Financial fallout from Greece could harm UK and wider Eurozone

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By a Newsnet reporter

Following the failure of the Greek political parties to form a working coalition government, Sir Mervin King, Governor of the Bank of England has warned that the Eurozone is “tearing itself apart”, adding that the economy of the UK would not escape “unscathed”.

Speaking at a press conference called to announce a reduction in UK growth predictions, he said that the Euro area posed the greatest single threat to the recovery of the UK economy and that there was a “risk of a storm heading our way from the continent”.

Final talks aimed at agreeing a coalition failed on Tuesday, raising concerns over the future of Greece within the Eurozone.  Worries that a failure to form a government would lead to a run on the Greek banks, however, proved to have been premature.  George Provopolous, head of the Greek central bank, said that “there was no panic, but there was great fear”.

The Financial Times has stated that Greek bank withdrawals exceeded 1.2 bn Euros over the first two days of this week, representing three quarters of a percent of all deposits.

An interim government will be sworn in on Thursday, and will run Greece until a new election can be organised on the 17th of June.  Alexis Tsipras, leader of the left-wing political party, Syriza, is expected to win the June election, having come second in the elections of the 6th of May.

If successful, Syriza has pledged to renegotiate the international bailout and has refused to join any coalition which would continue with the austerity measures demanded by the EU and the IMF, leading to concern that Greece could drop out of the Euro altogether.

Mr Tsipras, in a BBC inteview, said that if the “disease of austerity destroys Greece, it will spread to the rest of Europe”. 

Banks were profiting at the expense of thousands of Europeans – in Spain and Italy, as well as Greece – left in poverty and hardship he said, adding “therefore the European leadership, and especially Mrs Merkel, need to stop playing poker with the lives of people”.

European Central Bank (ECB) Governor Mario Draghi said, “I want to state that the governing council’s strong preference is that Greece will continue to stay in the Euro area,”

Jose Manuel Barroso, President of the European Commission, stated “Greece is a very important member state in the European Union. We want Greece to remain a part of our family, of the European Union and of Europe.”  He then added, “This being said, the ultimate resolve to stay in the Euro area must come from Greece itself.”

The Bank of England has now cut its growth forecast for the UK this year to 0.8% from 1.2%, saying the eurozone “storm” is still the main threat to UK recovery.  The Bank predicts that the UK economy will not return to pre-crisis levels until at least 2014.