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5 reasons you should worry about Greece and the euro
(Update) The eurozone once again faces a full-blown crisis centred on Greece. What does it mean for people in the UK?
by Gavin Lumsden on May 21, 2012 at 09:03Follow @FundFanatic
The eurozone once again faces a full-blown crisis centred on Greece.
The chances of the country remaining in the euro club are no better than 50-50 following this month’s messy general election in which voters registered a protest against the austerity measures required to reduce Greece’s debts.
With the risks of financial chaos growing I look at how you could be affected.
1) Eurozone recession would hurt us
Greece may be small, representing just 3% of the eurozone economy, but it cannot simply drop out of the single currency without causing massive financial disruption.
The great fear is of a ‘disorderly’ euro exit but even if Greece withdraws after a period of preparation it will deal a shattering blow to Europe’s fragile banking system and economies.
Banks that lent to Greece would have to write off all their debts if the country reverted to the drachma, not just most of them as they have previously done. Further weakened, they would lend even less to consumers and businesses, hitting economic growth.
There is also the danger of bank runs as people panic and withdraw money from institutions they think may be unsafe. There have been ominous signs of this already (see below).
In all probability the eurozone would suffer a deep recession, extending the UK’s own downturn as around half of our exports go over the Channel.
Last week the governor of the Bank of England said it was ‘inconceivable’ that a breakup of the euro would not hurt the UK as he slashed his growth forecasts for this country and said inflation would take longer to fall than he had hoped. Some feel King is still being too optimistic.
Robert Chote, chairman of the Office for Budget Responsibility, has warned that the crisis could push the UK into its second deep recession since the financial crisis, and that it 'may never recover' its lost growth.
2) Financial contagion and bank runs
The Greeks may be right to object to the decades of hardship they would endure repaying their country’s debts in full. But the alternative is hardly much better. The currency devaluation that would come with a switch to the drachma would give Greece a platform on which to rebuild its economy, but only at the cost of wiping out the savings of its population.
Worried savers have already pulled €1 billion out of Greek banks since the inconclusive election, which left the country temporarily in the hands of an unelected judge.
More about this:
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- What are bonds and how do they work?
- Why is the stock market falling?
- Citywire Selection fund recommendations
What others are saying
- Martin Wolf of the Financial Times on the implications of euro disintegration
- The Independent: UK warned of credit downgrade
- The Guardian: UK 'may never fully recover' if Greece exits euro
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