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Can London businesses ignore the Eurozone crisis?

18th Jun 12 8:37 am

We don’t need bailouts and we’ve got our own currency. So should we just stop worrying about the horrors overseas?

Ever heard the fact that half our trade is with Europe? Well, its rubbish.

In fact 95 per cent of British trade is intra-national, meaning it takes place exclusively within our own borders. Of the remaining 5 per cent which is international, half of that is with Europe.

With that in mind it is legitimate to ask: can we just ignore the Eurozone crisis?

We aren’t in the Eurozone. Our banks are not being downgraded. In fact unless you are a shareholder in a French bank, or obsessed by Spanish cajas, or an Irish firm facing soaring taxes, then it is likely the crisis has no direct effect on your business.

Following the saga is time-consuming. And there are stories more ghastly to gawp at – the civil war in the Congo, the mass-murders in Syria, the astonishingly violent drug wars in Mexico.

I asked around three dozen chief executives for their views. It turns out that many simply couldn’t care less about the Eurozone crisis.

Sarat Pediredla, founder of mobile app design house Hedgehog Lab, told me: “On a professional level, I am completely bored with the Eurozone crisis despite the fear-mongering around how this will impact the UK economy.

“The reality is that, as a B2B service provider, the recession has not hit us at all. We posted 300 per cent growth in the past year and continue to do so. What double dip recession? I don’t see this crisis having a material impact on big business spending in the UK and even most parts of Europe.”

Even firms which deal with the Eurozone are keeping calm and carrying on.

Dave Hemingway of the Nouveau Beauty Group has distributors in Greece and Italy. And although he says it is “soul destroying to see them struggling”, their impact to the firm is “very small” and Nouveau will carry on almost unaffected.

Being an ostrich seems both a popular and plausible strategy.

So can London businesses ignore the Eurozone crisis?

Alas, the deluge of responses I got arguing “no” were more convincing than the examples of companies ploughing on as if nothing was happening.

Over and again I heard the same warnings. Here are the top five reasons you can’t ignore the Eurozone crisis. They make a pretty good case.

1: Our own banks may freeze lending

Eimear Daly, market analyst at Schneider Foreign Exchange warns: “A ‘Grexit’ worst case scenario will likely be avoided, but a deepening economic situation in Europe will weigh on the UK. The banks will be weakened as funding costs soar and their holdings of European debt are written down. Bad debts and Eurozone bonds weigh on UK banks’ balance sheets, raising funding costs and constricting credit to businesses and households. 

“Businesses need to be prepared for this scenario and make sure that they are not reliant on their bank. If they are, they need to make changes now rather than waiting.”

2: Even if you don’t deal with Spain, Italy or Greece, your clients may

Sarah Lafferty, co-director of Round Earth Consulting, narrated this grim tale: “One of our former clients is an Irish software company whose main creditor is the Italian public sector. A little reported fact in the UK is that a few weeks ago the Italian government, whose public sector debt makes ours look enviable, announced that they will pay their creditors in government bonds, rather than cash. Well you can’t pay your staff with government bonds. This means that our client had to make immediate redundancies and cancel their contract with us.”

3: Bad news is contagious

The British workforce is being made miserable by the drip-drip of bad news. Graham Scrivener, managing director of Forum Corporation’s EMEA region, reports that volatility can be “demotivational” and when employees are uncertain they may “try less hard”.

4: The Euro is falling in value

The Euro used to be 1.14 to the pound. It is now trading at 1.23 to the pound. This causes two problems. British exporters to the eurozone find it harder to sell. And it becomes easier for our Eurozone rivals to export to other world markets and compete with our firms. Keeping American and Australian clients happy will get just that bit tougher.

5: The size of the crisis is mind-blowingly big

The latest bailout to Spain was 100bn euros. The borrowing cost of the Spanish government has risen since then, and the latest estimate was that another 300bn euros bailout is needed. If Spain defaults, the meltdown will be unlike anything Europe has seen since the Second World War. It may be necessary to abandon Southern Europe altogether.

Denys Shortt, founder of pharmaceuticals distribution giant DCS Europe, says he’s already making plans: “If the money dries up in Spain and Greece then we will look to other places. Australia, South Africa are growing for us as well as Middle East is strong.”

In conclusion: Don’t ignore the Eurozone crisis

For a bit of expert advice I asked Chas Roy-Chowdhury, head of taxation at ACCA, whether with all this mind it was still acceptable for British businesses to ignore the crisis?

“No! Absolutely not!” he said with a hint of panic in his voice. “They need to be making provision to deal with a potential banking collapse and for Greece to leave the euro”. Such as? If you deal with the Eurozone he suggests: “Get payments upfront. If you are the one paying for goods then make sure you get the goods before paying. Or you might pay and get nothing.”

For firms who think they have no exposure, he advises doing some detective work: “Look at the status of your partners. Check to see if they can pay, and if they can’t pay on 30 days then don’t extend their payment terms.

“This is question of survival. None of us ever expected a crisis of this size. It is like something you expect to only read about in history books.”

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