The UK is not the first country to be on the verge of leaving the EU. It may benefit from a much larger and more productive economy than that of Greece, but there are alarming structural similarities between the two economies that cannot be ignored. Like the threat of Grexit, Brexit is expected to hurt the UK economy. And now, after an indecisive election that weakened the government’s ability to govern, another similarity to struggling Greece is being added. A critic.
Chancellor Philip Hammond insists that the UK economy is ‘resilient’. But look closer and there are striking similarities with Greece, a country hard hit by the recession.
Both enjoyed debt-fueled prosperity. British public debt has increased even more aggressive than its Greek counterpart. Successive governments in Greece have run deficits for many years. They were committed to public services such as free health care and free education. Both countries maintain an expensive military, a large civil service and have spent billions to host the Olympics. The Greek government recently succeeded reign over one’s deficits and currently has a structural budget surplus. Great Britain still waiting.
Industry and property
Both countries saw the industry decline in the 1980s, leading to greater reliance on the service sector for employment and tax revenue. In Britain, the service sector now accounts for 78% GDP; in Greece it’s 85%. Tourism, the financial sector and real estate are at the heart of the Greek economy. It’s much the same for Great Britain, but in a different order.
The UK and Greece also share a home ownership culture, boosted by cheap money, which made real estate critical for both countries. The sharp fluctuations around the financial crisis have highlighted the risk of asset price bubbles, but this culture also makes the workforce less mobile and less likely to retrain, which contributes to the lack of skills UK.
Britain is in a precarious position because it begins Brexit negotiations with the EU. Right now, Brexit only means uncertainty in the business world and uncertainty is a direct threat to the country’s most lucrative industry: the financial sector. The danger is that a significant part of this industry will be encouraged Where even armed by the UK’s former European partners to migrate to competing financial cities such as Dublin, Paris and Frankfurt. Britain’s role as a gateway for hundreds of billions of euros in foreign direct investment into the EU, a particularly wealthy economic area of 500 million people, is also under threat.
And just like the Greek governments at the start of the Greek drama, who were bound by the decisions of the European Central Bank, the British governments have their hands tied. Monetary policy has pretty much anything he can.
The fall in the pound and the rise in inflation following the Brexit referendum are a unproductive pound devaluation. A devaluation would further hurt consumers’ disposable income and consumption and sound like a distress call to capricious investors. Interest rates are already at rock bottom and a new cut now would have little effect.
And what about fiscal policy? After all, the national debt in the UK amounts to what seems derisory 88% of GDP compared to 181% of Greece. Perhaps the UK could finance investment, stimulate consumption and emerge from the uncertainty of Brexit and the impending recession? Greece tried this from 2004 to 2009. Almost a decade later, the mounting debts of that time keep Greece in an economic coma.
And there are other reasons why using fiscal policy would be dangerous for the UK. If the UK wanted to increase its total debt, currently at around £1.7 trillion, international money markets would see the UK stumble in Brexit talks at a time of political fragility while asking for very large sums of money to refinance debts and pursue fiscal policies on top of that. To compensate for the increased risk, investors will seek higher interest rates. Debts would then become more expensive to repay, reducing the impact of any exuberant fiscal policy and further justifying a skeptical view of the UK from financial markets. Greece will tell you how it ends if you get the balance wrong.
Weak and wonky
Underlying all of this is the final, and perhaps most crucial, similarity. The British elections of June 8 have delivered a paralyzed government. A narrow majority and the heterogeneity of any coalition government will mean a government that cannot move left or right, forward or back without losing valuable support and likely collapsing.
Greek governments in the decade before the crisis in the country provided the perfect example of how fear of political cost can lead to disastrous inaction on the economy. Along with deep structural challenges, low productivity and a mountain of debt to pay off, the UK now also faces the prospect of a bad deal with the EU, negative trade expectations, monetary and fiscal policy options exhausted and serious threats to its lucrative financial sector. .
Even an effective and decisive British government with a clear mandate would struggle to get the economy out of harm’s way. For the crippled and ineffective government that emerged from the last British election, this task may prove impossible: public confidence will crumble, market confidence will decline. Greece has taught us not to navigate these headwinds if we can avoid it. The prospect of new elections may not be acceptable, but it is better than entrusting the future of a generation or more to a government barely worth the name.