The euro was supposed to ease conditions for doing business across Europe – and to add to peace, prosperity and stability not just in the Old Continent, but also across the world. Rarely, if ever, can a monetary project conceived of as producing so many positive outcomes have become so quickly subverted into a hideous contradiction of the original plan. Amid the outpourings of heat and light on numerous schemes for rescuing economic and monetary union (EMU) over the past two years, very little has been accomplished apart from an increase in political cacophony, a swelling up of social acrimony, and a sharp diminution of Europe’s standing in the world.
A great deal is at stake. EMU has been the emblematic symbol of European unity, the most ambitious project for European integration since the signing of the Treaty of Rome in 1957. Less than three years ago, monetary union was regarded as a beacon of stability in an uncertain world. Even during the recession year of 2009, when the financial overheating of 2007 and the deleveraging of 2008 translated through to a ruinous correction of advanced countries’ economies, EMU was regarded as having saved Europe from the worst fall-out of the credit crisis. It was only after the election of a new Greek government under George Papandreou in autumn 2009, and the discovery that previously-reported relatively healthy Greek budgetary figures were the result of over-optimistic assessments or downright forgeries, that the bitter realisation started to hit home.
Far from becoming an engine of stability, the euro could become an instrument of economic divergence and wealth destruction on a hitherto undreamt of scale. Yet there was denial, even as the scale of the drama unfolded. As late as March 2010, just a month away from the International Monetary Fund being called in to assist Greece, Klaus Regling, the German civil servant who has now become chief executive of Europe’s EFSF emergency bailout facility, felt able to give his name to a co-authored report (published by the Asian Development Bank Institute in Tokyo) that stated ‘Thanks to the successful first decade of EMU, the euro area and its Member States are today in a much better shape to weather these truly testing times than ever before.’
What will happen next? And what will be the effect on business? Whatever happens to the euro as a whole, a core group of European countries with convergent economies may indeed remain linked by indissoluble bonds of monetary and fiscal orthodoxy. This group would include Germany and the Netherlands as well as other members of the “creditors’ club” of northern European countries which have run current account surpluses for most of the past decade and could easily withstand a higher value of their currency than at present.
As part of this development, it would seem wise for policy-makers to consider the possibility that in a short span of time the euro in its present form may no longer exist. History (particularly in the arena of world money and finance) instructs us that when politicians and officials state that a certain outcome is impossible or absurd, that is not necessarily a good guide to what will actually happen.
Here is a 10 point plan for how governmental and corporate organisations should prepare for possible euro fragmentation in 2012. The first five of these points are aimed at governments and public sector authorities; the second half is focused mainly on the corporate sector.
1. Internal and external strategy
Political and central banking leaders need to prepare for a possible new future in which a major tenet of European integration – and one which they have told their electorates is irreversible – would come to an end, at least in its current form. This would demand many different streams of action in the fields of internal strategy and organisation as well as in external communication and public relations. One inevitable consequence of such a dramatic shift would be that one group of powerful politicians and officials associated with certain policies would be discredited, and another opposing faction, normally with less de jure power, would gain in prestige and status: a state of affairs likely to promote considerable in-fighting and dislocation (to put it mildly).
2. Changed central banking operations
Central banks would face an urgent need for changed operations in intensely visible technical areas like banknote printing (particularly in the case of Greece) as well as in other important fields such as commercial bank refinancing, links with the ECB etc. Some of this work would be tied in with continuing missions in issues like financial stability. Since the new euro arrangements would plainly have a broad link to the former set-up, the work required would involve adapting existing structures rather than creating brand new ones. Any preparatory action must be carried out with utmost discretion.
3. Re-ordering of European alliances
At the level of economic and political cooperation, new alliances would need to be formed with European countries now outside the monetary union. This applies to the stronger northern countries like the UK, Sweden and Denmark, as well as to Poland (which is doing particularly well economically) and some non-EU members such as Switzerland and Norway. If the euro area frays, these countries would start to look much more attractive as partners versus the current countries within EMU. At the same time, as banking and financial regulation is made much more stringent under the processes of the Group on Twenty and Basel III, countries like Britain at present outside the monetary union may have to face a new future in which they will find European regulations actively hampering them from developing business potential to the full.
4. A fresh currency framework
Countries which find themselves in the future outside the euro core, with a less exacting exchange rate and interest rate regime, would need a new framework to harness themselves to rigorous economic policies that provide better perspectives for growth and investment and employment than at present. There would still be exchange rate agreements in Europe and a number of countries will almost certainly share single currencies of different descriptions, linked to each other under arrangements reminiscent of the old Exchange Rate Mechanism.
5. New lease on life for EU
The European Union would need to find a new lease on life after the extinguishing of a wide EMU. Mapping out strategies to allow European countries to compete more successfully in new industries and technological sectors, and bringing inappropriate shorter and longer term methods for doing this would be of great importance.
6. Small and medium-sized businesses
Foremost among the companies that would benefit from the new flexible exchange rate order in Europe would be the small and medium-sized business sector. Governments should redesign programs of support for such firms, while banks and other financing organizations would have to find more innovative ways of funding growth.
7. Expansion outside Europe
After any monetary reordering of Europe, companies in manufacturing and services (including financial firms) would need to find new growth strategies to profit from the realignment of exchange rates. Consideration should be given to a policy based on “Expansion strategies beyond Europe” that make optimal use of the potential for partnerships, alliances and cooperation at all levels with corporations and governments in high-growth areas of the world.
8. Adopting best practice
The scaling down of politicians’ hopes for an economically and monetarily more integrated Europe should focus corporate managers’ minds on accomplishing the achievable rather than the illusory. Analyzing and adopting best practice in running companies should become an even greater priority than before. Companies should start by looking at the many examples of European corporations, large and small, that have made a success of their operations within and outside Europe in the last 10 years by assimilating technological innovations, enhancing manufacturing efficiency, improving production lines, revitalizing marketing and sales, and dynamizing management.
9. Adjusting treasury operations
The most obvious place for companies to make changes to adapt to new monetary circumstances is in their treasury operations. Adding new currencies to the panoply of foreign exchange trading already mastered by international companies should be manageable, in view of the explosion of dealing in emerging economy currencies in recent years. In terms of funding, the widening of interest rate differentials on euro bond markets has provided a foretaste of what companies might expect if Europe moves away from “one size fits all” monetary policies. Treasury departments, which have profited greatly from simplified European monetary arrangements over the past decade, should be well prepared for reversion to certain recognizable and relatively predictable aspects of the pre-euro status quo.
10. General readiness
A company’s ability to cope with a shift in European monetary arrangements provides a general measure of its ability to handle the unexpected. Contingency planning for impending changes in 2012 should be built into senior management strategy for the next few years.
