How vulnerable would new UK government be to Grexit?

Greece Image copyright Getty Images

For all the hour-by-hour reports that talks between Greece and its eurozone creditors are going better (as is said to be the case today) or worse, the working assumption in the UK government (in its dying days) is that Greece will leave the euro.


Well British ministers and officials have witnessed, they tell me, that the patience and goodwill towards Greece of their German counterparts is completely exhausted (and I have seen some of the same).

And they also detect a curious alliance between the eurozone minimalists and maximalists.

The minimalists believe the eurozone has put in place adequate buffers and has taken enough remedial action - a bigger bailout fund, supposedly successful austerity in Spain and other vulnerable economies, a demonstration that the European Central Bank will be more interventionist - to limit contagion from a Greek exit.

And the maximalists hope that the only way to secure the kind of budget-making and political union that they see as necessary to underpin the euro in the long term is to give eurozone political leaders and citizens a big scare - and the departure of Greece would be that.

Also neither maximalists nor minimalists want to give populist parties such as Podemos in Spain or the Front National in France comfort that refusal to play by eurozone rules will deliver dividends. So neither want Greece's Syriza government to be able to declare that it has trounced Berlin and Brussels.

So if Greece were to be out of the euro - still hypothetical naturally - when might we know that?

Well next Monday's meeting of eurozone finance ministers is billed as a big one in that regard - which is bloomin' obvious given that the Greek government is running perilously short of cash to pay creditors including the IMF and the European Central Bank.

And it won't be long, I am told, before the European Central Bank further curtails the ability of the Greek government to borrow from Greek banks.

Now I have to say the smell (sic) of déjà vu around all this is overwhelming. I remember on UK election night in 2010 telling David Dimbleby live on air that Greece was on the brink - and that the mess in the eurozone could have a bigger impact on our prosperity than whoever wins the election.

Well this time it is the same and different.

Now it was always moot how vulnerable we were to a Greek-style crisis in Britain - though the head of the Treasury Sir Nick Macpherson has recently conceded that he and ministerial colleagues felt it important to err on the side of caution, and impose greater austerity than might have been strictly necessary, to insure against such a crisis.

The reward, if such it be, is that since 2010 the UK's public sector deficit, while still large by international standards, has been halved to 5% of national income.

And all the main parties likely to lead or influence a new government in Westminster are committed to further deficit reduction.

Which further reinforces the idea that the UK cannot possibly turn into Greece (not to mention the conspicuous facts that our banks have been nursed back to health and our central bank has shown a willingness to be the buyer of first resort for the government's debts).

What is more the UK economy is growing faster than most big rich competitors - albeit there was a slowdown in the first three months of the year.

Also in the eurozone more-or-less everywhere - apart from France and (to state the obvious) Greece - there are unmissable signs of economic recovery. In Spain, for example, that recovery looks pretty robust. Even in Italy growth may at last be picking up.

All of which indicates that an exacerbation of the Greek crisis would be an inconvenience for Britain. But by no means a disaster.

That said, the Treasury fears that Greek exit would be more damaging to the medium-term sustainability of the euro than most of the eurozone establishment apparently believes right now - in that it would prove the euro is not forever.

The euro would be turned into a glorified Deutschmark peg: speculators would have a big incentive to bet on who will be next to leave the currency; and history (the ERM for example) shows those bets can be self-fulfilling.

So here is the weird symmetry with 2010.

Early next week, whoever is Chancellor will attend a meeting of EU finance ministers as a bystander - though not a wholly dispassionate and disinterested one - as they decide the fate of Greece and (perhaps) of their bold monetary experiment.

He (I'd love to think of a possible "she" chancellor) will presumably point out to eurozone colleagues that what is probably best for the prosperity of Europe is not a precipitate Greek exit. But will be powerless to do anything about it.