The future of EuropeGrant Thornton International Business Report 2013
2 Introduction4 Report highlights5 Stagnation8 Integration10 ExpansionContentsWelcome to the second edition of our ‘Future of Europe’series, which draws both on data from leading economicforecasting houses, and on 3,100 interviews conductedwith senior executives from in and around Europe as partof our International Business Report (IBR).The report deals with three distinct aspects of the ongoingsovereign debt crisis: the stagnation of Europe’s economies,the closer integration suggested as a means to mitigatinguncertainty and what this means for the future expansionof Europe.
eurozonegrowthflat-0.5%-0.5%1.0%in 2012in 2013in 2014eurozonegrowthflat-0.5%-0.5%1.0%in 2012in 2013in 2014The future of Europe 3The future of Europe remains delicately poised. Whilst thefeeling at the 2013 World Economic Forum in Davos was thatthe worst of the crisis was over, growth prospects for2013 look very weak. The European Central Bank (ECB) isforecasting a contraction of -0.5% across the eurozone in2013 – with only mild improvements expected in 2014. Eventhe mighty German economy, previously relatively insulatedfrom the crisis, posted a contraction of 0.6% in the ﬁnal threemonths of 2012, pulling full year growth down to just 0.7%.France did not even manage that, with growth ﬂat in 2012.IntroductionThe future of Europe: IBR 20132012 did bring some cheer for Europeanleaders, with the completion of the biggestsovereign debt restructuring in history inMarch: 86% of investors holding privateGreek debt agreed to join a write-off deal,lowering the country’s debt burden bysome €105 billion or just over half thecountry’s private debt. However, doubtsabout the Spanish banking sector wereﬁnally realised in early June with thegovernment requesting a loan of up to€100bn from the European StabilityFacility to recapitalise its banks. Withinvestors wobbling, borrowing costs,especially in Southern Europe, began toclimb back to unsustainable levels. It tookan announcement on 26 July, by MarioDraghi, President of the ECB, that hewould do “whatever it takes to preservethe euro” to restore an element of calm tothe markets.The ECB’s proposed ‘outright monetarytransactions’ (bond purchases in secondarymarkets) aimed to cut the borrowing costsof debt-burdened eurozone members.Whilst no government requested a bailoutwhich would trigger these transactions,just having the mechanism in place seemedto placate bond markets. At the turn of theyear all eyes were on the ﬁscal cliffnegotiations across the Atlantic, whilstfocus in Europe shifted to aligning thegrowth with austerity.But a raft of bad economic data inJanuary 2013 was followed by a worryingstalemate in Italy’s election which leftformer comedian and anti-austeritycampaigner, Beppe Grillo, as the potential‘kingmaker’. More recently, the travails ofthe smallest member of the eurozone,Cyprus – which accounts for just 0.5% ofcurrency area GDP – has reignited thecrisis. The plan proposed forcibly buyingtroubled banks shares with up to 9.9% ofsavers’ deposits but was unanimouslydefeated by the Cypriot parliament. Undera revised bailout deal, one of the twobanks in trouble is being wound downwith heavy losses inﬂicted on largedepositors of both. The impact on thewider economy could be severe andcontagion to other economies withunstable banking sectors are a major risk.
The future of Europe 4Report highlightsGrexitchancesfadingIntegrationto sharpendividesPowerof singlemarketdeclining94%want tosaveeuro65%open to debtmutualisationprospectsWeakgrowthEurope’s economies are stagnating:economic and business growth prospectsare weak and unemployment rates areset to remain high; rising businessinvestment offers some hope.Support inside the euro remainsstrong: 94% of eurozone businessleaders want to see the euro survive andjust 6% want their economy to exit;78% view joining the single currency aspositive, up from 71% in 2012.Eurozone members are open tofurther integration: 66% want to seefurther economic integration, with40% open to more political union;a further 65% show support foreurobonds, although this drops tojust 32% in Germany.Less appetite for a ‘Grexit’: theproportion of eurozone memberswanting to see economies leave the eurohas fallen from 24% in 2012 to 17%this year.Potential entrants remain keen to join:more than 50% of business leaders inDenmark, Latvia, Lithuania and Polandwant to join the euro; althoughmajorities in Denmark and Poland donot see it happening until 2018 at theearliest.Eurosceptic nations wary of furtherEU integration: more than half ofbusinesses in Sweden and the UK donot want to see any further integrationand one in ten think the euro shouldbreak up.Neighbouring markets see decliningvalue in improving ties: 52% of EUneighbouring economies believe furtherintegration would be an advantage,down from 62% in 2012; increasedopportunity for exports is seen as thekey beneﬁt; one in ﬁve would like theireconomy to eventually join the euro.The future of Europe: IBR 2013
