This month Tony Hazell focuses on the impact of the eurozone crisis on the UK

Until a couple of years ago Greece evoked images of beach holidays, ouzo, olive oil and retsina. Now the mere mention of the country can send shudders through financial markets.

But why should what happens in Greece cause us any concern? It is, of course, all tied up with the euro.

The eurozone crisis has helped push up the value of the pound. You can buy about 10 per cent more euros with every pound than you could last year. That’s great for your summer holidays. But it makes life tougher for British businesses because everything sold to Europe is now 10 per cent more expensive.

The problems facing exporters to eurozone countries were illustrated by trade figures issued by the Office for National Statistics (ONS) for March. Half the goods we exported – £13.2 billion worth – went to EU countries. But we imported £4.5 billion more than we exported. And that gap widened by £700 million in just one month.

The good news is that trade with countries outside the European Union (EU) is now at record levels. Our exports to non-EU nations rose by 12.1 per cent to £13.2 billion in March. UK businesses have done particularly well at exporting to the USA, China and Russia. We exported an extra £555 million in goods to the USA alone. Against this, our imports from non-EU countries rose by four per cent to £17.3 billion.

So, what would happen if Greece left the euro and how would it affect us? It may well reinvent its former currency, the drachma. This would probably devalue rapidly, making Greek holidays much cheaper. However, some of these benefits would be lost because inflation would be likely to push up the cost of goods. And there would be other consequences.

It is very likely that Greece would just admit it could not repay all its debts. Greece was lent another €130 billion in May (£103 billion). France is most exposed, carrying 56.7 per cent of Greece’s €340 billion (£271 billion) debt. UK banks hold a relatively small €4.85 billion (£3.87 billion) of this debt.

It will be worrying for the UK if this sets off a domino effect and more pressure is put on weaker eurozone countries such as Spain, Ireland and Italy. Our banks have lent considerably more to them.

Spain’s economy, the fifth largest in Europe, is in considerable trouble. Retail sales there fell by 9.8 per cent in April compared with the same month in 2011, the biggest fall since records began. The credit ratings of 16 of its banks have been cut because of the risk of huge losses if property loans are not repaid.

Bank of England Governor Sir Mervyn King has warned that the euro area posed the greatest threat to UK recovery, stating in his inflation report speech there was a “risk of a storm heading our way from the Continent.”

Another consequence of the eurozone crisis is that it looks comparatively safe to lend to the UK Government. This makes UK gilts – the official name for debt sold by the UK Government – very popular. The amount of interest paid on gilts – known as the yield – hit a 300-year low in May of 1.87 per cent.

This has a knock-on effect for pensioners because pension firms use gilts to pay retirement incomes. A £100,000 pension fund will now buy a 65-year-old man an annual income of little more than £5,300 at best. In 2008, the same sum would buy an income of £6,800.

Away from the euro, there is some good news on the jobs front. Unemployment fell by 45,000 in the first three months of this year to 2.63 million. Youth unemployment is down by 17,000 and now stands at just over one million. However, the number of people unemployed for more than a year increased by 27,000 to 887,000. This is the worst total figure since 1996.

The Bank of England’s (BoE) most recent quarterly report on the economy was gloomy for the short term. It cut its growth forecast from 1.2 per cent to 0.8 per cent. If the BoE is right, companies will expand more slowly and fewer jobs are likely to be created in the private sector. One area suffering particularly badly is construction, where output fell by 4.8 per cent in the first three months of the year. However, it is not all gloom. BoE Governor Sir Mervyn King himself said in his inflation report speech: “The big picture remains one in which the economy gradually recovers.”

A warning signal on inflation came in the producer price index published by the ONS. On the face of it there was good news, with the price of goods leaving manufacturers rising by 3.3 per cent in the year to April. This compares to 3.7 per cent in March, and is the lowest figure since December 2009.

The figures also suggest that manufacturers are passing inflationary increases on to the price of their goods. That would mean high street inflation falling more slowly than many would have hoped. This was confirmed in the Bank of England’s quarterly report.

The BoE now predicts inflation will remain above the Government’s two per cent target for the next year or so. Beyond that, inflation is expected to keep falling.

And in April the consumer prices index fell to three per cent from 3.5 per cent in March so there are glimmers of light breaking through the gloom.

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