Disruption in Europe, any form of disruption, is bad for the British economy. Uncertainty in financial markets is bad for Britain too. So what has been happening across the Channel has in the short term become the greatest single threat to what has been at best a disappointingly weak recovery. True, there are some modest offsets – for example, the flood of money seeking a safe haven from the storm enveloping the euro and being invested in British government securities. That has helped drive down the interest rate on 10-year gilts to below 1.9 per cent, the lowest in our history. It has also brought wealth from rich Europeans into the British property market. But these gains are more than offset by the fact that the eurozone remains the UK's largest single export market and that any form of uncertainty makes companies based in the UK more cautious about hiring and investment plans. So we should resist any inclinations towards Schadenfreude. The UK may not be in the front line of the battle to save the euro but we are already being caught in the crossfire.
What happens here in the months ahead depends very much on what happens in Europe, and that is really wide open. It is possible, to take one extreme, that the present pressures will be contained and that no countries will leave the eurozone ever. It is possible, at the other extreme, that there will be no euro by Christmas. Extreme outcomes are by their nature unlikely, but the financial crisis of the past four years has taught us that nothing should be excluded.
What is certain is that financial tensions in the eurozone go far beyond Greece, extending to Portugal, Spain, Ireland and Italy. Some would include France as a potential member of this unfortunate club. It is also becoming clear that it will be hard for the eurozone to show much growth through the next year or so, partly because of the austerity being imposed on weaker members, but also because businesses across the Continent are having to be cautious, conserving cash and holding back on any expansion plans. They may not expect an extreme outcome but they have to plan for every eventuality. Some countries, notably Germany, have benefited from the relatively weak euro as this as made exports to the emerging world (and to the US and UK) more competitive. But taken as a whole, the eurozone is suffering and will continue to suffer.
This is a daunting outlook. But there are some chinks of light. One is that the US economy seems to be growing more strongly, with the housing market bottoming out and consumers gaining confidence. The US remains the UK's largest export market: larger than Germany, though smaller than the eurozone put together. Another is that oil and commodity prices have slackened, which takes pressure off inflation and hence adds to demand across the developed world. Money not spent filling up the car can be spent in the supermarket. A third is that were events in Europe to take a still more serious turn – were there to be a run on the banking system, say – then there are policy measures that can be taken to avert catastrophe.
The drawn-out nature of the eurozone's travails has damaged confidence, and the stumbling response to these problems has undermined it further. But there has been one advantage of the way the authorities have "kicked the can down the road": it has enabled the commercial and financial world to get used to the possibility of a eurozone break-up. As a result, any damage would be easier to contain. Finally, while there would be short-term costs, these might lead to medium-term benefits. After all, Britain's long boom began only after we were kicked out of the ERM – even if that boom did end in tears.