How do problems in the Eurozone economy and a weak Euro affect the UK?
A weaker Euro would help European goods and European travel appear more attractive. It would be good news for British holiday makers not wanting to risk transatlantic flight with the Icelandic volcano still smoldering.
It would not be good news for UK exporters who would be less competitive in selling to Europe. However, it should be borne in mind, that Sterling has fallen approximately 20% in the last couple of years. The Pound is also unlikely to become suddenly become strong against the Euro; we have many similar problems to the Eurozone.
The problem is that the weak Euro is related to the weakness of EU economic growth. As the Eurozone is our main trading partner a slowdown in growth would hit the chances of the UK economic recovery.
Problems in Eurozone
The Euro economy is experiencing a number of difficulties. Firstly, the impact of fiscal reduction strategies is likely to reduce growth in the Eurozone. Because countries are having to cut spending and increase taxes, there will be a negative impact on growth. (deflationary fiscal policy)
Confidence is also being adversely affected by the talk of crisis. This will lead to lower growth and consumer spending.
The threat of debt default is pushing the Euro lower. Even though the UK has its own debt problems, markets may feel the UK has a better chance than Eurozone members – see UK vs Greece debt.
A weaker Euro, would make UK exports to the Eurozone less competitive.
The Eurozone is the UK’s main source of exports (60% of trade). A prolonged Euro downturn could be a problem for the UK’s weak recovery. If other areas of the economy like consumer spending, government spending and investment continued to grow, it may not be a problem. But, at the moment, it is hard to foresee a turnaround in consumer spending. Government spending is, if anything, likely to be cut.
Another issue is how long the Euro fiscal crisis will continue to impact the Euro economy. Given the scale of government debt, low growth forecasts and prospects of deflation, it is possible it could get worse before getting better. The outlook for the Euro economy is poor and it will definitely hold back the UK economy.