The Debt Contagion in Europe continues to spread fear in the markets. But while most attention has been on Greece and their debt crisis, the UK may be in even worse shape. The spring forecast for 2010 by the European commission paints a grim picture as the UK votes for a new prime minister. Whoever gets elected will be facing a budget deficit of 12% of it’s GDP, the highest in Europe. Greece is poised to have a budget deficit of 9.3% of it’s GDP.

An earlier forecast in March by UK Exchequer, Alistair Darling, put the budget deficit at 11.1%. There is much contention between the two forecasts over projected GDP growth and unemployment rates. Greece is currently facing social unrest as the country is forced to slash wages and benefits to it’s public employees and raise taxes on all citizens. About 1/3 of all employees in Greece are public employees, the overall unemployment rate is around 11.8% and GDP growth is expected to be a negative 3%. The public sector of the UK budget consumes 21.6% of it’s GDP. Unemployment stands near 8% and estimates of GDP growth range from 0.6% to 1.2%.

Moody’s and other bond rating firms have already reduced Greek bonds to ‘junk status’. The UK bond ratings are also under pressure to be lowered from it’s current AAA status. Today’s forecast from the European Commission blasts Darling’s projections for a GDP growth rate 3.5% in 2011, saying that they only see a possible growth of 2.1% next year. The EC forecasts the GDP growth for Greece to be a negative 0.5% in 2011.

What this all boils down to is confidence in the ability of either nation to claw it’s way out of it’s debt burdens. Greece requires a massive bailout for the next two to three years to have a chance despite the draconian cuts they are making. For the UK, much will depend on the outcome of today’s elections. A new government will have to make the hard choices to keep GDP growth positive while reducing government spending. We are already seeing with Greece that such a balance is difficult. The unrest by civil workers coupled with a flight of taxpayers will hamper their efforts. While the UK appears to be in better shape to cope with their debt issues, further declines in the economy will change the calculus greatly.