Greek citizens made a pivotal decision this weekend when they voted to reject international bailout terms in a national referendum. Many political analysts effectively regard this as an in/out referendum on Greece’s continued membership of the monetary union.
Neither Greece nor the leaders of the EU want Greece to exit the Euro, but time and patience is running out fast. Greece has already missed a €1.6 billion loan repayment to the IMF (the only advanced economy to do so) and neither the Greek government, nor its creditors, seem to be able to find common ground.
If Greece were to exit the Euro, how would that impact trade in food and drink trade between the UK and Greece? Greece is not a major trading partner with the UK. Approximately 1 per cent of the UK’s total food and drink exports are sent to Greece and less than 1 per cent of the UK’s food and drink imports are from Greece. Therefore, disruption to trade would not have any major consequences to the food chain as a whole.
In 2014, total UK food and drink imports from Greece amounted to £236 million, which is less than 1 per cent of our total food and drink imports. Roughly half of what we import from Greece is fruit, vegetables and nuts (processed and unprocessed), a quarter is dairy products (mostly cheese) and the rest is a heterogeneous mix of products.
UK food and drink exports to Greece are even lower. The UK exported £118 million worth of food and drink products to Greece in 2014, roughly half of which is accounted for by alcoholic spirit drinks.
Nevertheless, the situation in Greece will impact some UK businesses that export to and import from Greece. Some are short-term, whereas others are longer term.
Short-term risks
In the short term, the main risks to the UK appear to be the liquidity of Greek businesses (i.e. getting paid) and which currency will be used to carry out transactions.
Liquidity
Liquidity is a major concern. Greek citizens are only able to withdraw €60 per day and the capital controls imposed by the government greatly restricts the flow of capital within the economy and prevents it from leaving the country. For exporters to Greece, getting paid is a major concern. Where possible, exporters to Greece are likely to demand upfront payment, which will only deteriorate the cash flow situation of Greek suppliers.
Currency risks
A weak Euro, relative to the sterling, creates temporary advantages for European exporters. This is not specific to Greece, but for all countries in the Euro. A Greek exit from the Euro would likely bring the drachma back into circulation, which, given the state of Greece’s finances, would be significantly devalued relative to the Euro. This could potentially benefit UK buyers because it would enable them to purchase food and drink products, such as cheese, from Greece at a lower cost than it could from other European countries in the Eurozone.
Ironically, a Greek exit could have a beneficial short-term effect on a boost to Greek exports, benefitting both buyers and suppliers. However, in the long-run UK importers would have to manage greater currency risks of transacting in drachma, rather than the euro.
Long-term risks
Demand
Regardless of the outcome of the referendum vote, Greek consumer expenditure is likely to be constrained for some time to come as the country attempts to reduce its debt burden. Unemployment remains crippling high, real wages are falling and non-essential items will bear the brunt of the fall off in demand.
Competitiveness
Notwithstanding a temporary competitive advantage that may be afforded to Greece if it were to leave the euro and return to using the drachma, Greece must undertake fundamental reforms to improve the long-term competitiveness of its economy. This will require sustained investment in all forms of industry to make Greece as productive and efficient as other European economies.
Contagion effects
Perhaps the biggest risk to the UK of a Greek exit, if it were to happen, would be the contagion effects it would have on other, significantly larger, European economies with which the UK has a much greater trade relationship with, most notably Spain, Portugal and Italy. Whilst the situation in these economies is nowhere near as serious as in Greece, the nature of a deal with Greece, or a Greek exit could have profound implications for the rest of the Eurozone and therefore Europe’s trade relationship with the UK.
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