Europe Crisis: How this could be resolved

Strategy Implementation
-Prof. R Kannan
Group 3
021 - Deepak R. Divecha 025 Vishal Doshi 032 Ratna Gandhi 056 Arnab Maiti 061 Sameer Mayekar 077 Deepti Patel 090 Ranjith Bhanu 110 Pooja Thawani
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Content
Basic Information on EU Objective: Understand the Europe Crisis, what is the status of the same currently, why is it like that and how it can be resolved The Outlook (what part of objective) Cause (Why part of objective) Recommendation (How part of objective)

Brief Information European Union

1945 1959: A Peaceful Europe: the beginning of co-operation The European Union is set up with the aim of ending the frequent and bloody wars between neighbours, which culminated in the Second World War. As of 1950, the European Coal and Steel Community begins to unite European countries economically and politically in order to secure lasting peace. The six founders are Belgium, France, Germany, Italy, Luxembourg and the Netherlands 1960 1969: The Swinging Sixties: a period of economic growth It is a good period for the economy, helped by the fact that EU countries stop charging custom duties when they trade with each other. They also agree joint control over food production, so that everybody now has enough to eat - and soon there is even surplus agricultural produce 1970 1979: A Growing Community: the first enlargement Denmark, Ireland and the United Kingdom join the European Union on 1 January 1973, raising the number of member states to nine
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Brief Information European Union

1980 1989: The Changing Face Of Europe: the fall of Berlin Wall In 1987 the Single European Act is signed. This is a treaty which provides the basis for a vast six-year programme aimed at sorting out the problems with the freeflow of trade across EU borders and thus creates the Single Market 1990 1999: A Europe without Frontiers With the collapse of communism across central and eastern Europe, Europeans become closer neighbours 2000 today: A decade of further expansion Euro became the new currency

Brief Information Europe Union

Member states of the EU (year of entry)
Year Country Year Country Year Country

1952 1952 1952 1952

Belgium France Germany Italy

1981 1986 1986 1995

Greece Portugal Spain Austria

2004 Hungary 2004 Latvia

2004 Lithuania 2004 Malta

1952 1952 1973 1973

Luxembourg Netherlands Denmark Ireland

1995 1995 2004

Finland Sweden Cyprus

2004 Poland 2004 Slovakia 2004 Slovenia

2004 Czech Republic 2007 Bulgaria

1973 United Kingdom 2004

Estonia

2007 Romania

Outlook Europe Crisis

Outlook Europe Crisis

The euro-zone is facing the dangerous combination of a sovereign debt and banking crisis. Politicians, economists and central bankers are attempting to solve this but the outcome will not be clear for some time meanwhile the noise and uncertainty continues. So far: Banks have been told to prepare contingency plans for the break up of the eurozone, some are at risk from the current instability in European capital markets. Stronger austerity measures are being introduced that will impact both government spending and are already changing consumer behaviour in the countries affected. Capital is moving towards safer havens as Euro deposits are reduced and transferred away. Risk of disruption, unrest and fraud have all increased in the most affected countries. Large number of European companies face the challenge of refinancing their activities in the face of this crisis over the next 12 months.

Outlook Europe Crisis

Head of the IMF says there is a risk of a 'lost decade' David Cameron warns crisis is placing Britain in 'clear and present danger' Italy debt is so large it cannot be bailed out Markets across the globe fall in response to the news Worries France could be next country to fall victim The size of Italy s debts mean it is widely considered too big to bailout, unlike Greece, Ireland and Portugal. There is not enough cash in a eurozone bailout fund even for an initial rescue package, which economists believe would cost at least 550billion As the debt crisis in Italy escalated, the euro fell 2.2 per cent against the U.S. dollar in its worst one-day fall for 15 months

Causes Europe Crisis

The eurozone has agreed a new "fiscal compact" Eurozone leaders have agreed to a tough set of rules - insisted on by Germany - that will limit their governments' borrowing each year to just 3% of their economies' output

Eurozone had agreed in 1997, to the same limit their governments' borrowing each year to just 3% of their economies' output

Italy was the worst offender. It regularly broke the 3% annual borrowing limit. But actually Germany along with Italy - was the first big country to break the 3% rule. After that, France followed. Of the big economies, only Spain kept its nose clear until the 2008 financial crisis; the Madrid government stayed within the 3% limit every year from the euro's creation in 1999 until 2007

Causes Europe Crisis

The borrowing graph actually shows the Germany is safe heaven market despite of high borrowings and Italy & Spain in trouble.

