True that the recent UK credit downgrade attracted a lot of attention, however as some analysts pointed out, it did not reveal anything new. We all know UK growth is flat-lining and the Government’s austerity measures are failing to translate into deficit reduction. The Eurozone faces an even greater challenge as the economic fortunes of member countries diverge.
Indeed, there are many factors which suggest that a loosening of ties with the Eurozone by British businesses is possible, if not already under way.
Unstable Eurozone economy
Recent data suggest a two-speed economy emerging in the Eurozone. There are reports that some Eurozone countries, such as France, Germany and the Netherlands, are actually benefiting from the crisis as low interest rates stimulate borrowing by businesses. However others, such as heavily-indebted Spain and Italy, are suffering at the hands of much higher interest rates.
At the same time, youth unemployment in Italy has now surpassed that of Portugal to become the third highest in Europe, with well over a third of the country’s young people out of work.
Meanwhile northern Eurozone countries, particularly Germany, have substantially lower levels of youth unemployment. This suggests that Southern European nations will face chronic problems when the crisis finally recedes and economies return to trend growth, as there will be few skilled young people to meet demand from key growth sectors.
The drastic measures being taken in an attempt to repair the damage from the debt crisis are such that political instability in Europe is becoming the norm. Nowhere has this been better evidenced than the recent Italian election.
Despite the UK credit downgrade dominating news headlines locally, the majority of market turmoil was created by the inconclusive Italian election result, arising from fears surrounding its potential impact on both Italy’s finances and the Eurozone as a whole.
However, it could be simply a precursor to what will happen come September when Germany goes to the polls. Given Germany’s influence over the debt negotiations, the general election will be hotly contested and there will be much anxiety in the final lead-up until a result is known. If that election also fails to return stable leadership, the effects on the Euro and confidence in the Eurozone would plummet.
Volatile exchange rate
The £/€ exchange rate in recent years has been extremely volatile, one of the most wildly fluctuating of the major currency rates. In many ways it has been a race to the bottom, as a trickle of information confirming the poor state of the respective economies led to a see-sawing effect.
In 2012 alone, the Euro began the year approaching €1.10/£1 with Sterling, only to reach four-year lows above €1.28/£1 come July. However the situation had reversed yet again at the start of this year, culminating in the UK losing its AAA credit rating, before the Italian election result snapped the trend back again.
It has long been considered the case that Western countries were more “pro-business”, while strict regulations in other countries made entry both difficult and costly. Yet in recent times, this trend has been reversing.
Decreasing regulation in the likes of China, Russia, Turkey, India and other emerging markets is now commonplace, as these nations race to reform their laws to become more business-friendly and attract greater international investment.
Conversely, austerity measures, tax rises and increasing documentation requirements are adding to the cost and red tape burden of businesses trading in the Eurozone. While designed to help restore the balance sheets of heavily indebted nations, these measures in practice seem to be taking the business environment backwards, inhibiting creativity, entrepreneurship and ultimately profitability.
Sustainability of growth
Much has been made of the growth opportunities available in emerging markets, particularly the BRIC nations – Brazil, Russia, India and China. Due to their sizeable populations and rapidly developing economies, growth in these countries is largely organic, based upon the increasing wealth of citizens, rising education and training standards, and growing demand for new products and services. This provides a sustainable avenue for British businesses to expand.
Again, this contrasts markedly with the Eurozone, where growth is going backwards and many companies – including major banks – are reliant on stimulus measures simply to stay afloat. This in its own right poses longer term risks to economic stability.
Opportunities in Commonwealth countries
Many Commonwealth countries present solid growth opportunities, from Western nations such as Australia and Canada to emerging markets in India and even Africa.
In some aspects, British firms can find it relatively straightforward to trade with businesses in these countries thanks to historical ties and an emulation of British processes. Politics, judicial systems, education, business protocols, taxation and cultural aspects can closely resemble or may even be directly transferred from the British system, providing a familiar backdrop with which to launch new trade relations. The language barrier can also often be less of an issue, since English is widely spoken in most Commonwealth countries, particularly in major metropolitan areas.
However…there are unique barriers to overcome
A disunited Eurozone economy will undoubtedly have ramifications for the value of the Euro, which in turn will impact on the potential for UK firms to recover from the economic malaise. But dealing with emerging markets in particular brings a new set of challenges.
More moderate exchange rates, combined with superior growth prospects and an increasingly business-friendly regulatory environment make China and Russia, for instance, much more appealing avenues of achieving business security. Yet for businesses investing in new trade relations in such countries, political, economic and cultural implications all need to be more acutely considered, since they can operate very differently from Western countries.
Unlike Europe, perhaps the majority of people in the likes of China, Russia, Asia and South America do not speak much if any English, so language can be a barrier. There are hurdles to market entry which do not exist in EU nations, such as trade restrictions, taxation rules and issues in obtaining visas to conduct business in person.
Also, business practices and customs vary quite drastically from the Western customs with which we are familiar. These can be as simple as an initial greeting which, if done incorrectly, could preclude a UK business from even getting a foot in the door.
It is hardly fair to say that the Eurozone is a sitting duck with no prospects to get off the ground again, however with the current crisis continuing to reveal its ugly head again and again, the better prospects for growth and stability in emerging markets can only become increasingly tempting for UK companies. Taking up opportunities in alternative markets may be a more stable and prosperous option for these firms going forward, but such a move will require careful planning and specialist advice throughout the process to determine such a move is in their best interests.
As the Managing Director of Smart Currency Business, Charles has helped thousands of UK SMEs reduce the risk and improve the efficiency of their overseas trade, and leads a successful small business with 50 staff. A trained chartered accountant, he has 25 years experience in the international payments industry, and was previously the CFO of a listed company.