Examining the Euro: Why does it Matter?

Early in 2012, Accenture interviewed leading CEOs and CFOs to find out their opinions about the nature, extent, and implications of the euro crisis.

The research indicated that while faith in the euro remains strong, concerns about bank liquidity are now surfacing once again and most companies are proactively putting into place measures to manage risk and seize newly presented opportunities. Accenture identifies 10 key questions that executives need to ask themselves as they prepare for possible future scenarios.

Although the European financial crisis has been extremely drawn out, there have been a number of positive developments during the past six months. The most troubled governments have received the necessary short-term financing. Now, concern over banks’ longer term liquidity has emerged as a more pressing concern. The European Central Bank has established a mechanism for providing banks with additional liquidity, the Long-Term Refinancing Operation.

However, creating a defense against a possible crisis does not alter the fundamentals that are causing the issues in the first place. These fundamentals are:

• Debt levels for both government and private business remain high, and sustainable financing implies deep austerity from governments and consumers in a number of countries.

• Economic growth remains subdued, as consumers cope with reducing their own debt in addition to bearing the burden of government spending reductions.

• While Greece has averted an immediate crisis (at the time of writing), the route to return to financial sustainability remains precarious, and the situation continues to evolve.

• Elections over the next two years raise a number of questions about the durability of any political settlement.

Early in 2012, Accenture interviewed a number of leading CEOs and CFOs from around the world about their opinions of the euro crisis. Their collective views indicate that time is of the essence with respect to investment in the European economy—and those seeking competitive advantage not only refuse to wait but also embrace the uncertainty.

Our interviews reveal:

• Confidence in the euro holds fast: There is a general acceptance that a peripheral country is likely to be forced out, but a widespread view that the euro will survive.

• Recession is likely to follow any euro withdrawal: There is strong belief that there will be a severe recession, not only in any countries that withdraw from the euro, but also in the wider euro zone in the event of any country withdrawing.

• Fear of a liquidity crisis is paramount: Executives’ “top-of-mind” concerns have shifted from a partial break-up of the euro to the impact of an accompanying liquidity crisis.

• Concerns that the solution meets the challenge: Recent efforts from central banks have addressed immediate anxieties, but corporate executives remain concerned that a liquidity solution has been applied to a solvency problem.

• Crisis management activity is underway: Every company interviewed is either considering or actioning contingency planning in preparation for a partial break-up of the euro. Regardless of the eventual outcome of the euro crisis, companies have implemented a series of established procedures from risk assessment to keeping up-to-date contingency plans.

Drawing on the feedback from our interviews and our own experience and insights, Accenture has identified a series of approaches companies might adopt—from cautious to opportunistic—and set these against a number of plausible scenarios for the future:

• The euro survives, but European gross domestic product growth remains subdued.

• A country leaves the European Union, or is forced out, but wider economic damage is averted.

• A departure of one or more countries from the euro results in financial contagion of the banking sector.

• Events move beyond the control of central banks and political leaders and there is a more widespread economic and financial breakdown of the euro zone.

Whether or not any of these four potential scenarios play out in the future, should executives accept the world has changed as we know it? Without doubt, there are some fundamental changes in the euro zone affecting the delicate balance between risk and opportunity.

Accenture believes there are 10 key questions executives need to ask themselves to prepare better for the future:

• Does my company have an agreed action plan that defines which actions would be taken and by whom for a variety of scenarios?

• Has my company prepared itself for the opportunities, including inorganic growth, which might emerge from a euro zone crisis?

• How might regulatory changes affect my business?

• Has the leadership of my company prepared itself for the possibility of a new currency?

• How might my company, my key clients and customers cope with a widespread liquidity crisis?

• What lessons did we learn from recent recessions that help us understand how a renewed recession will impact consumer demand for my company’s goods and services?

• How exposed are my key counterparties, advisors, banking relationships and suppliers to any of the scenarios explored?

• To what extent is my bank able to meet a range of financial services’ needs; for example foreign exchange, trade accounts or other services?

• What strategy and plans have been developed to strengthen my company’s financial position, including managing cash balances in areas likely to be affected and our strategy on inter-company debt?

• How is my company modifying credit terms with customers and suppliers to manage risk in high-risk countries or create opportunities for market share gains?