EUROZONE CREDIT DOWNGRADES SHOULD SURPRISE NO ONE

14 01 2012

In fairness, Standard and Poor’s downgrading of credit ratings for Italy and Portugal probably hasn’t surprised anyone but reaction to France’s, and to a lesser extent Austria’s, downgrading has met with some surprise. It shouldn’t. 

A month ago this blog criticised the lack of leadership and the lack of strategy being seen in addressing the Eurozone crisis and, as what we termed ‘the management of the continuation of mediocrity by the unaware’ has continued, perhaps the only surprise should be that Standard and Poor’s took so long to act.

Early last month Europe’s management met in Brussels to address the deepening Eurozone crisis. All ignored the demand of the moment which was for an issue-based strategy which addressed the immediate problems and which could lay the foundation for a vision-based strategy aimed at addressing the Euro’s future if it was saved.

Instead, Europe’s political management chose to ignore strategy altogether and begin work on designing a structure for the Euro’s future, a future which was (is) far from secure.

Or, as Standard and Poor’s put it in yesterday’s statement; “Today’s rating actions are primarily driven by our assessment that the policy initiatives that have been taken by European policymakers in recent weeks may be insufficient to fully address ongoing systemic stresses in the Eurozone.”

The statement went on to say; “The outcomes from the EU summit on Dec. 9, 2011, and subsequent statements from policymakers, lead us to believe that the agreement reached has not produced a breakthrough of sufficient size and scope to fully address the Eurozone’s financial problems.”

Britain’s credit rating is, for now, unaffected. The Prime Minister’s stance in Brussels gave the impression that he understood the need for issue-based strategy however the government’s over all lack of real strategy since taking office might leave the UK exposed to downgrading later this year, especially if the need to diversify the UK economy to one less reliant on banking is not addressed.

The warning was there in Standard and Poor’s statement but has been largely overlooked by the media in the rush to report reaction from the continent; “we believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers’ rising concerns about job security and disposable incomes, eroding national tax revenues.

What of Germany, Europe’s economic powerhouse, seemingly safe from this pressure? Germany is perhaps unique in EU nations in that it has developed extremely healthy business relations with, among others, the BRIC nations – the world’s four fastest emerging economies of Brazil, Russia, India and China. While playing their (big) part in the EU, they have understood the need to proactively engage with other markets. This diversification leaves them less prone to the economic woes presented by the Eurozone crisis which, although not part of the Euro, affect Britain and its over-reliance on one sector and low penetration in a diverse range of markets.

As an example, in June 2011 David Cameron proudly announced trade deals with China worth an estimated £1.4b only to be trumped two days later when Chancellor Merkel announced German trade deals with China worth in excess of £9b rising to a potential £165b over four years!

Fortunately Britain is not in the position of downgraded Austria who allowed an unhealthy percentage of their economy to become reliant on trade with Italy and Hungary, two of Europe’s more worrying crisis nations.

Having recognised the issues facing the UK and Europe seemingly a month ahead of Standard and Poor’s as well as many others, do I feel smug? No, not at all – I feel worried, worried that this crisis is far from its conclusion and that, as highlighted in my previous blog on the issue, not a single European government has yet recognised the importance of strategy and of leadership in this (and all other) matters. At a table which should have four seats filled by manager, economist, leader and strategist, the latter two remain unfilled.

What next? The Eurozone will not survive in its current format; the time when a strategy to save it could be devised has now passed. Indeed yesterday, as the latest Greek bail out stalled, a term emerged in the corridors of Europe’s political management and in the continent’s markets; ‘velvet divorce’. Already (though not yet publicly) the focus is shifting from saving Greece to splitting Greece from the Euro without causing further economic damage to other members. Other debt laden Eurozone economies which lack the means to balance the books look on in interest.

The good news? There are a number of excellent lessons for those running businesses in the mismanagement of the Eurozone crisis:

  1. Don’t ignore current crises in the rush to design the future. There may not be a future if you ignore the present.
  2. Having addressed the present don’t overlook the future, standing still is the same thing as engaging reverse.
  3. Don’t mistake structure for strategy.
  4. Ensure you have the advice you need to make the right decisions now and going forward – management and economics are vital but are only half the story. Overlook leadership and strategy at your peril.
  5. Don’t assume you know what strategy is – the research tells us that most UK and European businesses do not!

Relevant earlier Cowan Global blogs:

The Eurozone Crisis – The Management of the Continuation of Mediocrity by the Unaware. Written on 3rd December 2011 prior to the Brussels crisis talks.

The Eurozone Crisis – Still No Strategy and Still No Real Fix. Written the day after the Brussels crisis talks ended.

© Jim Cowan, Cowan Global Limited, January 2012

Read more blogs by Jim Cowan

info@cowanglobal.net

Twitter @cowanglobal

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19 05 2012
THE EUROZONE CRISIS – A LESSON IN BAD STRATEGY AND INCOMPETENT LEADERSHIP « Cowan Global Website

[…] Eurozone Credit Downgrades Should Surprise No One (14th January 2012). […]

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