The news out of Europe is terrible. Day by day, things get more dire. However difficult the past four years were, there’s much worse to come. As The Economist  puts it (May 12), “the night terrors are back.”
First quarter growth for Germany came in at 0.5%; the Netherlands and France showed no growth; Italy contracted by 0.8%. Greece by 6.3%. The Eurozone as a whole came in flat. More than half of Eurozone countries are now in recession. Unemployment in the 17 hit 10.9% in March.
After years of dithering about what to do about Greece, it’s now clear that kicking that can down the road was always a bad idea. Policymakers have run out of road and hard decisions must now be made. U.K. prime minister David Cameron sees this as “make or break” time.
The only thing that came out of the recent Greek non-elections was proof—as if it were needed—that Greek voters can’t live with the tough conditions imposed on them by the ECB/IMF bailout package that was signed only a few months ago. Their economy has shrunk by 20% in five years. Their lifestyle has gone to hell in a hand basket. Many of them are struggling to survive. They’ve lost hope. The tragedy of their plight is captured in a headline in the New York Times : “Increasingly in Europe, suicides ‘by economic crisis.'”
Greece has been in recession for five years, and can’t pay its bills without even more more help. The central bank now holds just $1.9 billion in cash. There are fears of a run on banks, as withdrawals rise. Even if everything goes Greece’s way from now on, it will take decades for the country to trade its way out of the hole. (Will tourism, olive oil, and goat cheese do the trick? Will Greece suddenly become a manufacturing powerhouse, a financial hub, or the next Silicon Valley?)
The elections failed to produce a new government and highlighted deep disagreement about the best way forward. No party won enough support to assume power, and despite days of intense haggling after the poll, politicians were unable to put together a coalition to govern. A judge has been sworn in as interim prime minister to “manage” the place until new elections are be held on June 17—and who knows what will happen afterwards?
Even though it seems most Greeks would prefer to stay in the Eurozone, most analysts believe Greece has no choice but to default on its debts and get out. The bust-up would be traumatic, and the impact nasty. There are massive legal hurdles, and no agreed way of making it happen.
BLEAK TIMES GET BLEAKER
The European dream is unravelling. Whatever Greece does, a long period of deep uncertainty and insecurity lies ahead. And while it drags on, the rest of the world will struggle to grow.
French and German voters have joined the anti-austerity chorus. Francois Hollande became France’s first socialist president in 17 years after defeating Nicholas Sarkozy, and centre-left voters in the German state of North Rhine-Westphalia hammered Angela Merkel’s conservatives. (Merkel’s overall support has plummeted from 34.6% to 26.3%.) Hollande has promised to stimulate growth; Merkel is holding her ground on austerity. So it’ll be interesting to see who blinks first.
Spain is a basket case. The banks are in terrible shape, and it’s getting worse. Moody’s downgraded 16 of them on May 16. Shares in the second largest, Bankia, fell by 29% after reports that customers had withdrawn €1 billion in less than a week. Writing in the New York Times  (April 15, 2012), Nobel economics laureate Paul Krugman proclaimed the country to be “in full-on depression, with the overall employment rate at 23.6 percent, comparable to America at the depths of the Great Depression, and the youth unemployment at over 50 percent.”
The Spanish economy, of course, is much larger than that of Greece.
And then there’s Italy… and Portugal… and Ireland… and …
A VICIOUS CYCLE MEANS TROUBLE FOR ALL
Any country that sells into Europe is feeling the freeze. Demand in the region is weak, with finished goods, components, and raw materials all taking strain. Many suppliers are from emerging markets, and the slowdown is hurting their economies—just when they were seen as the growth opportunity of the future. So the ripples are spreading outwards. From India to South Africa to Latin America, growth forecasts are being cut.
GDP in the UK shrank by 0.2% in the first quarter, putting the country into a double-dip recession. The official forecast is for 0.8% for this year; and a return to pre-2008 growth is not likely before 2014. Mervyn King, governor of the Bank of England, is preparing for more fallout from Greece.
