Could Greece save the Eurozone? Don’t look away, we are at a crucial point.


A fresh perspective from Greece, …

Watching Yanis Varoufakis on the BBC’s Newsnight programme last Friday was fascinating. We saw someone willing to challenge the basis of the economic policy currently being applied  in the Eurozone. Mr Varoufakis was clear: Greek Government debt cannot be repaid and hence Greece is insolvent. He went on to say that this means that a bailout extension makes no sense. A bailout is the solution to illiquidity not insolvency. With Greek Government debt at 175% of GDP, the facts seem to support his view. and

…with ideas for change…

Addressing the insolvency issue is only one element of the Greek plan. Mr Varoufakis wants to have an open discussion on both austerity and the current model of structural reform with the objective being to develop an approach that has a chance of working for the Eurozone not just Greece. We should not forget how challenged the Eurozone economy remains, the December EY Eurozone forecast does not envisage growth reaching 2% anytime in this decade and unemployment in Greece and other countries is still at unbearably high levels. Surely Mr Varoufakis cannot be alone in thinking now is the time to consider alternative ways forward?

I have to confess to a personal interest here. I have worked extensively in Greece over the years with both public and private sector clients. In the course of these engagements, I had some of the most fun and rewarding experiences of my career and made some lasting friendships as well as learning about the “Greek reality”. As a result, I have spent a great deal of time observing and participating in projects to implement EU policies for industry reform that were initially developed elsewhere, usually in the UK, into Greece. If nothing else, I became convinced that “top down” solutions developed outside of a country rarely work. Yet much of the structural reform is exactly this and it is for this reason I believe we should be willing to listen to alternatives developed by people familiar with the specifics of the Greek situation. Re-hiring public sector workers may conflict with conventional wisdom but it may be a better option for Greece with policy changes made elsewhere to balance out these moves. We should at least be willing to listen to the rationale.

…but could the plan work?

I am not alone in thinking the outline Greek proposals deserve consideration. An excellent analysis can be found in Frances Coppola’s article and speaking last week, Mark Carney, the Governor of the Bank of England suggested fiscal policy in the Eurozone needed to be more supportive than it currently is. Moreover, The Economist newspaper appears to be in agreement with the ideas on debt restructuring  and reframing austerity although it is unwilling to embrace change to the ongoing structural reform process, describing proposals to change as “crazy socialism”.

Is it really crazy? I firmly believe that policy makes in Europe have failed to grasp the seriousness of their situation. Over the last three years I have presented and discussed the Eurozone situation with over 100 businesses, many of which are based outside of  the Eurozone. The overwhelming majority are extremely worried about the economic situation and are very reluctant to commit resources to expand their operations in the Eurozone. It is no surprise that investment has been so low in recent years, business leaders cannot see the growth story in either the short, medium or long-term. Quite the opposite, I have heard leaders speak at length about how they despair of watching the Eurozone economy continue to decline and lose its productive capacity. In the face of such high levels of youth unemployment with investment insufficient to create the basis for future growth, one CFO said to me, “Where are the European consumers of the future going to come from?”.

A more reasonable question might be, why would policy-makers not consider alternative courses of action?

What does it mean for business and investors?

It is difficult to predict what the outcome of the current activity. Detailed discussions have yet to take place and negotiations are currently only taking place in the media. In high-level terms, there are three outcomes, either:

  • Negotiations do not reach an agreed conclusion and lacking financial support, Greece leaves the Eurozone; or
  • A ‘muddle through” position is agreed with minor changes to the current outlook; or
  • There is a significant change in policy agreed impacting Greece and other countries in the Eurozone.

The first option is one businesses should now have plans in place to address. The scale of the impact remains uncertain but this scenario has been around for some time.

The second case would mean little change to current circumstances and outlook.

It is the third option that is most interesting and does merit further consideration by businesses. This is particularly so because the Greek initiated negotiations come at a very interesting time for the Eurozone. After months of discussions, the ECB has finally launched quantitative easing and the € has continued to weaken, offering benefits to European exporters. In addition, the oil price has fallen significantly which will boost economic growth primarily via increased consumer spending. if QE now also acts to boost asset prices and increase bank lending then the Eurozone might find itself benefitting from a reasonable tailwind for the first time in several years.

If the Greek Government was to be successful in obtaining some relief from its debt burden and also managed to initiate a change in the nature of austerity and structural reform in other countries, the combined effect with the tailwinds described above could be reasonably significant. For the first time since 2010, growth in the Eurozone could start to accelerate at levels that would be noticeable.

The Eurozone is not suddenly going to bounce back to pre-crisis levels of activity. Improving the outlook is a long-term game requiring further hard work and sacrifice but the short-term outlook could look better relatively quickly, providing an envelope in which to continue reform with more positive support. In this environment, opportunities for businesses to make moves to improve their position in respect of their European assets. With higher asset values both buying and selling of assets might become more realistic giving companies the opportunity to either tidy up their portfolios or to acquire assets to help them consolidate markets. There might be enough growth to support business cases that have been put on hold.

Things could suddenly become much more interesting. So while the mood is of worry and concern it is important to stay balanced with a close eye on developments. We are at a critical point in the Eurozone’s journey. What a turn-up if Greece were to be the catalyst for securing the Eurozone’s future.

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