While we in Britain are busy with tomorrow's election, the big news in the rest of Europe is the ongoing fiscal calamity in Greece. There are a few important points to note:
1. Joining the euro would have been a disaster for Britain
In recent elections the Liberal Democrats repeatedly pledged to work towards getting the economic conditions where Britain could join the euro. Had they or the other advocates of Britain joining succeeded, we would now be a part of the disaster currently engulfing the continent, facing Germany's problems at best and Greece's or Ireland's at worst.
Martin Wolf, Chief Economics Commentator at the Financial Times, writes:
"The crises now unfolding confirm the wisdom of those who saw the euro as a highly risky venture. These shocks are not that surprising. On the contrary, they could have been expected. The fear that yoking together such diverse countries would increase tension, rather than reduce it, also appears vindicated: look at the surge of anti-European sentiment inside Germany."
2. In the short term, the problems in the eurozone could be good for British Government debt interest costs but bad news for company shares
Stephanie Flanders, BBC Economics Editor, describes just how worried the markets are about the situation in the eurozone, and quotes a fascinating article from economist Charles Wyposz about the potential of contagion to call into question the fiscal stability of the whole eurozone. This section of her article give us a sense of what is going on:
"Sovereign CDS spreads for Greece - a rough guide to market expectations of a default - are now over 730 basis points, higher than yesterday, or the end of last week (though somewhat below their peak of 824 points a week ago.)
Spreads for Spain and Portugal have risen by 30-40 basis points. Officials were probably hoping to see them go down.
There will be more to say on this in coming days - particularly on the ramifications for the balance sheets of European banks and of the ECB, where a good part of this crisis may now be played out.
But here's one interesting point to note about today: the interest rate on German government debt fell once again. You might say - what's so surprising about that? The answer is that it's not a surprise, but it does tell you that bond investors do not think that, in the end, Germany will put European integration ahead of its own monetary stability."
In the short term all the worries about the eurozone will make Britain look relatively safe. That should help keep our debt interest costs down and give the new Government a little breathing room. So some good news.
But on the other hand it is bad news for share prices as many companies - such as the banks, which unfortunately we are all invested in as taxpayers - are exposed to economic troubles in the eurozone. The Financial Times reports that the FTSE 100 fell 2.6 per cent yesterday on worries about Greece and potential contagion affecting other countries.
3. In the medium term, the crisis makes the need for a fiscal adjustment here more pressing
At the moment we are being treated quite well by the markets and ratings agencies. They are working on the assumption that the British public are relatively understanding about the need to cut spending and our history of behaving responsibly. If that belief isn't validated after the election then sentiment could turn very, very quickly.
With markets already anxious about sovereign debt thanks to the ongoing crisis in the eurozone, there is a particular premium on being seen as a safe haven rather than the next potential casualty of the crisis. We will pay a huge price if we fall into the latter camp either in higher debt interest payments or by being forced into draconian action at vast cost if we need a bailout. By contrast, if we keep the confidence of the markets then investors fleeing the debacle on the continent could keep down the cost of the debt we're building up now, and thereby ease the challenge of balancing the books and getting the whole situation under control.
That is why the need for a responsible fiscal policy, and spending cuts, is now even more pressing. The dramatic events on the continent up the ante.