Greek currency drama should serve as warning for UK

Greece is the word in the financial markets at the moment. But aside from the potential for weak puns like that ("Greek tragedy", "acropolis now", etc), what do recent developments there mean for the country itself, for the European single currency and for us in the UK?

The first point to make is that there are at least some factors which set Greece aside from other countries.

For a start, it has a particularly awful track record on fiscal discipline, having defied European Commission warnings to get its books back in order ever since it entered the single currency back in 2001.

Second, market confidence in Greece was severely rattled by the revelation last year that the fiscal position was actually much worse than the
previously published figures had indicated. Since then, Greece has not surprisingly suffered from what its own Prime Minister has labelled a
"credibility deficit".

And finally, Greece is particularly vulnerable to the gradual withdrawal by the European Central Bank (ECB) of the measures it has implemented to support the euro-zone banking system over the last couple of years.

All of these issues have meant that, as financial markets have stalked the global economy looking for countries to punish for fiscal laxity, Greece has had a large and highly visible target painted on its proverbial rump.

But it would be wrong to think that this is a purely Greek problem, in the same way that Lehman Brothers' collapse was not (primarily at least) down to how that particular institution was managed. It has become increasingly likely that other economies will be dragged in to some form of rescue package for Greece. (The world has learned from letting Lehmans go.)

It is still not clear just what form that package will take. Some have argued that it should be left to the supposed experts on such matters — the International Monetary Fund (IMF).

But the euro-zone's big hitters have been anxious for the matter to be sorted largely "in-house". Yesterday's disappointingly vague statements from the EU left us none the wiser, but some form of loans from other euro-zone countries looks the most likely option. This solution carries political dangers. There are fears that the recent riots on the streets of Athens will be mirrored in Paris and Berlin as French and German taxpayers are forced to dip into their pockets. Some even think that the break-up of the euro-zone is close.

But the economic reality is not so worrying. After all, even wiping out Greece's entire budget deficit would cost Germany and France together less than 1% of their annual GDP — hardly loose change, but not enough to hit their taxpayers hard either.

The far bigger concern, is that other, bigger, economies will ultimately face the same pressures as Greece to undergo an extremely painful fiscal squeeze. Attention so far has centred on the other members of the unflatteringly labelled "PIIGS" (Portugal, Italy, Ireland, Greece and Spain) which together account for almost a third of the euro-zone.