After the crash there was endless worry of a double dip recession. Nobody worried about a sovereign debt crisis. This is now approaching fast. It has three components. One is political. Another is financial. The third is the survival of the Euro.
It is the political element which is now the driver. Greece is heading towards default and the government will be too weak and the population too angry to allow sufficient financial austerity to prevent this. There is fear of financial contagion but it is political contagion which is far the most dangerous. If populations say no, that is that. Already in the UK there is talk, by the most inflamed union bosses, of the biggest strikes for nearly a hundred years. The majority of the British public are realistic about what has to be done (unlike certain union leaders) and that majority will most likely be sustained. Maybe not so in Ireland and Portugal and certainly not so in Greece.
Serious defaults will make the European Central Bank insolvent, as well as hammer the balance sheets of universal banks. The exposure to Greek debt of UK banks is manageable, but their much larger exposure to Ireland may not be and in some cases definitely will not be. At the end of it all so much borrowing will be needed to shore up older debt and pay accumulating interest that, just like the developing economies of years back, the problem becomes so crippling that consensus collapses and with it the economies of the affected countries.
Added to the problem is the Euro, which is at the root of the current crisis. So often has this blog remarked that it is impossible to have a currency without a government, that we hesitate to say it again. Nevertheless the Euro is now a major problem because the currency came before full political union. Its founders supposed that union would follow naturally, until slowly the various populations wanted their independence either back or diluted no further. Thus political union has stalled. For the euro to survive those who want to keep it will have to agree a loss of economic sovereignty to a federal financial government. Those unwilling will have to drop out. That is pretty certain. What is not so certain is whether this crisis can now be contained long enough for all that to happen.
Europe is now in uncharted waters, or sailing with charts which are wrong. Nobody knows for sure where the ship is headed or how the voyage will end. The UK can do no more than batten down the hatches and try and balance its books. The unions need to think on these things before they try to make matters worse.