Analysis: Time for businesses to plan for European disharmony

By PAUL BREWER
Published on 21/06/2012 02:17

The outcome of Greece’s election was probably the least-worst-case scenario for the euro. Already we have seen a new coalition government being bolted together with New Democracy leader, Antonis Samaras, at its helm, quashing fears of an early and messy Greek exit.

However, while New Democracy and Samaras have avoided an immediate Greek political and fiscal crisis, the problem, for both Greece and the eurozone, remains unchanged.

Samaras fought an election to keep Greece in the euro, but he also pledged to renegotiate the hair shirt austerity bail-out that triggered the election in the first place. That means Greece and its creditors are back at the table for yet another round of negotiations. As a result, fears of a Greek exit will remain and continue to haunt the market.

But what does this mean for Scotland? According to analysis by the Fraser of Allander Institute, a Greek departure could be enough to halt what is already seen as a tentative Scottish recovery. It is anticipated that in the region of 50,000 jobs could be lost over a three-year period while output could be adversely impacted by around 1.2 per cent, pushing the country back into recession – a sizeable shock for our fragile economy.

True, Greece is not a major trading partner for Scotland, generating less than 0.5 per cent of our total exports, but its presence – or to be more accurate, lack of it – in Europe would certainly be felt. This is mainly due to the impact it will have in terms of loss of output in other economies that are much more important markets for Scottish goods – for example, France, Germany, the US and not forgetting our biggest market, the rest of the UK. Factors such as banks restricting credit to companies in these countries and their own exposure to the eurozone coupled with linkages between banks in the financial markets would also be significant.

As a result, a small downturn in key Scottish export markets, such as the rest of the UK and the US, could lead to a larger impact on exports from Scotland, and falling employment in Scotland. The report looks at demand and jobs, but continued euro disruption will bring wider direct impacts, for example from currency volatility.

So, how can Scottish businesses shield themselves from the ongoing eurozone debt crisis?

The key is to understand the range of potential impacts and stress-test every potential scenario against all areas of the business. Many companies that don’t directly buy or sell in euros fail to recognise the euro exposures they face in their supply chain, capital investments, financing arrangements or through euro influence on market demand and pricing. Those businesses that develop detailed contingency plans will be best placed to safeguard themselves from the impact of potential structural changes that could have a major impact on their operations.

A Greek exit is by no means certain but if companies don’t recognise and address their euro-related risks, instead of waiting for the next big shock to find them out, they may find the potential safeguards have long gone.

• Paul Brewer is senior partner at PwC in Edinburgh

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