For anyone tempted — as, evidently, Tony Abbott and Joe Hockey have been — to think that the financial problems of Europe are of little relevance to Australia, they should read today’s Reserve Bank Statement of Monetary Policy. The RBA says about its forecasts for the Australian economy:

“The largest risk to these forecasts is the sovereign debt and banking problems in the euro area … The Bank’s central scenario continues to be one in which the European authorities do enough to avert a disaster, but are not able to avoid periodic bouts of considerable uncertainty and volatility. A worse outcome in Europe would adversely affect the Australian economy, and underlying inflation would be likely to decline.”

Even without the bizarre events in Athens over the last four days, and regardless of the result of events in the Greek parliament over the next 48 hours, Europe’s economy is in deep trouble; more data overnight points to recession-like conditions across much of European industry. That is, even without a financial crisis flowing from what happens in Greece, many European countries will at best struggle to grow and may well slip into recession.

That’s the best case scenario for Europe currently. Other, far worse scenarios will emerge from the failure of the bailout deal agreed last week. And even if that deal holds, there are other threats, particularly from Italy.

The notion peddled by the opposition yesterday that, given the threat of another financial crisis of the kind that froze world markets in 2008, Australia should engage in economic isolationism and not increase its support for the IMF, is mystifying and dangerous. Julia Gillard, of course, lacks the clout her predecessor carried in the G20, but as a growing economy with a strong fiscal position and low debt compared to virtually every other developed country, Australia can play a constructive leadership role in ensuring the G20 does all it can to prevent a (further) European meltdown.

As the RBA makes clear, it is in Australia’s direct economic interests to do so. We can judge the Europeans severely for their many and varied faults of economic management, but for the sake of Australian jobs we can’t stand idly by while they drag the globe into recession.

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