Could today’s Greek tragedy become tomorrow’s euro nightmare?Follow @PwC_NI
After months of crises and negotiations, a Grexit - the latest term for a Greek euro exit – is as topical as ever. But how can a small Mediterranean country have such a disproportionate effect on the world’s largest trading bloc.
What does it matter for Northern Ireland anyway; and even if it did, what can we do about it?
PwC Chief Economist, Dr. Esmond Birnie, explains why we should care.
Why is there a Greek crisis?
Greece was living well beyond its means even before it joined the euro; and when it did join, things got worse as the Greek government could for the first time borrow at German interest rates. So, when the global downturn hit, a combination of years of skyrocketing public spending and widespread tax evasion meant Greece could neither pay its debts nor sustain its economy.
Since 2010, a €240bn bailout, loan write-offs, renegotiations and a 6% annual decline in the economy has fermented widespread civil unrest, two general elections and a growing fear that Greece would be forced to leave the euro and potentially default on €356bn of foreign debt.
The second Greek election outcome was a best case scenario for the euro, with the pro-bailout New Democracy and its leader, Antonis Samaras bolting together a ruling coalition. That’s the good news for euro supporters as it quashes fears of an immediate and messy Greek euro exit.
The bad news is that the fundamental problem of how Greece can pay its way within the European currency union hasn’t been fixed.
Samaras fought an election to keep Greece in the euro, but he also pledged to renegotiate the hair shirt austerity bailout that triggered the election in that first place. That means Greece and its creditors are back at the table for yet more negotiations.
How does this become a eurozone crisis?
First, because if Greece leaves the euro and reintroduces the drachma, that will quickly devalue making is even more likely that Greece will be default on existing debt. And with UK banks alone are owed €9.2bn, and French banks much more heavily exposed to the tune of €41.4bn, that shock will impact on banking confidence.
Second, investors will stop buying government bonds from other vulnerable economies like Italy, Spain and Portugal and those governments in turn, won’t be able to pay their creditors; savers will shift their money to ‘safer’ banking locations in say, Germany or the UK, leading to potential banking defaults.
Third, the collective impact of this would be to undermine confidence in the global banking system, triggering another credit crunch.
How would that impact on Northern Ireland?
Well, of the 125,000 Northern Ireland jobs created in the decade to 2008, we’ve already lost over 30,000 thanks, directly and indirectly, to the credit crunch. Yet another credit crunch will take another heavy toll on employment and push the region deep into recession.
The latest Fraser of Allander report has calculated that the direct result of a Greek eurozone exit would be a 1% decline in UK GDP growth. In Scotland alone, Fraser of Allander says 49,000 jobs would be lost and the Scottish economy would decline by 1.2%.
So the impact could be very severe; whether it would be catastrophic would depend on what would happen next to the other heavily indebted euro countries.
But there’s not much the Northern Irleand Executive can do about it, is there?
Not a lot but some opportunities exist.
First; understand the problem and its implications. Companies need to know what could happen and how they might be impacted. We’ve developed a PwC report and action plan that is going to our clients; some if it is on our website, but every company needs to know.
Second; we need to encourage new export strategies. In the past 14 years the our overall level of external sales has increased and RoI now accounts for approximately 40% , Europe for 20% North America 18%; and the Rest of the World has increased to 21%.
However, the overall level to the BRIC nations (Brazil, Russia, India and China) remains low at no more than 3% and given the low absolute volume of sales to the BRICs (£123m in 2010), boosting that could be a real coup.
Finally, we need to drive up productivity amongst both our indigenous and overseas-owned companies. There is no quick fix for the eurozone, but increasing knowledge, exports and productivity would be a good start.
Email: Esmond Birnie
Tel: +44 (0)28 9041 5808