Eurozone Forecast
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25 Aprilie 2010 |
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ERNST & YOUNG S.R.L. |
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Our perspective for businesses in and beyond the Eurozone
This first Ernst & Young Eurozone Forecast comes at a time when the global economy is emerging from recession. However, recovery is not the only issue. The economic crisis has also raised questions about the strength and integrity of the euro, and the strength and cohesion of the EU as an economy.
Companies involved in the Eurozone face a challenging economic environment in the coming months. Although the Eurozone showed signs of recovery earlier than other developed economies, its recovery as a whole will take longer to achieve and the development will be heterogeneous across the European geographies. Furthermore, in the Eurozone, the return to pre-crisis levels continues to depend on growth in other global regions − notably Asia and the US. The crisis has further shifted the world's economic centre of gravity towards Asia and emerging economies. However, even among developed economies the Eurozone is losing ground. The US will see growth of more than 3% in 2010, with signifi cant improvement in productivity and corporate profi tability, while Eurozone countries will struggle to achieve half of that rate in double the time. This is challenging for the Eurozone, as companies are reconsidering their strategic planning and may conclude redirecting investment and further enlarging their geographical footprint to more attractive growth economies.
In particular, unemployment uncertainties and weak levels of investment are set to hold back growth in the medium term. The continued need for high levels of government borrowing to maintain recovery may discourage private investment, both by raising the cost of capital and reducing the availability of fi nance, and by expectations of higher taxation and the effect of increasingly complex regulation.
Reduced government spending will have an immediate effect on some sectors; life sciences and health care for instance will be affected directly by cuts in government funded health care systems in Europe, triggering the need for the industry to target consumers who are willing to pay for health care and medication privately and dealing with increasing pricing pressure. Similar issues apply in highly capital intensive sectors such as power and utilities and transportation, where the increasing cost of capital, combined with expected cuts in government spending, have already slowed the investment needed for driving productivity and efficiency.
To put public debt on a more sustainable course, a combination of signifi cantly higher growth of at least 2% and sustained fi scal restraint will be needed. BusinessEurope — which is the main horizontal business organization at EU-wide level — predicted in a recent report (Combining Fiscal Sustainability and Growth: A European Action Plan, March 2010 - www.businesseurope.eu) that a combination of signifi cantly higher growth, of at least 2%, and sustained primary surpluses of close to 3% of GDP, will be needed to put public debt on a sustainable course.
It proposed a two-pillar strategy: on the one hand, a coherent exit strategy for government stimulus and funding which comprises credible commitment to fi scal sustainability, including a drive towards greater efficiency in public administration, greater recourse to market principles and reform of the pension and health care systems. On the other hand, these exit strategies should be combined with a renewed commitment to improving the Eurozone as a business-friendly area, most importantly by investing in education, research and modern infrastructure.
Businesses can benefit from these developments in at least three ways. Firstly, as suppliers to government for sectors such as telecoms and technology, which provide the modern communications infrastructure, including 4G mobile networks and fi bre optic networks, and power and utilities companies which are driving the next generation of power generation and the integration of grids across Europe. Secondly, business will continue to benefi t from a modern infrastructure and the availability of a highly educated workforce. Thirdly, companies should seek to benefi t from continued tax and government incentives that will continue to be provided for key industries, such as the car scrappage scheme that helped to prevent a steep decline in automotive sales. Recent investments by developing eastern economies in the European automotive sector demonstrate the attractiveness of the Eurozone, particularly for hi-tech and research and development. This development will continue, even though more intractable issues such as diverse labor legislation in different economies will remain a long-term issue for the industry to address.
The crisis may also reinforce the commitment of governments to address necessary reforms of product, labor and capital markets. Arguably, the pace of reform has been slow in the last decade in a seemingly benign global environment. Combining government reform and a further liberalization of labor markets with an expected continued weak euro, may encourage businesses to invest as the traditionally higher cost of labor may diminish in the Eurozone.
This Forecast also identifi es imbalances within the Eurozone, notably the “Greece Effect”. The outlook for the smaller euro economies looks grim if the current practice of defl ating their way back to competitiveness in very short timescales remains the policy of choice. A more measured approach is possible; consider Belgium in 1993 with government debt at 130% of GDP, reduced to 85% by 2007 as a demonstration of managed rebalancing. Hedge funds and opposition politicians love the volatility that rapid rebalancing creates just as much as long-term investors and companies hate it. As such, European governments are well advised to drive a more balanced approach that puts the competitiveness of European businesses at its center.
As we can see from our forecast, economic recovery is predicated on an upturn in corporate investment and exports to the rest of the world. Based on conversations with our clients, we are of the view that the recovery is widely based and that many businesses are ready to begin investing to make the forecast a reality.
The new performance agenda we identifi ed in our insights program, Lessons from change, clearly shows that companies should expand their geographic footprint. The Eurozone Forecast and the insight we have gathered from over 45,000 client meetings suggest that they will allocate additional resources to faster growing markets. However, the Eurozone remains one of the two largest markets in the world with a stable and relatively solvent business environment. Now is the time to reinforce innovation and differentiation as a future source of growth in Europe. Companies should continue re-evaluating their business models, adapting their strategies and organizational structures and seeking collaborations with partners that allow them to lead in innovation and differentiation at thehigher value end of the R&D, production and supply processes.
Companies also need to continue improving access to finance and the availability and the deployment of capital. This will be necessary to deal with the expected tightening of tax regimes and a continued need to work closely with the treasury function in the sourcing and allocation of capital and necessary provision for hedging.
The continued pressure on margins will create incentives for sector consolidation through mergers and other partnerships such as agreements to share infrastructure investments and cross-industry relationships. This has already started to happen within the telecoms, technology and media industry, where price pressure has not only been driven by the depressed GDP, but also by the fact that their services are increasingly viewed as commodities. Consolidation is also a trend within life sciences and there will be a window in the coming months during which cash-rich pharmaceutical companies can partner with successful biotechnology companies to bring price-resilient innovative products to market. There is also a growing trend towards mergers and partnerships within the power and utilities sector, driven mainly by environmental issues and the carbon trading regime.
Last but not least, it is important to reinforce that an economic outlook and GDP projections are only one part of the mix that infl uences companies’ performance and success. Our research clearly has demonstrated that, even in the worst economic environment, there is opportunity for those who can apply and reinforce good business practice and are faster and more disciplined in executing upon revised business strategy than their peers.
The euro area has signifi cant upward potential if Eurozone member states are committed to the necessary reform of product, labor and capital markets. The benefi ts would far outweigh the impact of the crisis for companies and citizens alike. Maybe this economic crisis, which has shaken the euro area to its core, will be a trigger for more radical change and will provide a boost to those willing to embrace it.
16 Eurozone countries
