It has become clear that the ongoing crisis presents firms and their strategic planners with a business environment that has the potential to seriously destabilise their business operations, says Nick Noakes, Marketing Director, City & Financial Conferences. Indeed, he points out that whole economies are at risk.
Greece, Ireland, Portugal and Spain are clearly struggling to implement the austerity measures needed to address their debt problems. The political consensus in these countries is fractured and public hostility to the austerity measures already in place is growing.
In Ireland 50% of the population have refused to pay a new €100 tax and in Spain the newly elected government failed to win an important regional election. This political uncertainty, and the rejection of Brussels’ prescription, some argue, could ultimately lead to the complete collapse of the Euro project.
The recent collapse of the Dutch Government after it failed to reach agreement on a budget intended to reduce its deficit to 3% of GDP by 2013 is just one example of this instability. Long perceived as one of Europe’s stronger economies, the Netherlands actually ran a deficit of 4.7% of GDP, significantly higher than that of Portugal and Italy The leader of the country’s far right party has vowed to make the next election a vote on Europe and the Euro, a position no doubt influenced by the success of Le Pen in the first round of the French presidential elections.
The French elections have seen the Socialist candidate and frontrunner vow to renegotiate the Euro zone fiscal compact, Noakes says. Meanwhile, Spain’s central bank is struggling to deal with a budget deficit of 8.5% of GDP in 2011, and recent figures showing that the economy shrank by 0.4% in the first quarter of 2012.
Less than 48 hours after the IMF increased its global bailout fund, European problems and the difficulties member countries face in restoring financial discipline came to the fore once again. The markets are already reacting with share price falls in Europe and the US.
Against this background Danny Alexander, the UK’s Chief Secretary to the Treasury, has announced new rules to tighten the fiscal rules for government departments citing the ongoing Eurozone crisis and economic uncertainty as the reason for his action.
On the positive side, yields on government bonds in the Eurozone have moved away from previously unsustainable levels, but this has largely been due to the European Central Bank providing enormous amounts of liquidity to banks, which they have used – in part – to buy Eurozone sovereign debt. The ECB’s actions also eased investors’ concerns about the banks in these countries, which itself had a knock-on effect on government borrowing costs.
There is also a big question mark over the other positive aspect – the political will to secure the future of the Euro. Despite Angela Merkel’s statement in a BBC interview that “Germany would do everything it could to keep the Euro zone together”, it remains to be seen how long voters in Germany, and indeed in the other economically sound Eurozone countries, will be prepared to support governments that are committed to providing huge sums of money to bail out their neighbours in the Eurozone.
Whatever the future holds, Noakes stresses that strategists are realising that the Euro crisis is a chronic, long term problem and that firms have to get to grips with it and, like the government, need to be ready for any eventuality.