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Monday, February 27, 2012

What does the Euro Crisis mean for the UK?

By Michael Fielding

Looking at things prima facie, it appears as though with the exclusion from the new treaty, the UK will remain for the most part, directly unaffected by the Eurozone's new agreement. With the aims to set up the European Financial Stability Facility (EFSF) and later, a more permanent European Stabilisation Mechanism (ESM), the UK will not have to pay for the bailout this time or in the future. Similarly, the proposed rules on government borrowings won't be imposed on the UK, nor will the "Robin Hood Tax" be imposed on financial transactions. These are all changes that are directed primarily at the Eurozone. Taking a closer look at the crisis and understanding it proves that the UK might not be as unaffected.

The numbers are looking good. The Office for National Statistics reported that since December, public spending excluding the bailout fell to 13.708bn well below the forecast of 14.9bn making the total fiscal year's borrowing 103.289bn, which is 11bn than the previous year.

The government should be on track to meet its goal cut in borrowings at 127bn down from 137.6bn the previous year. The Office for Budget Responsibility, an independent body that provides fiscal forecasts for the government has also indicated that it expects the targets to be achieved.

So far, so good. Unfortunately, while these results are encouraging on paper, but there are a lot of issues that might only show up as problems a few months later or might threaten the progress the Chancellor has been making in balancing the books.

There is the slow growth that will reduce tax revenue and increase benefits claims. Official reports show that Britain's economy shrank .01% in the beginning of the year and most economists expect it to shrink further over the next few months.

But the UK has an option that the Eurozone doesn't. In the worst case, to finance expenses, the Treasury can order the Bank of England to print more currency.

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