Uncomfortable Greek lessons

Greece: lessons for UK: The Greek crisis has vindicated British euro-scepticism but is a warning on the UK’s deficit and debt. Gordon Brown, now seemingly in the twilight of his leadership, was right to stay out of the euro experiment. But other Greek lessons are uncomfortable.

The UK fiscal deficit is not too far short of Greece’s heroic 13.6 per cent of gross domestic product, and bigger than in Portugal and in Spain, just downgraded by the credit rating agencies. The risks for the UK’s finances are clear and big.

It might be argued now that utter disregard for the rules of the single currency — rather than profound design faults — has caused the euro zone’s problems.

But there can be little doubt that had the UK joined the zone’s ultra-low interest rates in the middle of the last decade would have seen the country suffer an even bigger housing bubble - and an even worse housing bust.

Ireland gives an idea of what might have happened. Irish house prices are now down by more than one-third from their peak.

The Irish banks would all have gone bust without huge state support. Government debt has soared still more rapidly than in the UK. And the route ahead for Ireland, and other troubled euro zone economies, is hard to discern. They must cut their deficits, but how they can regain competitiveness is unclear. Britain’s advantage is flexibility thanks to a depreciating pound.

However, the Greek crisis is also teaching that Brown was wrong to push others to jack up spending to overcome economic weakness. Italy, fortunately, did not heed that siren call. Its debt pile is as big as Greece’s but a fiscal deficit of a not-appalling 5 percent of GDP has so far kept it off the Greek rocks.

The rating agencies, which have made most of their calls in the midst of crisis rather than before it, might be keen to show themselves ahead of the game in the UK’s case. If the UK deficit is not addressed meaningfully soon after this week’s election, the risk of a UK downgrade and of spiralling interest rates on government debt may be high.

Britain may be pleased not to be euro-tied. But without the euro it has managed to tie itself in a dangerous knot all its own.