"Britain is not Greece" - but similarities remain (Feature)

By Anna Tomforde Apr 20, 2010, 6:06 GMT

London - The confidence-sapping aftermath of the global financial crisis, the fear of a double dip recession and a possibly inconclusive general election have raised the question: Could Britain be the next Greece?

A fragile economic recovery, a plummeting pound and a widening trade gap - on top of a massive budget deficit - have recently fuelled the more pessimistic view that the current upheavals are more than a passing wobble.

The nervousness has been heightened by a narrowing gap in the opinion polls between the two main parties - Labour and the Conservatives - ahead of the May 6 national election.

'Investors are worried about the uncertainty,' said City analyst Chris Turner from ING, agreeing with the general assessment that the sliding pound is a main casualty of that uncertainty.

With an election looming, however, the government of Gordon Brown is reluctant to come clean about the dose and effect of the medicine required to cut the massive annual budget deficit of 167 billion pounds (254 billion dollars) - which is equivalent to 11.8 per cent of gross domestic product (GDP).

While economists, the European Commission and political critics have urged Brown to tackle the structural deficit now, the government says its plan to halve the deficit over four years from next year is the 'most aggressive reduction plan' yet.

'It is necessary to get rid of the structural deficit. If you don't do that, interest rates will go up, you won't have an economic recovery,' said Kenneth Clarke, the former conservative chancellor who now plays a prominent role in the Conservatives' election team.

'Britain is not Greece, but there are similarities on the surface,' Larry Elliott, the economics editor of the Guardian newspaper, told German Press Agency dpa.

'Britain's deficit has deteriorated sharply and there is a sense in the market that after Greece there must be somebody else,' said Elliott.

What both countries had in common was that they had 'struggled' through the recession, rather than emerging into a sustained recovery.

However, unlike Greece, Britain had not 'fiddled its figures' and therefore had greater credibility in the markets. By not being a member of the eurozone, Britain had also been able to absorb the shock of adjustment through a cheaper currency.

'If Britain had an austerity package similar to that of Greece there would most likely be labour unrest,' said Elliott.

A further difference between the two countries was that, with most of Britain's debt being long-term, it was not under the same time pressure to 'satisfy creditors.'

However, the situation remained worrying and fragile. Markets had been shocked by the recent trade balance figures which showed that the export market had been unable to 'take advantage' of a 25-per cent depreciation of the pound.

It was clear that an ambitious programme was needed to cut the state debt, and that a rise of Value Added Tax (VAT) to 20 per cent from the current level of 17.5 per cent could not be ruled out.

If a future government, whether Labour or Conservative, failed after the elections to present 'credible' deficit reduction plans, Britain's much-discussed Triple A credit rating could be endangered.

'It's like football. Britain has been shown the yellow card on the rating,' said Elliott.

The predicament could grow if there was a 'hung parliament' after the election in which neither of the two big parties had a clear majority.

'Political uncertainty remains a factor. If there is a hung parliament and the parties start playing political games, circumstances could change and the financial markets could take fright,' said Elliott.