Britain is hugely exposed to the euro

Allister Heath
THERE was a time when exporters would be regularly urged to trade more with the European Union, which was seen by officials as the great new market for the UK. How times have changed: now companies the world over are doing their best to downplay their exposure to the Eurozone and its crippling toxic debt and accelerating credit crunch. Yesterday, Sir Mervyn King used apocalyptic language to describe the risks facing the financial system; forecasters are falling over themselves to estimate the cost to the UK of a disorderly collapse of the Eurozone.

The bad news is that Britain is highly exposed to the Eurozone; the slightly better news is that some of the oft-quoted numbers exaggerate this dependency. One often hears from politicians that half of the UK’s trade takes place with the EU; but such figures only refer to exports, not to overall economic output. Goldman Sachs has crunched some of the numbers; the (partial) metric it uses is goods exports as a share of GDP. The exposures vary dramatically, from 0.7 per cent of GDP for Australia, 1.3 per cent for the US to almost 50 per cent of GDP for the Czech Republic. Among the non-euro G7 economies, exposure varies from 1.2 per cent of GDP in Japan to 8.7 per cent in the UK.

Financial linkages are even more important; that is why forecasters believe the UK could lose up to 5-7 per cent of GDP in the event of a total collapse. Bank of International Settlements data show that the UK and Switzerland are more exposed than the US and Japan. Deleveraging Eurozone banks will also hit economies that are not directly exposed via a contraction in credit. This will affect Central and Eastern Europe as well as Latin America.

As to exports, the (slightly) better news is that official statistics overstate the Eurozone’s importance as a market for UK goods and services. There are two separate distortions, the Rotterdam-Antwerp effect and the Netherlands distortion, both highlighted by the Global Britain think-tank. The problem is that statisticians record as the destination of the export the country of the first port of discharge of a consignment, even when the consignment is only in transit on its way to a different end country. Lots of British goods go to Rotterdam in the Netherlands and Antwerp in Belgium, two of the biggest ports in the world; a small percentage of these goods stay in those countries while a lot more goes to other EU countries, generally on lorries or trains. But quite a lot of these goods are transferred to cargo vessels going to other continents. A decent chunk of UK exports recorded as going to the Netherlands or Belgium will end up on container vessels heading to Singapore or anywhere else in the world.

A similar effect is at play with flows of capital: cash is often funnelled through holding companies based in Luxembourg and the Netherlands, even though it actually originates from elsewhere. Global Britain calculates that the real proportion of UK exports of goods and services going to the 26 EU member states, as well as receipts of income, is around 42.6 per cent of the total, substantially less than the 48 per cent or so usually recorded. Unfortunately, that remains a huge number, which means that the UK is bound to suffer grievously from the Eurozone’s slow motion crash – and that is even without a financial crisis and the ensuing contagion.
Follow me on Twitter: @allisterheath