The future of Europe 5GDP forecastsGrowth prospects in Europe look tepid at best. A mild contractionis expected for the eurozone as a whole in 2013 – output isexpected to shrink in all the troubled Southern Europeaneconomies: Greece (-5.0%), Portugal (-3.0%), Spain (-1.6%) andItaly (-1.2%). Growth in France is expected to be ﬂat for thesecond year in succession whilst the German economy is forecastto expand by just 0.7%, slower than 2012.Many of the more indebted nations wantto relax agreed budget deﬁcit targets in theface of the strong economic headwinds,but Germany has promised to balance itsbudget by cutting net borrowing to a40-year low, citing the low ECB interestrates as stimulus enough. Conversely,France expects to overshoot the agreeddeﬁcit target of 3% this year, anannouncement which drew a sharp rebukefrom the Bundesbank.Prospects for older EU members outsidethe single currency are not much brighter.UK output is expected to climb by just0.5% in 2013 meaning the economyremains more than three percentage pointssmaller than before the ﬁnancial crisis.Growth rates in Sweden (1.4%) andDenmark (0.8%) are not expected to bemuch faster.Growth rates are slightly elevated inEastern Europe, but Poland’s economyhas slowed markedly and is expected topost expansion of just 1.4% in 2013.Latvia (3.7%), Estonia (2.6%) – whichjoined the euro in 2011 – and Lithuania(2.5%) have brighter forecasts butremain largely dependent on regionalgrowth.Outside the EU, forecast levels ofexpansion are more impressive.Economic output in Turkey is expectedto grow by 3.7% this year, acceleratingto 5.2% in 2014. Growth in Russia isforecast at 3.3% in 2013, climbing to3.9% in 2014, but Georgia leads the waywith output forecast to expand by 6.2%this year and 7.3% next.2013 2014 Source: EIU 2013-0.6%-1.6%0.4%-1.2%1.0%0.7%1.0%1.6%1.9%1.4% 2.7%1.3%0.9%-0.2%3.7% 5.2%6.2% 7.3%1.4%0.8%1.3%1.4%0.8%0.5%0.5% -0.6%1.4% 3.1%PortugalSpainItalyGermanySwitzerlandPolandBelgiumTurkeyGeorgiaDenmarkUKIrelandNetherlandsSweden2.5% 3.1%Lithuania3.3% 3.9%Russia3.7% 4.0%Latvia2.6% 3.0%EstoniaFrance0%-5.0% -1.5%-3.0%GreeceThe future of Europe: IBR 2013Stagnation
The future of Europe 6DebtThe concern for Europe is that these low growth rates are runningtangentially to huge ﬁscal austerity programmes which areshrinking levels of government spending across the continent in aconcerted effort to lower levels of sovereign debt. However, slowgrowth and elevated levels of unemployment, are weighing downon tax receipts whilst pushing beneﬁts payments up.GreecePortugalItalyIrelandFranceUKBelgiumGermanyLithuaniaNetherlandsLatviaPolandEstoniaDenmarkSwedenFinlandNet government debt as % GDP20112013Source: IMF 2012IMF, 2013: ‘The Challenge of Debt Reductionduring Fiscal Consolidation’50 100 150As the IMF points out in a new paper,because those countries introducing theheaviest austerity programmes are startingfrom a relatively high level of debt and thenegative impacts of the cuts they aremaking is large, rather than decline, debtto GDP ratios actually look set to rise forsome time.The net government debt of Greece isexpected to reach 181% of GDP this year,up from 165% in 2011, despite the‘haircut’ private bondholders have taken.The debts of Portugal (119%), Ireland(107%) and Italy (104%) are all expectedto continue climbing over 100%. Spain’sdebt is expected to climb to 84% of GDPthis year, up from 57% in 2011 largely dueto bailing out its indebted banks andregional governments. Meanwhile, Franceand the UK have both lost their AAAcredit ratings as stagnant economieshamper efforts to bring budget deﬁcitsunder control. The governments of bothcountries are enjoying record lowborrowing costs, but should the yielddemanded by investors begin to pick upagain, debt servicing would become amajor issue.The future of Europe: IBR 2013Publicdebt isrising
