Grexit and the aftermath: What does it mean for the UK?
It’s been a rollercoaster ride, but what does the third Greek bailout mean for the UK, are we out of the woods from a Grexit and are there any positives to draw?
Like the best of the Greek mythological sagas, the so-called 22-hour war ended when Germany capitulated and agreed to an €80bn bailout, under pressure from France, Italy and the IMF. In return Greece will have to overhaul its VAT system, cut pensions and raise €50bn from the sale of state assets, which will be put into a trust fund supervised by its creditors. It’s a tough deal for Greece, some calling it a new Versailles, and one that will require a complete transformation of the way it has operated in the past. Not just a revolution in economic policy but political culture too, to banish the overstaffing and cronyism that led to the bloating of the state budget in the first place. But can it work?
Unsurprisingly commentators and economists are divided. Eurosceptics argue Greece’s experience shows how Economic Monetary Union (EMU) on a scale such as Europe’s is unworkable and seemingly no longer irreversible. They state this most recent bailout is only prolonging the eventual and inevitable exit of Greece and a return to the Drachma as the prescribed reforms can’t support Greek growth which will leave the country in a perpetual state of dependence on their creditors, whose eventual patience and willingness to bail Greece out for a fourth time will expire.
Those a little more sanguine have drawn comparisons to Ireland’s recovery and how the once Celtic Tiger has bounced back after its bailout in 2010 (the same time as Greece’s first bailout), as evidence that the Hellenic country can do the same. This may be misleading. Ireland’s crisis was precipitated by an overfunded private construction and development sector and those who lost jobs were easier absorbed into other industries, helped by Ireland’s huge export sector, relative to its size. Greece however, has one of the lowest levels of exports in the developing world and its economic crisis stems from the country’s corrupt, ill functioning public sector. Whereas Ireland had the institutional mechanisms of state to instigate and drive change, Greece does not – its state inefficiency is notorious, and it’s precisely Greece’s inability to adopt the institutional framework that should have accompanied EMU in 2001 that is partly responsible for the mess it is in today.
As European stock markets troughed and peaked with news of an agreed bailout for Greece, we saw first hand how a possible Grexit could affect the UK’s economic performance. June was the FTSE’s worst performing month of the last three years, largely down to the Greek crisis. The Eurozone is the UK’s largest trading partner, so any slump there would harm UK exports. British lenders remained minimally – if at all – exposed to Greek debt. HSBC is the bank most exposed to Greece, with 3.7% of its total net asset value invested in the country. The one clear winner however, was the London property market. Long the preserve of the Greek super-rich, agents in London reported an increase in Greek middle class buyers looking to invest their money outside of Greece in to stable assets that would maintain the value of their equity, hedging against a further Grexit in the future.
As for the wider picture and whether the deal means a sustainable path to recovery for Greece it remains to be seen. Perhaps, a healthy dose of perspective may be needed, provided by former Head of Economics at Goldman Sachs, Jim O’Neill, who pointed out that China creates an economy the size of Greece every month. With that said, are we overstating the fallout from any future Grexit?