The Grexit risk hits home

Greece's future in the eurozone has financial implications well beyond its borders

Economic forecasts rarely stop people in their tracks. But the estimate of job losses if Greece tumbles out of the eurozone has done just that.

The Fraser of Allander Institute at Strathclyde University reckons the impact could be a contraction in the economy of 1.2%. Translated to jobs, which is when it means something to most folk, that's nearly 50,000 fewer jobs in Scotland three years after the Grexit takes place.

If the whole eurozone collapses through contagion, the impact is very much worse. The economy would shrink by 5.3%, it's reckoned, with a loss of 144,200 jobs.

That compares with 122,000 more people seeking work as a result of the recession of 2008-09, and 126,000 which the Strathclyde economists claim are the result of fiscal austerity.

It might be worth picking some of that apart, and reminding ourselves that such precision about jobs or about contraction is not possible.

The authors are saying it's not so much a forecast as a 'what if? impact study'.

Contagious collapse

What's happened is that the Strathclyde economists have taken an economic model of a eurozone bust which was worked up by ING bank.

It ran the same rule over the UK economy, and concluded that the Greek exit would be the same 1.2% scale as in Scotland.

But the impact of a wider downturn from a contagious collapse, reverting to 17 different currencies, would be worse than the Scottish forecast, with a 6% fall in output.

Brian Ashcroft, professor of economics at Strathclyde, admits that there are big uncertainties in such modelling.

He explains that it takes into account the direct trade effects, of reduced demand from the eurozone itself, added to the indirect trade effects of the reduced demand resulting from a shock in the Asian markets (they're already slowing up because of Europe's problems) and in the US.

He stresses the US market is particularly important to explaining why Scotland would face a sharp contraction from currency nightmares to be found coming from the other direction.

The global nature of the impact of a eurozone collapse is underlined by the dominant role it played in the G20 summit just finished in Mexico. It's also underlined by the figures showing that trade is what's been going best for the Scottish economy.

The lack of household and business confidence, allied to the cuts in government spending are not being credited for the anaemic recovery we've got so far. That's down to exports.

Debts repudiated

But where the modelling is more suspect is in the impact of a collapse on banking; the freezing up of inter-bank lending, the losses on loans as Greeks or others repudiate their euro commitments, and as sovereign lending goes sour and banks have to take write-downs on their balance sheets.

Some banks could collapse, but even the strong ones could face straitened resources with which to keep their Scottish clients funded.

Nor is it clear what it would do for FDI or foreign direct investment.

That's the input from overseas being credited by Ernst & Young this week with giving Scotland a clear lead in job creation over other parts of the UK.

So if those are unclear, is this modelling not to be trusted? Well, it doesn't take into account the impact of public policy responses.

Already, there are significant moves afoot - in credit and liquidity provisions on both sides of the Atlantic - that central bankers are mobilised for the crisis going critical.

But on banking and FDI, Prof Ashcroft is in little doubt that the risk is to the upside - that is, his assumptions are conservative. It could be far worse than his figures indicate, and instead of one lost decade spent struggling to recover from the 2008-09 recession, it could be two.

Dislocated markets

The Greek exit is in the realms of the probable, according to some economists. A complete collapse and reversion to 17 different currencies looks rather less likely.

Apart from anything else, contagion might pick off some of the weaker eurozone members, but it needn't force apart the currency alliance between, say, Germany, Austria, France, the Netherlands, Belgium and Finland.

Just one of their problems would be the strengthening of their currency if the others break away, making their exports more expensive.

Having stopped some people in their tracks, the financial consultancy and accountancy firm that backs the Fraser of Allander commentary, PricewaterhouseCoopers, is adding that companies should plan for a Grexit or worse.

PwC's Paul Brewer talks about stress testing the business, across treasury, operations, exports and personnel, identifying vulnerable areas of the supply chain for instance, and developing plans to deal with dislocated markets.

He's also pointing out fortune will favour the brave, and that businesses could be looking for growth and export opportunities outside Europe.