There aren’t many economic issues anyone can agree on right now. The economy might need a stimulus, or we may need to stick to cutting the deficit. The Bank of England might need to print more money to save us from another recession, or perhaps it should finally do something about inflation.
You have more chance of reaching an agreement on whether Strictly Come Dancing is better than the X Factor than of resolving any of those questions. But one theme unites politicians and pundits right across the spectrum of opinion: a break-up of the eurozone would be terrible for Britain.
A euro collapse would put “millions of livelihoods at risk”, warns the deputy prime minister, Nick Clegg. “It would do enormous damage,” argues the chancellor, George Osborne. A chorus of senior industrialists and economists make precisely the same argument. Indeed, it would be so bad that Britain has little choice but to grin and bear it while a fiscal union is created on the continent, over which we have little say. We must also dig into our pockets when asked to fund another few tens of billions for the International Monetary Fund (IMF) to bail out the countries in trouble. It’s annoying, but better than the alternatives.
On the face of it, you can see their point. The eurozone is Britain’s largest trading partner. A euro-collapse would lead to a deep depression across the continent. British businesses would suffer and jobs would be lost. Our banks might well be on the hook for massive losses on eurozone sovereign debt.
But would it really be that bad? Let’s start with exports. It is a mistake to think of our economy as being mainly made up of people making things to sell to Europe. It’s true that we trade a lot with the continent. America is our main export partner,but France and Germany are numbers two and three. The eurozone countries account for 43% of our imports and 47% of our exports. Our exports account for 27% of GDP. So roughly 13% of our economy is dependent on exporting stuff to the eurozone: a significant but not overwhelming chunk of the economy.
How badly would that be affected by a euro break-up? Assume the collapse of the single currency leads to a deep recession – perhaps a 5% to 10% drop in GDP. Any industry that was in any way dependent on discretionary spending would get knocked for six. But Britain doesn’t make many things that people buy in the shops anymore. Our major physical exports are weapons, pharmaceuticals, and oil and petroleum products, closely followed by lots of business and legal services, financial services, media, design and consultancy. We export a lot of cars, mainly from big Japanese manufacturers based here, and Scotch whisky, which, while mainly drink by the Japanese, has a following across the continent.
It seems fair to assume that the weapons business will be fine and medicines usually do OK, whatever is happening to the economy. So does oil: people have to carry on driving their cars and heating their houses. Business services never fluctuate that much. In fact, the only real sector of the British economy that would seem acutely vulnerable to a collapse of the euro is the Japanese car plants. And possibly the Scotch distilleries – although who knows, they may well need a few stiff ones over at the European Central Bank as the deal goes down.
Overall, then, it is wrong to assume that the 13% of the economy that exports to the eurozone is going to be wiped out. Some sectors will be hit hard. But others will do OK.
Next, think about the upside. The City is home to Europe’s major financial centre. The French and the Germans might well blame the boys in the pin-striped suits for the collapse of the euro. But they will still need people to re-establish national currencies, and they will need people to trade them against the dollar and the yen. The only place to find that kind of expertise will be in the City. The lawyers will be working round the clock redrafting contracts and filing writs. Consultants will be working overtime to make sense of the chaos for big firms.
Britain will also benefit from a flight of capital. There is already evidence that wealthy Greeks are buying London property, seeing it as a safer bet than keeping their money in euros. The Italians and Spanish may well follow them. If the London market gets a big boost that could very quickly ripple out across the country. A revived housing market would be a shot in the arm for the economy. Inward investment would benefit: American and Japanese and Korean firms would relocate here to escape an unstable eurozone. And, of course, there would be a one-off opportunity for British firms to snap up assets across Europe at bargain prices as the euro collapsed in value.
On balance, Britain might gain more than it loses. There are not many bright spots on the horizon for the British economy in 2012 – but the collapse of the euro might just be one of them.
• This article was originally published in MoneyWeek magazine issue number 569 on 23 December 2011, and was available exclusively to magazine subscribers. To read all our subscriber-only articles right away, subscribe to MoneyWeek magazine.
• Matthew’s new e-book The Long Depression: The Slump of 2008-2031 is available now from Endeavour Press.