UK 'may never fully recover' if Greece exits euro

Andrew Sparrow, Helena Smith and Larry Elliott

guardian.co.uk, Friday 18 May 2012 21.01 BST

http://www.guardian.co.uk/business/2012/may/18/uk-greece-exits-euro

Robert Chote, chair of the Office for Budget Responsibility, who was speaking to the Guardian as world financial markets staggered to the end of a week that rekindled memories of the collapse of Lehman Brothers in 2008, warned that there was risk that a fresh downturn would do irreparable damage to the UK. Britain has made up less than half the ground lost when output plunged by more than 7% in 2008-09, and Chote said there was a risk that "you go down and you never quite get back up to where you started".

In a separate exclusive interview, Alexis Tsipras, the increasingly powerful 37-year-old Greek politician now regarded by many as holding the future of the euro in his hands, told the Guardian that he was determined "to stop the experiment" with austerity policies imposed by Germany. He described the tax increases and spending cuts as a "crime against the Greek people".

The leader of the Syriza party, whose success in last month's general election has led to political paralysis in Athens and a second general election, said he wanted Greece to stay in the euro, but was fighting capitalism. "On the one side there are workers and a majority of people, and on the other are global capitalists, bankers, profiteers on stock exchanges, the big funds. It's a war between peoples and capitalism ... it is the international financial system, and more especially banks, that are gaining most".

The head of the UK's OBR said the deepening crisis in the eurozone could force him to tear up his forecasts, made only two months ago, that Britain would post modest growth of 0.8% this year. "The concern is that you end up with an outcome in the eurozone that creates the same sort of structural difficulties in the financial system and in the economy that we saw in the past recession, and that has consequences both for hitting economic activity in the economy, but also its underlying potential," said Chote.

With economic output in the UK still 4% below its peak level when the recession began in early 2008, the prime minister and the governor of the Bank of England, Sir Mervyn King, have expressed concern in recent days about the vulnerability of Britain to the eurozone.

Chote said he was particularly concerned about the possibility that a second deep recession would leave permanent scars. "That means not just that the economy weakens and then strengthens again – it goes into a hole and comes out – but that you go down and you never quite get back up to where you started."

Shares in London closed down for a third week, with the jittery mood in financial markets pushing the FTSE 100 below 5,400 for the first time this year. German and French stock markets were also depressed, with even the much-anticipated stock market debut of Facebook in New York failing to lift spirits.

Greece's caretaker prime minister, Panagiotis Pikramenos, said the German chancellor, Angela Merkel, had suggested in a phone call to the Greek president, Karolos Papoulias, on Friday that Greece hold a referendum on its continued membership of the single currency alongside next month's elections, in an apparent attempt to encourage voters to back mainstream parties who support the current austerity programme.

The German government said that no suggestion of the kind had been made. But the Greek government was insistent, and said that Pikramenos had rejected the suggestion because he does not have the power to call a referendum.

Merkel's finance minister, Wolfgang Schäuble, said the eurozone crisis could last two more years, while financial market speculation that Greece's days in the euro were numbered cast a shadow over the annual gathering of leaders of the G8 western industrial nations at Camp David. Canada's prime minister, Stephen Harper, voiced his frustration at Europe's leaders, demanding tough action to tackle the crisis.

In Brussels, the European commission denied comments by Europe's trade minister, Karel de Gucht, that preparations were being made for Greece's departure from the single currency.

Meanwhile, analysts at Deutsche Bank predicted that the weak state of Ireland's banks could result in the former Celtic tiger requiring a second bailout, and in Spain there were reports that the government would call in Goldman Sachs to help sort out its banks after 16 suffered credit downgrades on Thursday.

In an echo of the months leading up to the Lehmans collapse, Mike Smith, chief executive of Australia and New Zealand Banking Group, said the turmoil in the eurozone meant Australian banks were being frozen out of money markets when seeking funds.

Chote said there were so many uncertainties around what might happen with Greece and the eurozone that trying to produce firm predictions was not "particularly helpful".

But the OBR has tried to quantify the impact of a disorderly sovereign debt restructuring in the eurozone on Britain – and the figures make grim reading. Britain would be plunged into recession for two years, according to the OBR analysis, published in its most recent economic and fiscal outlook report. There would also be deflation and unemployment would reach almost 11% by 2013-14, with debt subsequently reaching more than 90% of GDP.

Chote said these projections were of limited value because the eurozone crisis could develop in so many different ways. "For example, one issue would be, do difficulties in the eurozone make it cheaper or more expensive for the UK government to borrow?" he said. "If it makes investors more nervous about risk in general, it might make it more expensive. If they see the UK as more of a safe haven, it might make it less expensive."