The UK isn't an island

UK/Greece: Britain can’t wash its hands of Greece. Some of its euro-sceptic politicians, including London’s Mayor Boris Johnson, love the idea that the deeply troubled southern state might leave the single currency. They should be careful what they wish for. A chain reaction default and break-up of the euro would put Britain’s banks back in hospital and crush the European economy, the UK’s major trading partner. One can understand why euro-sceptics are reacting with glee to the euro’s misery.

They predicted it would all end in disaster. While that remains to be seen, it is true the project was premature and Greece, specifically, should not have been allowed to join when it did. But unscrambling this egg would be a messy business - particularly if it was done right now. It’s hard to see how Greece could leave the euro without the country’s banking system collapsing. Ordinary citizens would rush to remove deposits before these were denominated in drachmas. That would also have knock-on effects through the euro zone - and even reach Britain’s shores.

Euro-sceptic politicians make great play of how Greece accounts for a small fraction of the continent’s economy - and it is only 2.4 percent of the euro area GDP. What they don’t appreciate is how contagion could be triggered by a chaotic Greek default and that the rest of Europe hasn’t yet built strong defences against such an eventuality. For the UK, one of the main avenues of contagion would be through the banking system. If the Greek banks collapsed, there could easily be a panic in the Irish banking system.

If that drove the Irish economy further into a bog, Britain’s banks – which have exposures totaling at least $135 billion to the emerald isle – would be back in crisis. RBS , for one, would need further infusions of taxpayers’ funds. Britain should be delighted that the Greek government has survived a no-confidence vote – jumping one of the hurdles needed to unlock the next tranche of bailout cash necessary to stop an immediate default. There may come a time when the rest of Europe can safely cut Greece loose. But not now.