doubt the EU has beneficially enhanced the competitiveness and export potential of British industry. It is not surprising the UK tops Maplecroft’s index of countries most dependent on the Eurozone.
The Maplecroft report also concludes that Sweden, Poland, Hungary and the Czech Republic are at “extreme risk.” Those countries are also more towards the economically liberal end of the spectrum when it comes to EU members. The fact that there are so many members that share the UK’s concerns presents an obvious avenue for engagement. The government’s current strategy of seeking to be as uninvolved in the negotiations on the future of Europe as possible risks squandering a chance to wield considerable influence over the outcome.