Author: Mark Otty, Area Managing Partner, Europe, Middle East, India and Africa
Another difficult year draws to a close. A year of economic contraction, rising unemployment, government austerity and chronic business uncertainty. Predictions of disaster may have proved false, but it seems certain that few in the Eurozone will mourn the passing of 2012.
Today, a new realism is spreading throughout the Eurozone. Confirmation that the 17-country bloc fell back into recession in the third quarter has ended any illusion that the crisis was waning, or confined to peripheral southern states. The going is tough — for many businesses, in many places — and getting tougher overall. Our recent Growing Beyond study found over 90% of the highest performing companies expect the market to be more challenging in the next two years than the last.
The recent EU summit in Brussels laid bare many of the problems affecting the region. Against the backdrop of a contracting Eurozone economy, country leaders sought to balance their competing domestic agendas with securing Europe’s spending priorities for the period between 2014 and 2020. Finding a way to reduce costs and increase investment to catalyze growth proved, for now at least, beyond them — although in focusing on how to make Europe more supportive of entrepreneurs and business, they are looking in the right direction.
But, of course, it’s not only about events within Europe’s borders. In our interconnected world, the Eurozone is competing against a US economy that faces its own “fiscal cliff” and against rapid growth economies that continue to grow. And nor is the competition confined to the
BRICs — countries such as Vietnam, Turkey and Indonesia have been singled out by the
Ernst & Young Rapid-Growth Markets Forecast as ones to watch over the nextdecade. The next 10 years in Europe, bycontrast, are likely to be far bleaker. Ratherthan preparing for a quick return to a“normal” situation with continuous growth,five years into the crisis, companies shouldprepare for a “lost decade,” one markedby continued struggles over growth andlingering high levels of unemployment.
We continue to expect that, after contracting by about 0.5% in 2012, the Eurozone economy will stagnate in 2013 before growing by just 1.3% a year in 2014–16 and at similar ratesby about 1.6% a year in the remainder of the decade — well below rates in the pre-crisis period. In this environment, unemployment will continue to rise throughout 2013, peaking at close to 20 million. It could, however, have been worse and some real progress has been made. The risk of a Greek exit has diminished, and actions taken by the European Central Bank have reduced the risk of a Eurozone breakup. There have also been significant advances made by peripheral economies. Ireland and Spain, for example, have achieved large increases in productivity, which have helped reverse negative competitiveness trends. But these results aside, peripheral economies continue to be challenged. The adjustment in competiveness, itself far from complete, will in the short term lead to a further squeeze on household incomes, which will, in turn, deepen the domestic recessions and increase political tension in those countries.
The solutions to these systemic challenges partly lie with the Growth Pact, which was approved at September’s European Council meeting. But while the supplyside reforms agreed are likely to lead to some long-term benefits, the Pact is unlikely to shift the immediate dynamics of the Eurozone. Re-establishing a political consensus on Europe may require a new form of engagement with its members and their citizens.
While policy-makers continue to work to deliver sustainable solutions, business leaders — some sitting on record piles of cash — also need to step up. They need to ask themselves the right questions. Do I fully understand the implications for my market of further instability among clients, suppliers and the financial sector? Can my organization respond quickly to possible changes in tax policy and regulations? Is now the time to invest to shape the new market opportunity?
What Europe requires now is confidence. Confidence that there is enough shared will across Europe to imagine a new economic framework and sufficient political courage and skill to create it. The biggest boost to growth in the short term would be to remove uncertainty about the future of the euro — this would help persuade companies to dip into their reserves and unlock investment. But looking further ahead, the answers we need won’t be found by operating within our national borders, but instead by sharing our experiences, sharing Europe’s abundant resources and strengths, and by sharing opportunities for growth.
In a world both competitive and shrinking, it is all too easy for people and organizations to turn inward. Working together represents the best opportunity to secure the growth and prosperity so urgently required — in both 2013 and beyond.