Harvard Business Review

The Euro Is Not a Long-term Crisis


Posted on Harvard Business Review: September 30, 2011 10:05 AM

By James Mawson

At a private meeting for some of Europe’s largest companies, held on the neutral territory of Switzerland’s tallest mountain, the future of the eurozone and its impact on corporate investment were high on the agenda.

Most were blasé as trade between European Union member states will continue to account for most of Europe’s business, whether the states have national currencies or are part of the euro. Of the 17 members of the euro zone, just three (Germany, France and Italy) make up more than three-quarters of the area’s aggregate gross domestic product (GDP) of about €12 trillion. Even if they leave, the size of their economies means they will remain trading partners for the others.

The consequences on global trade of Greece or other periphery countries leaving the euro zone will be relatively minor, compared to other factors, such as inflation, confidence, monetary policy, economic growth, and the balance of payments.

Although a break-up would not reduce overall trade, it would create some major shifts in relative competitiveness. If the euro is fractured back into sovereign currencies, Germany’s relative economic strength would be more obvious and it would face an appreciation of the currency. Switzerland’s Franc offers a sobering foretaste of what that would mean. Its 20% rise in the past 18 months has cut Swiss GDP growth rates and provided a competitive advantage to companies in the euro zone.

To avoid this scenario, the companies agreed it would be be necessary to ensure an orderly default or repayment by Greece in such a way that it can stay in the euro and allow its lenders to recapitalize themselves. If the ECB and other authorities supporting the financial system can achieve this, they will contain the euro crisis.

At present, uncertainty about the feasibility of a rescue deal and what it might mean for companies and people working in Europe and elsewhere is affecting short-term investment decisions. But, with their healthy balance sheets and a realization that the macroeconomic trade picture is not as changed as people fear, most of the companies at the investment forum said they would continue to invest in Europe for the long term.

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