Looking at things prima facie, it appears as though with the exclusion from the new treaty, the UK will remain for the most part, directly unaffected by the Eurozone's new agreement.
Speculation of Recovery
The Eurozone crisis is twofold: a banking crisis and a government debt crisis. The former is that European banks have been finding it increasingly difficult to borrow in foreign currencies like the dollar. The latter is that government spending has increased sharply, resulting in a sharp increase of government borrowing. Both these problems could also become problems that the UK faces.
The English banks have a limited exposure to European banks, with the exception of the Republic of Ireland and France. The French banks however, own a great percentage of Italian and Spanish debt. This means that if one of these banks went bust, it would make borrowing in the financial markets very difficult for the UK banks.
However, it is at times like these that the Bank of England offers support in the form of crisis facilities, like the one it just implemented to cover the risk of banks unable to or facing difficulties in borrowing in sterling.
To further complicate matters, Greece will be seeing a change in government with the upcoming elections. The government will have about 60 days to implement structural reforms that are long-overdue and come to an agreement on curbing public spending as much as possible before the troika officers come down for a critical inspection in June.
Despite the crisis, the UK has been able to borrow at very low rates. Chancellor George Osborne claims this is because the UK is considered a "safe haven" as Germany is, due to its austerity measures. Other economists suggest that this is because the UK's economy is severely depressed, not unlike Japan's.
So the real risk that the UK faces is that of inflation, not debt. This could happen if the banking crisis in the Eurozone spilled over to the UK, which is heavily dependent on foreign money to close the trade deficit. However, since the government only borrows in sterling, it could lead to a lot of the investors losing confidence in the UK and exiting the pound, which would in turn cause the value of the currency to fall. This would mean an increase in prices of imported goods and government borrowings.
But the UK has an option that the Eurozone doesn't. In the worst case, to finance expenses, the Treasury can order the Bank of England to print more currency.
Speculation of Recovery
The Eurozone crisis is twofold: a banking crisis and a government debt crisis. The former is that European banks have been finding it increasingly difficult to borrow in foreign currencies like the dollar. The latter is that government spending has increased sharply, resulting in a sharp increase of government borrowing. Both these problems could also become problems that the UK faces.
The English banks have a limited exposure to European banks, with the exception of the Republic of Ireland and France. The French banks however, own a great percentage of Italian and Spanish debt. This means that if one of these banks went bust, it would make borrowing in the financial markets very difficult for the UK banks.
However, it is at times like these that the Bank of England offers support in the form of crisis facilities, like the one it just implemented to cover the risk of banks unable to or facing difficulties in borrowing in sterling.
To further complicate matters, Greece will be seeing a change in government with the upcoming elections. The government will have about 60 days to implement structural reforms that are long-overdue and come to an agreement on curbing public spending as much as possible before the troika officers come down for a critical inspection in June.
Despite the crisis, the UK has been able to borrow at very low rates. Chancellor George Osborne claims this is because the UK is considered a "safe haven" as Germany is, due to its austerity measures. Other economists suggest that this is because the UK's economy is severely depressed, not unlike Japan's.
So the real risk that the UK faces is that of inflation, not debt. This could happen if the banking crisis in the Eurozone spilled over to the UK, which is heavily dependent on foreign money to close the trade deficit. However, since the government only borrows in sterling, it could lead to a lot of the investors losing confidence in the UK and exiting the pound, which would in turn cause the value of the currency to fall. This would mean an increase in prices of imported goods and government borrowings.
But the UK has an option that the Eurozone doesn't. In the worst case, to finance expenses, the Treasury can order the Bank of England to print more currency.
About the Author:
Michael Fielding writes articles on behalf of Ferratum UK who provide short term loans and instant payday loans for those who are hit with an unexpected cost
0 comments
Post a Comment