Euro crisis and strategic choices of firms

Will Europe manage its crisis? Does euro have any future? Will Finland, Europe, and the USA face a serious economic depression in the near future? All questions are topical, yet little attention has been paid to the role of the firms among the crisis. Even though the euro crisis is intermitted to economies through firms, their representatives have not been able to participate in the euro-elite meetings and negotiations.

Our analysis projects that the crisis is likely to generate an economic depression in Finland. An uncontrolled disintegration of the euro zone would lead to a Europe-wide depression, where the GDP in Finland would fall more than 10 percent within only two years. The appearance of a Germany-centered core-euro would pay as much as 26 billion euro to us, and an introduction of the so-called Eurobonds would cost at least 600 million euro as annual interest rates.

From the firms’ point of view, the most extensive effects would follow from a total disappearance of the Eurozone, as depression, combined with a re-appeared currency risk, would complicate the business life in Europe. The potential core-euro would leave the former members of the euro zone alone with their economic problems, while the core-countries would face a considerable appreciation of their currency, which would violate their competitiveness in the long run. The increased interest payments, associated with the Eurobonds, would tighten the public budgets thus rising taxes, lowering the profits and dampening the investment prospects of the firms.

Managing the risk

Which tools are available for firms to anticipate the risk generated by the crisis? Above all, firms should identify the potential alternatives and develop suitable strategies for handling each potential outcome of the crisis. During conventional business cycles, forecasts for coming trends are available with considerable certainty, thus allowing clear-cut strategic options for firms. However, as uncertainty increases, strategic choices may become vague and obscure, and the conventional market signals may disappear. Therefore, scenario-based forecasting is needed. In scenario-based forecasting, the alternative outcomes are specified to highlight the future, and the firms are able to dictate the associated strategic moves. Whatever the outcome, the firm never loses its ground. The advantage of the scenario thinking is that firms have a suitable strategy to match every potential outcome of the crisis.

Scenario strategies

To control for uncertainty, three scenarios, the most pessimistic, the most optimistic and the most likely, are usually needed. These scenarios are intended to survey the probable outcomes of any process, such as the euro crisis. Each scenario comes with likelihood for realization, facilitating the choice of the associated strategy.

GnS economics supports firms by providing quarterly scenario forecasts for the business cycles in Finland, Europe, and the U.S.A. In our latest Q-review,  we supply the most optimistic, the most pessimistic and the most likely forecasts, indicating the economic growth in Finland may vary from + 2.5% to -3.5% in 2013. Obviously, facing this kind of uncertainty and risk, firms urgently need a scenario-based strategy. On the other hand, a well-composed scenario strategy also renders a considerable competitive advantage over the competitors, indicating that the current crisis provides substantial opportunities as well.  In the next blog entry, we will discuss on the strategies that firms can use to control for the uncertainty.

 

 

 

 

Tuomas Malinen, PhD (econ.)

Principal economist
Tel: +358 40 196 3909
Email: tuomas.malinen@gnseconomics.com

 

 

 

 

Ulla Lehmijoki, professor
Chairman of the board
Email: ulla.lehmijoki@gnseconomics.com

GnS economics applies cutting edge academic research. We aim to offer the best possible information and analyses to support our clients’ decision making in the competitive global markets. Amid short term fluctuations, it is imperative to have a clear view on the long-term economic outlook in order to be prepared and to maximize the opportunities.

2017-07-13T12:16:59+00:00 10.8.2012|Tags: , , , |

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