I blogged last week about the position of Greece within the Euro, and even within the European Union itself.  I mused that exits from the Eurozone may not stop with Greece, but may even involving much larger economies, even Italy.

My goodness.  What a long period of time is a week.

Events are moving so quickly at the moment, one really has to stop speculating about outcomes.  One thing is certain, however.  With its veto on extra funds to shore up Italy, it is Germany which holds the key to the whole Eurozone shape, and perhaps even the shape of the European “Union” going forward.  If Germany either releases additional funds to help Italy, or allows or enables the European Central Bank to provide a safety net, then this feeling of security will provide a period of stability where politicians and speculators can catch their breath, and firm plans might develop.

If the instability over Italy continues, it really does call in to question the future of the Euro, which in turn has a very major effect on the UK.  If the Euro slides against Sterling, it may not help our growth prospects at home, as our goods and services will be more expensive.  On the flip side, we will be able to buy European goods more cheaply for our supply chain.

Conversely, if the Eurozone contracts to centre around Germany and France, the Euro might actually strengthen, with the opposite effect.

There are a huge number of additional knock-on factors, and in the end the continued “pairing” of Sterling and the Euro as of roughly equivalent value may be seen as the best outcome for stability.  It remains to be seen what actions the Treasury and the Bank of England might take to maintain this pairing.

We have the Chancellor’s Pre-Budget Report at the end of November which will set out spending and tax plans.  It will be interesting to see how he juggles this with the wild fluctuations and uncertainty in the European background.