UK: Deloitte Monday Briefing: Five Euro Themes

Last Updated: 7 August 2012
Article by Ian Stewart

Most Read Contributor in UK, August 2017

The euro crisis has rumbled on into the summer. This week's note looks at how corporates are responding and draws on client conversations and discussions within Deloitte's euro crisis group.

  • First, UK corporates see a growing risk that the single currency could break. In June, UK chief financial officers responding to the Deloitte CFO Survey said they saw a 36% chance that one or more country would leave the euro area before the end of this year, up from 26% in March. Financial markets have also been taking a more gloomy view. Economists at Citigroup recently assigned a 90% probability of Greece leaving the euro area in the next 12-18 months.
  • Second, major UK corporates have stepped up plans for a breakup. The proportion of UK CFOs who say preparations in their businesses are at an advanced stage jumped from 18% in March to 28% in June. Last week IAG, the business that incorporates British Airways and Iberia, said it was drawing up plans to deal with the risk of a Spanish exit from the euro. In its half yearly report IAG said it has established, "a Eurozone crisis management group that meets every two weeks to review progress on projects; scenario planning...ensuring financial counterparty risk and hedging policies continue to be fit for purpose; and commencement of a Spain Euro exit roadmap project which considers the commercial, administrative, systems and people issues to be addressed".
  • Third, whilst the focus on Greece has been driven by a greater perceived risk of Greek exit, the 'euro crisis' is about more than what happens in Greece. In the long term there are a wide range of possibilities – from the euro area developing into a more integrated region to a full or partial breakup of the existing union. Businesses need to be alive to the effects of such outcomes on their operations.
  • Fourth, an advantage of planning for some form of Greek exit is that it provides a business with a template for contingency planning in other "at-risk" euro area countries.
  • Fifth, even if the euro area holds together corporates face a new environment in Europe. The official "Plan A" for the euro area combines fiscal austerity, structural change and growing integration – a fundamentally different world from that which prevailed before the financial crisis. The contagion impact of these policies is now being felt in countries not previously perceived as "at-risk", pushing the euro area into recession and contributing to a slowdown in countries such as the UK and Sweden, which are outside the Single Currency. Corporates need to incorporate a changed economic, financial environment into their long term thinking.

Of course it's not all "doom and gloom". Next week the Monday Briefing will take a look at the Irish economy where a number of important things have been going right. But the clearest message is simply that no one knows how things will pan out in Europe. Consider just three hurdles the euro faces in the coming months: the troika of the IMF, the ECB and the EU will rule on whether Greece will need a third bailout; Germany's constitutional court must decide whether a new programme for bailing out weak countries is lawful and the Netherlands faces further elections.

The uncertainties are legion. It such a world it makes sense for corporates to understand the risks and have plans to mitigate them.


The FTSE 100 rose 2.8% last week on better-than expected US jobs figures.

Here are some recent news stories that caught our eye as reflecting key economic themes:


  • US non-farm employment increased by a better-than-expected 163,000 in July – US employment
  • UK real household disposable incomes fell to their lowest levels since Q2 2005 – squeezed consumers
  • Spain's budget deficit rose to 4.0% of GDP in the first half of 2012, up from 2.2% a year earlier, due to weak tax revenue and increased funding of regional governments – euro debt crisis
  • Leandros Rakintzis, Greece's general inspector of public administration, claimed that the cost of bribery in the Greek public sector has fallen, as "there is no money for major wrongdoings" – Greece
  • Survey data showed UK services and manufacturing activity slowed sharply in July from June – slowdown
  • Survey data showed eurozone manufacturing contracted at its fastest rate in 3 years in July – slowdown
  • UK house prices fell 0.7% in July according to Nationwide, the sharpest fall since 2009 – house prices
  • Eurozone unemployment rose to 17.8m in June, the highest level since records began in 1995 – unemployment
  • Irish unit labour costs fell 6.3% between the first quarter of 2008 and the end of 2011 according to data from Eurostat – internal devaluation
  • Savers now have more money invested in to the government-backed National Savings & Investment scheme than at any time since April 2008 – flight to safety
  • China will attempt to land an exploratory craft on the moon for the first time next year, according to state media reports – space race
  • China Railway Construction Corp agreed to pay $600m for a 15% stake in Inter Milan football club, whilst also agreeing to build a new stadium for the club by 2017 – M&A
  • The value of assets managed by private equity firms hit a record $3tn in the year to 31st December 2011 according to research by Prequin – private equity
  • Goldman Sachs invested $9.6m in a new four-year scheme aimed at reducing re-offending among young prisoners released from a New York prison, with financial gains or losses from the loan depending on the success of the scheme – social impact bonds
  • Corporate bond manager M&G urged investors not to invest more in their funds due to regulatory concerns over a lack of liquidity in bond markets – regulation
  • Digital subscriptions at the Financial Times overtook print circulation for the first time – digital revolution
  • Global digital album sales past the 100m mark for the first time – digital revolution
  • Time Out, London's leading entertainment magazine, is to become a free distribution magazine in the autumn of 2012 in an attempt to boost circulation – consumption trends
  • The Swiss National Bank has accumulated $374bn in foreign currency reserves in order to prevent the Swiss franc further strengthening against the euro – exchange rates
  • The Emilia Romagna earthquake in Italy destroyed the world's only two factories of specialist non-reusable tubing for dialysis machines – supply-chain vulnerability
  • Knight Capital Group revealed a $440m pre-tax loss, blamed on software errors that triggered erroneous trading positions – technological vulnerability
  • The Bloomberg website remains blocked in China, a month after it published a report detailing the wealth of senior politician Xi Jinping's family – censorship
  • Enel, Italy's largest electricity firm, said a special tax introduced last year contributed to a 29% year-on-year fall in net profits in the first half of 2012 – austerity effects
  • 58.6% of Japanese households still own a fax machine according to the Japanese Cabinet Office, partly due to the ingrained culture of personal handwriting – cultural good
  • Italian athletes receive $182,000 per gold medal at the Olympic Games, by far the highest bonus on offer according to Forbes, whilst British athletes receive no performance bonuses – golden handshake

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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