Papering over the cracks

AT FIVE o’clock on a freezing February morning, bleary-eyed negotiators emerged from a marathon 14-hour make-or-break meeting between eurozone finance ministers, Greek leaders and private banks with details of a bail out for the beleaguered country that keeps a default off the agenda – for now.

The €130bn (£108bn) needed to keep Greece afloat came at a heavy price of steep cuts in public spending and the imposition of a permanent team of monitors to ensure Athens sticks to the terms of the deal.

To some well-placed observers, the way European leaders – and in particular Germany’s – are behaving will have long-term negative consequences not just for the single currency but also for the EU itself and ultimately for businesses that buy and sell within the world’s largest economic area.

Michael Smyth, head of economics at the University of Ulster, compares the demand on Greece to cut €3.3bn or 1.5% of GDP this year alone, with the 1919 Treaty of Versailles that imposed reparations of £284bn in today’s money that took Germany 92 years to pay.

“I do see strong parallels with the 1930s when the economic orthodoxy was balanced budgets. It was wrong then and it is wrong now,” he says. “The balance of evidence suggests spending cuts impede growth and do not clear the ground for investment by firms and households.”

Maria Theodoropoulou, an economist at the European Trade Union Institute, says it was impossible for all members to pursue austerity simultaneously and expect growth especially when demand conditions were deteriorating.

“Eurozone economies are very interdependent so austerity means demand for imports gets reduced,” she says. “So we can’t all pursue austerity and hope to export our way out of austerity.”

Europe seems certain to continue with its austerity policy, backed up by a new surveillance regime known in Brussels as the “six-pack” and the fiscal pact that was extracted from the ruins of the treaty David Cameron refused to sign.

But the ambassador to the EU from one eastern European state says the Greek deal raises questions about the “democratic and political legitimacy” of those driving through the measures.

“As we create a very intrusive system of fiscal and economic surveillance we are step by step losing the backing of our citizens,” he says. “The implications of austerity with its large social impacts will not be perceived as something agreed by governments but as intrusion by undemocratic Brussels institutions.”

The debate is familiar to UK businesses. Proponents say a failure to cut public spending will lead to credit downgrades and higher borrowing costs. Opponents say prolonged austerity raises the risk of Japanese-style stagnation.

But the question that really concerns businesses is whether the euro will break up.

A straw poll of delegates at the Economist CFO Summit in March revealed that FDs are almost unanimous in their expectation that Greece is on the way out of the euro. About two thirds of the room expected that another country will follow Greece at some point in the future.

However, a Greek exit from the euro should not precipitate an exodus of business from the country. Luca Zaramella, senior vice-president, finance, at Kraft Foods Europe, told delegates he looks at Greece’s net monetary position every day but that it should not impact long-term strategy.

Businesses should not exit countries “from one day to the other” he said, citing the 1997-99 monetary crisis in Argentina as a reason why FDs should take the long view. “The position in Argentina is very good. Consumption is going up,” he said.

Such a break up would force governments and companies to redenominate contracts and assets into new national currencies that will suffer massive devaluations.

Michael Voisin, global knowledge and learning partner at law firm Linklaters, says: “Businesses need to think about contracts they have for the delivery of services of sale of goods into a country that is part of the eurozone.”

Diageo, the drinks giant, recently warned devaluation would make imported products such as its Johnnie Walker and Smirnoff “very, very expensive”.

Voisin says firms would also face indirect exposures to suppliers who may hit the wall in a euro crisis, and risk liquidity crises unless they have alternative sources of finance.

GlaxoSmithKline says it constantly reviews its risk management to ensure patient safety and access to medicines as well as business and financial continuity.

“It is part of our standard risk management practice to operate scenario plans for events such as this,” says spokesman Kalpesh Joshi.

Despite the gloom, experienced euro-watchers are upbeat. A senior Brussels-based US official says the boost the euro brought to trade made break-up inconceivable.

“It was not so wonderful pre-euro,” he says. “You would get ripped off 5% every time you changed money at the border. That made it costly for business. The bottom line is the euro is here to stay.” ?