The eurozone economic crisis that has rumbled on for the past few years looks set to come to a head in Greece over the next few days.
The Greek government has announced a controversial referendum for this Sunday, July 5, in which the population will be given the chance to decide whether or not to accept the latest bailout conditions imposed by the EU.
Many observers believe that if the proposals are rejected, it will lead to a Greek exit from the euro.
Clearly, the impact of the current economic turmoil is being felt most acutely in Greece itself – and there is little prospect of relief, whatever the outcome of the upcoming referendum.
But other euro and EU members are likely to be affected too.
British tourists could notice the cash shortage
The most immediate impact is on the large number of tourists that typically head to Greece over the summer months. Travellers from the UK are being advised to take as much currency with them as they think they will need, given the risks that ATMs may run out of money and that hotels, shops and restaurants may be reluctant or unable to accept non-cash payments.
This does pose extra risks for holidaymakers: carry large amounts of cash may not feel safe, and travel insurance policies typically impose relatively low limits – perhaps one or two hundred euros – on the amount of currency that is covered in the event of theft.
Some providers have however announced that they will temporarily increase this limit for policyholders who are headed to Greece.
It’s possible a Greek exit will trigger a European slump
More of a medium- to long-term concern is what effect a Greek exit could have on the UK economy and money markets.
Already we have seen stock markets in Britain and around Europe fall sharply as the crisis has intensified. But what – if anything – could happen to interest rates in the UK?
At the moment, as you might expect, no one really knows: much depends on the overall reaction to the eurozone issues by investors, banks and governments in Europe as well as around the world.
General panic might, in the worst-case scenario, lead to a return to the dark days of the financial crisis: this could mean a slump in economic activity and a fall in lending, for example.
Governments may then need to stimulate the economy by cutting interest rates – although their scope to do so is now extremely limited – and by pumping money back through a renewed programme of quantitative easing.
But an orderly exit is a more likely scenario
However, as the Bank of England pointed out earlier this week, the exposure of UK banks to Greece is limited. Furthermore, institutions around Europe have over the last few years put a number of measures and contingency plans in place to protect against exactly the sort of problems a messy Greek exit from the euro could create.
It’s likely a Greek exit will keep UK interest rates low
A more orderly exit could see investors put money into UK bonds and gilts, which could also help keep interest rates low. This appears to be a more likely outcome – and the Bank this week admitted as much, by reiterating its view that interest rates in the UK will remain low for the foreseeable future.
If inflation rises sharply or if the economy starts to overheat, we may then see the Monetary Policy Committee start to raise rates. But neither scenario looks particularly likely in the short term.