But the debt had nothings to do with govt borrowings, private sector as seen in bar graph was borrowing. . Instead it was the private sector - companies and mortgage borrowers - who were taking out loans. Interest rates had fallen to unprecedented lows in southern European countries when they joined the euro. And that encouraged a debt-fuelled boom

List your points here..we can consolidate

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Causes Europe Crisis

Imbalance struck: things went in favor of Germany and had adverse effect on southern europe: Germany became an export power-house after the eurozone was set up in 1999, selling far more to the rest of the world (including southern Europeans) than it was buying as imports. That meant Germany was earning a lot of surplus cash on its exports. And guess what - most of that cash ended up being lent to southern Europe But debts are only part of the problem in Italy and Spain. During the boom years, wages rose and rose in the south (and in France). But German unions agreed to hold their wages steady. So Italian and Spanish workers now face a huge competitive price disadvantage

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Outlook Europe Crisis

Nasty dilemma: the government borrowing had very little to do with the current crisis in eurozone. So to recap, government borrowing - which has ballooned since the 2008 global financial crisis - had very little to do with creating the current eurozone crisis in the first place, especially in Spain (Greece's government is the big exception here). So even if governments don't break the borrowing rules this time, that won't necessarily stop a similar crisis from happening all over again. Spain and Italy are now facing nasty recessions, because no-one wants to spend. Companies and mortgage borrowers are too busy repaying their debts to spend more. Exports are uncompetitive. And now governments - whose borrowing has exploded since the 2008 financial crisis savaged their economies - have agreed to drastically cut their spending back as well

Cut Spending ...and you are pretty sure to deepen the recession

Do NOT Cut Spending ... ...and you risk a financial collapse

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Causes Europe Crisis

The Making of a Crisis 1. Confidence in the prospects for growth and stability of the economies of Greece, Ireland, Italy, Portugal, and Spain (GIIPS) surged when the euro was introduced, causing their interest rates to decline to those of Europe s more stable members. 2. Improved confidence and lower interest rates drove up domestic demand in the GIIPS and investors and consumers have increased spending and run up debts, often owed abroad as foreign capital flowed in. 3. Growth accelerated and the prices of domestic activities rose relative to the price of exportable or importable products, attracting investment into the less productive nontradable sectors and away from exports and industries competing with imports. 4. Meanwhile, exports rose sharply as a share of GDP in Germany due to Growing demand in the GIIPS enabled these core countries to increase exports. The adoption of a common currency made their exported goods more affordable.

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Causes Europe Crisis

5. The domestic demand boom in the GIIPS induced rapid wage growth that outpaced productivity, increasing unit labor costs and eroding external competitiveness further. 6. The emergence of China, as well as currency depreciation and rapid labor productivity growth in the export sectors of the United States and Japan, added to the competitiveness problems of the GIIPS. 7. The single European monetary policy was too loose for the rapidly growing GIIPS (Spain, Greece, and Ireland) and too tight for Germany, whose domestic demand and wages grew very slowly compared to the European average. This reinforced the loss of competitiveness in the GIIPS. 8. Lower borrowing costs and the expansion of domestic demand boosted tax revenues in the GIIPS. Instead of recognizing this as temporary revenue and saving the windfall gains for when growth slowed, GIIPS governments significantly increased spending. Blatant fiscal mismanagement added to the problems in Greece.

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Company Strategy To Survive Europe Crisis

Five practical strategies

In our view there are five key areas in which to take action:

Act Now: 1. Immediate defensive actions 2. Immediate trading response

Plan Now: 3.Continuity and contingency planning 4.Group-wide consequences 5.Advantage from operating in a fundamentally different environment
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Company Strategy To Survive Europe Crisis

Act Now: 1. Immediate defensive actions:Act to minimise risk and increase balance sheet resilience in the event of a large scale default and Euro exit scenarios this includes a wide range of treasury actions, reviewing financing and funding positions. Change policy and process to enhance the visibility and control of credit exposures by country and customer. Review policies and contractual terms for customers and suppliers when writing new business. Reassess critical suppliers for failure risk & develop appropriate mitigation plans. Amend appropriate controls and authority levels. Consider what business processes are required to ensure that the management team is able to monitor the situation as it develops, take decisions quickly and communicate effectively and widely. Prepare contingency and continuity plans.
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Company Strategy To Survive Europe Crisis

Act Now: 2. Immediate Trading response: Grip cash flow. Have cash flow forecasts to give the best possible forward visibility of cash inflow and outflow in affected countries. Respond to the changing market and act to protect cash flow and profitability in affected countries. This includes considering routes to market, terms of business with customers and suppliers and changes in pricing and product mix. Review budgets and business plans. Prepare response plans now and do not leave the planning until trading has fallen off.
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Company Strategy To Survive Europe Crisis

Plan Now 3.Continuity and contingency planning : Plan for the worst. With the level of uncertainty, business continuity and contingency plans should be revisited or created. Produce triggered response plans. Given the range of possible outcomes it is not practical to create a contingency plan for each one Implement appropriate governance. Decision structures and governance for controlling and monitoring the situation are often overlooked but vital.

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Company Strategy To Survive Europe Crisis

Further: 75 % of the 20-64 aged population should be employed 3 % of EU GDP to be invested in R & D

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References
http://www.kpmg.com/UK/en/IssuesAndInsights/ArticlesPublications/Documents/PDF/ Advisory/eurozone-crisis-five-practical-strategies.pdf http://europa.eu/about-eu/eu-history/index_en.htm http://www.bbc.co.uk/news/business-16301630 http://www.dailymail.co.uk/news/article-2058868/Italy-economic-crisis-Fears-UKdragged-second-recession.html india@10.blogspot

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