Belfast Telegraph

Exporters with an eye on future must now look beyond eurozone

Just how bad is the Greek crisis and how much of an impact will it have elsewhere? Dr Esmond Birnie, economist at PricewaterhouseCoopers, looks to the Med via the rest of the eurozone

It's been a turbulent week for Greece; and not a great one for the euro, either.

Having agreed a €110bn bailout loan package last year, the Greek government desperately needs to get its hands on €12bn by July 3. But this crisis is about more than just keeping the lights on in Athens - the very survival of the eurozone is at stake.

Having marginally survived a confidence vote in parliament, Greek premier George Papandreou, still has to deliver another round of deeply unpopular austerity measures to keep the EU bail-out money coming. Tax rises, spending cuts and privatisation are all essential elements of the €12bn bailout, but even that will only bring temporary relief.

To avoid a complete Greek tragedy, the EU, the International Monetary Fund and jittery financial markets will have to agree a further rescue package, probably worth around €120bn to give Greece the opportunity to boost tax revenues, rebuild the economy and restore the credibility of its near junk-rated, sovereign bonds.

European leaders, particularly Germany and France, have staked their credibility on the euro as a political, as well as a financial, project, so they are reluctantly preparing another Greek rescue package. But if either they or Papandreou can't deliver and Greece crashes out of the eurozone, the future of the euro and the vision of closer European integration may be over.

The Greek crisis is a parable of the fiscal sins of the father being visited on the son. Mr Papandreou Senior, the then Greek premier, embarked on high spending policies in the early 1980s, but with economic squander firmly embedded for a decade, it now falls to his son George, to try and stop the rot.

So what happens next? The most recent statistics indicate that the Greek budget deficit was even worse than previously feared. Any further loan is now subject to the vagaries of politics in the major euro states, most notably Germany, and whether or not the Greek public signs up to an eye-watering austerity package. Papandreou's Pasok (Socialist) party then has to deliver it and survive.

If the rescue fails, there are several possible options. Greece could admit that it can't meet its debt obligations and embark on debt restructuring - telling its creditors they won't get what's owed and will have to wait for partial payment. It could leave the euro, revert to a devalued drachma, and hope devaluation would cut costs and boost exports. Or the doomsday scenario - admit defeat and default, probably bankrupting Greek banks and hitting German and French financial institutions very hard.

Whatever the options, it comes down to which is least worst. Any form of default will have knock-on consequences for the weaker countries - Portugal, Ireland, Italy and probably Spain - who will see higher interest rates on debt repayments. There could even be a domino effect where a Greek withdrawal from the euro might encourage others to do the same, sparking competitive devaluation and wiping out any first-mover advantage.

But this is a crisis not entirely made in Athens. Even in the early days of the eurozone, many wondered how the less competitive "southern" economies could remain flexible while tied to the same monetary policy as Germany. Since Italy, Spain, Portugal and even Ireland no longer had the option of devaluing against Germany, the theory was that their domestic wage rates would take the strain. But this did not happen and Greece, other Mediterranean countries and Ireland enjoyed a decade of an artificial boom fuelled by cheap credit underpinned by euro membership. There may be an eleventh-hour solution to the Greek problems, but given the enormous pressures on some member states and the jittery financial markets, there is no short-term certainty of eurozone stability.

This means it would be sensible for Northern Ireland exporters and retailers to prepare for further devaluation of the euro against sterling. There would also be considerable merit in having a diversity of export markets and looking beyond euro land to, say, the US, India and China.

Any form of default will have knock-on consequences for the weaker countries such as Ireland