China’s growth has slowed month after month, and a Bloomberg survey shows it at a 13-year low. Pimco, the world’s biggest bond trader, now sees 7% as the likely number for 2012. Both imports and exports are sharply down. Domestic demand is sluggish. Bank lending in April was way below expectations. Investment in fixed assets is at level not seen in a decade. Foreign direct investment has fallen six months in a row. Electricity consumption, rail freight, and bank loans are all slipping. The property market is taking strain (house prices are falling at a record pace) as a result of government measures to avoid a credit-driven bubble, and the construction industry is in a funk. And to complicate matters, the inflation rate is heading upwards.
The U.S. economy seems to be getting some of its spark back, but there are still weaknesses. Growth this year should be around 2.2%, but a survey of economists had most of them confessing that their forecasts were probably too optimistic. Krugman says the country (like Spain) is in a depression, not just a recession. Economists warn of a “fiscal cliff” at the end of 2012, when the Bush tax cuts expire and new taxes must kick in, but in this election year, politicians will avoid committing to any action to deal with the problem. March jobs figures were disappointing—unemployment fell slightly to 8.1%, but only because more people have given up looking for work. One American in six can’t always get enough to eat.
A TEST FOR OPTIMISTS
I could offer many more facts to show just how shaky things are. I could toss in the gloomy views of any number of economists, think tanks, business people, and others worth listening to. But you only have to watch Bloomberg or CNBC, or read the daily news, to get more than enough evidence that the world is in a precarious state.
As I wrote in my February 28 post (“Where is the global economy going, and what does it mean to you?”) we’re in the middle of a colossal economic experiment, and while many people have strong opinions on what to do, there are questions about every “answer.” The past may or may not be a reliable guide to the future. Well accepted theories may or may not hold up in a complex new world.
Economics and politics are on a collision course. Society is caught in the middle and is thoroughly pissed off. Any leader dispensing unpleasant medicine risks losing support and being voted out of office. But without unpleasant medicine, the Great Recession will run and run—and the entire world might be ungulfed by a new Great Depression before we know it.
There is no reason to think we might be in calmer waters anytime soon. There’s every reason to fear some dramatic event ahead that will be calamitous. And to accept that the difficulties we face right now are just the precursor of more to come. The Greek problem is Europe’s problem. Europe’s problem is everyone’s problem.
Here’s Krugman again:
“…it’s hard to avoid a sense of despair. Rather than admit that they’ve been wrong, European leaders seem determined to drive their economy—and their society—off a cliff. And the whole world will pay the price.”
A NEW ERA IN GLOBAL COMPETITION
As I’ve observed many times before, competitive hostility has risen dramatically in recent years. But if companies thought they were walking through fire in the past four years, that was just warm-up time. There’s a new array of daunting challenges ahead. They’re coming from all directions, and they’re coming thick and fast.
Firms in many countries are sitting on piles of cash, too nervous to lay new bets. They face the hard choice: seize the moment and invest in the hope of capturing today’s opportunities and preparing for tomorrow’s, ahead of the herd; or preserve their war chests in case more bad stuff hits the fan. But one thing they cannot avoid is taking another clear-eyed look—and another, and another—at the world around them.
Some companies will sensibly decide to continue with their current strategies, perhaps with some incremental changes. Others will have to pursue a more radical course. And for many, a bit of both will be best.
What no management team should bank on is that their business performance will soon get a lift from either an economic upswing or a breakthrough in strategy. What they should do is:
- Stay tuned in to their environment so they quickly sense significant changes.
- Get back to basics, dump any activities that weigh them down or distract them, and shorten their “to-do” lists.
- Focus on making a difference that matters to the “right” customers.
- Fine-tune their business models to deliver, and keep innovating and improving.
- Make sure there’s clarity—across their organization—about what they must do, 30 days at a time.
Strategy is always about laying bets for a world you can’t see. That’s becoming trickier by the day.