Minimizing surprises despite Eurozone uncertainties

The Eurozone is at a pivotal crossroads and will likely emerge from the ongoing crisis looking quite different from the one we know today. Because the world is so interconnected, most companies will be affected in some way, regardless of how this crisis unfolds.

The Eurozone crisis has created risks—and new opportunities—so businesses must prepare to navigate the different outcomes that may unfold. The run-up to the spring Greek elections and EU Summit demonstrated how quickly scenarios once nearly unthinkable in the European debt crisis can become realistic. Political developments, economic news, and approaching debt redemptions can trigger fears of a sovereign debt default or a Eurozone exit that could materialize over the course of a weekend.

The Eurozone future: How the crisis could unfold in the near-term
Four Eurozone scenarios dominated by uncertainty and high volatility
s1. Successive phases of fiscal and monetary action hold the Eurozone together
s1. Successive phases of fiscal and monetary action hold the Eurozone together
Eurozone leaders save the euro with progressively looser monetary policy and new loans in turn for further commitments to structural and fiscal reforms. Loose monetary policy alleviates recessionary pressure with Eurozone growth possibly reaching 2% in 2014. Inflationary pressure and restoring credibility drive the ECB to raise interest rates, dampening further economic growth.
s2. A sequence of managed defaults
s2. A sequence of managed defaults
Highly indebted countries restructure debt. Eurozone leaders avoid contagion by increasing recapitalization and other support to vulnerable economies. Eurozone remains intact but lack of credit, confidence plunge Eurozone into prolonged recession.
s3. Greece exits but contagion avoided
s3. Greece exits but contagion avoided
Greece is compelled to leave the Eurozone and then suffers a sharp deterioration in its economy, a rapid depreciation of its new currency and an inflation spike. Monetary expansion, fiscal transfers, bank recapitalisation and further Eurozone integration stave off contagion and the rest of the eurozone stays intact. The loss of Greece has an impact on confidence leading to a contraction until slow growth returns in late 2013.
s4. More countries exit Eurozone and a new currency bloc forms
s4. More countries exit Eurozone and a new currency bloc forms
A Greek exit leads to economic gloom and recession. Popular uprisings and pressure from bond markets, core Eurozone countries and the IMF lead the remaining periphery countries to abandon the euro. A new, smaller and tightly regulated Franco-German led bloc benefits from capital inflow and a boom in domestic demand, but loses competitiveness. Excluded economies contract in the short-term and face an uncertain future.
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What steps should businesses consider taking?
Read PwC's perspective on remaining resilient during the Eurozone crisis

Business environment

Short term

  • Manage revenue sensitive to euro and global economic uncertainty
  • Reinforce distressed vendors that may interrupt supply chains
  • Update IT architectures for flexibility if currencies change
  • Refine continuity plans for strikes, civil unrest, or cyber attacks
  • Prepare to adapt or acquire talent for changes in operating model
  • Monitor Eurozone economic sentiment (view chart), a key indicator for short-term business expectations

Long term

  • Forecast changes in competitive landscape, new openings to engage customers
  • Review strategies and M&A targets for opportunities to build new revenue or develop new innovation models
  • Review operations and supply chains for opportunities to reduce costs
  • Monitor Eurozone forecasted GDP growth (view chart), a key indicator reflecting ongoing business strength to support debt

Financial environment

Short term

  • Manage investments sensitive to geopolitical risk
  • Quantify ownership, liquidity of euro assets
  • Update credit and hedging strategies
  • Address potential working capital strains
  • Revise contracts vulnerable to currency changes
  • Assess tax implications of currency gains/losses and of actions such as modifying contracts, writing-off investments, refinancing and repatriating cash
  • Monitor Eurozone bond yields (view chart), a key indicator reflecting current credit strength

Long term

  • Prepare for financial market gyrations — credit may freeze or flee to safe havens
  • Manage exposures to potential debt-reduction tax reforms
  • Monitor Eurozone capital flows (view chart), a key indicator reflecting expectations of the ongoing investment environment

Regulatory and policy environment

Short term

  • Comply with euro crisis-driven reporting requirements
    • Regulators are increasingly focused on specific, disaggregated disclosures and how firms are managing and mitigating Eurozone exposures

Long term

  • Prepare for large-scale Eurozone restructuring
  • Prepare for new regulations, such as capital controls, debt limitations
  • Prepare for additional reporting requirements
 

Four Eurozone scenarios dominated by uncertainty and high volatility

 

Actual change in Eurozone GDP and projections for four potential scenarios (S1-S4)

What steps should businesses consider taking?
Read PwC's perspective on remaining resilient during the Eurozone crisis

Business environment

Short term
  • Manage revenue sensitive to euro and global economic uncertainty
  • Reinforce distressed vendors that may interrupt supply chains
  • Update IT architectures for flexibility if currencies change
  • Refine continuity plans for strikes, civil unrest, or cyber attacks
  • Prepare to adapt or acquire talent for changes in operating model
  • Monitor Eurozone economic sentiment (view chart), a key indicator for short-term business expectations
Long term
  • Forecast changes in competitive landscape, new openings to engage customers
  • Review strategies and M&A targets for opportunities to build new revenue or develop new innovation models
  • Review operations and supply chains for opportunities to reduce costs
  • Monitor Eurozone forecasted GDP growth (view chart), a key indicator reflecting ongoing business strength to support debt

Financial environment

Short term
  • Manage investments sensitive to geopolitical risk
  • Quantify ownership, liquidity of euro assets
  • Update credit and hedging strategies
  • Address potential working capital strains
  • Revise contracts vulnerable to currency changes
  • Assess tax implications of currency gains/losses and of actions such as modifying contracts, writing-off investments, refinancing and repatriating cash
  • Monitor Eurozone bond yields (view chart), a key indicator reflecting current credit strength
Long term
  • Prepare for financial market gyrations — credit may freeze or flee to safe havens
  • Manage exposures to potential debt-reduction tax reforms
  • Monitor Eurozone capital flows (view chart), a key indicator reflecting expectations of the ongoing investment environment

Regulatory and policy environment

Short term
  • Comply with euro crisis-driven reporting requirements
    • Regulators are increasingly focused on specific, disaggregated disclosures and how firms are managing and mitigating Eurozone exposures
Long term
  • Prepare for large-scale Eurozone restructuring
  • Prepare for new regulations, such as capital controls, debt limitations
  • Prepare for additional reporting requirements