The future of Europe 7Business conﬁdenceA lack of conﬁdence is evident in business expectations for growthin their own operations over the coming months. Just 14% ofeurozone businesses and 22% of those in the EU expect proﬁts togo up over the next 12 months, well below the global average(39%). Whilst business leaders in Estonia (44%), Latvia, the UK(both 40%) and Germany (36%) are more bullish, a majority ofthose in Southern Europe actually expect proﬁts to decline (-6%).LatinAmericaRussia TurkeyNorthAmericaAsiaPaciﬁcEUNordicBalticsNet % businesses optimistic about theeconomic outlook (next 12 months)Source: IBR 2013† Daily Telegraph, 2013: ‘Italy’s economy shrinks as EUleader warns of lost generation’Fears over the eurozone continue todampen business sentiment throughoutthe region. Optimism for the year aheadamongst EU business leaders in Q1-2013stood at just 2%, well below the globalaverage (27%). Whilst this represents asigniﬁcant uptick from Q4-2012 (-17%),led by a rebound in Germany (21% to42%), European ﬁgures are well belowother regions of the world – particularlyLatin America (58%) but also NorthAmerica (32%) and EU neighbours suchas Russia (53%) and Turkey (46%).Whilst the Southern European statesof Italy, Greece and Spain are suffering(-27%), it is French business leaderswho sit bottom of the global optimismtable (-50%).Concerns around business growthmean the job markets in many Europeancountries remains depressed, furtherweighing on consumer spending. InFebruary this year, eurozoneunemployment reached 12.0% – a recordhigh – and 10.9% across the EU. Theproblems in Greece (27%) and Spain(26%) are even more severe with theproportion of young people unemployedrising to more than one in two in theseeconomies, compared with 23.6%across the EU. The lack of employmentopportunities risks creating a ‘lostgeneration’ according to the EUemployment commissioner.Unfortunately, business leaders inEurope do not appear to be opening theirdoors to the hordes of people in search ofa job. Just net 6% of EU businesses expectto hire staff over the next 12 months,falling to 2% across the eurozone. Germanand UK business leaders (both 18%) aremore likely to hire staff over the next 12months but those in Southern Europeexpect further contractions (-8%). Thiscontrasts sharply with Turkey where 54%of businesses expect to grow theirworkforces.With governments and householdscutting back, and exports to otherEuropean countries naturally weak, thereis hope that business investment can helpprovide a boost to the region’s stagnatingeconomies. Encouragingly, the proportionof EU businesses expecting to increaseinvestment in plant & machinery over thenext 12 months jumped to 44% in Q1-2013, up from 26% in Q4-2012 – thehighest since Q4-2010. Similar jumps wereobserved in the eurozone (22% to 38%)and Southern Europe (12% to 40%) overthe last quarter. Indeed, businesses inLithuania (66%), Ireland (50%), Poland(46%) and Italy (44%) show some of themost positive investment sentimentglobally.eurozoneSouthernEuropeEuropeanoptimism lowThe global averageThe future of Europe: IBR 2013
66% wantfurthereconomicintegration66% wantfurthereconomicintegrationThe future of Europe 8Against this uncertain backdrop, there have been calls, especiallyfrom German Chancellor Angela Merkel, for greater Europeanintegration. She argues that the eurozone needs greater politicalunion to run alongside the economic and monetary union alreadyin place. Francois Hollande, President of the other blocheavyweight, France, is more cautious and wants to safeguardnational sovereignty and control over its own budget.Overall, 89% of eurozone businessleaders want to see further Europeanintegration of some sort, led by Spain(98%), Finland (97%), Italy and France(both 95%). The outlier is Ireland, whereclose to one in three (30%) businessleaders do not want to see any furtherintegration.Given their respective leaders’ standpointsit is perhaps unsurprising to see German andFrench business leaders’ opinions differsigniﬁcantly on the idea of furtherintegration. Whilst 61% of Germanbusinesses are open to more politicalintegration, just 35% of their French peersagree. Spanish (61%) and Belgian (45%)businesses are also interested in movingtowards greater political union.Whilst greater political integration isfavoured by just 40% of eurozone businessleaders, the possibility of further economicunion has the backing of a strong majority(66%). Business leaders in Spain (80%),Finland (79%), the Netherlands (77%)and Germany (76%) are all open to moreeconomic integration. Businesses in Ireland(50%) and Italy (56%) are the least keen.The ﬁrst steps towards a eurozonebanking union were agreed in late 2012 in adeal that will see the ECB supervise around200 of the region’s biggest banks fromMarch 2014. The deal gives the ECBpowers to close down eurozone banksthat break rules and is expected, in time,to allow the EU’s main rescue fund todirectly bail out struggling banks.There are already fears, however, that theproposed ‘resolution fund’ will be watereddown – or at least parked until the Germanelections in September – as it representsthe ﬁrst step towards debt mutualisation.German businesses are particularly againstthe idea of pooling eurozone debt througheurobonds: just 10% say they deﬁnitelysupport the idea with 62% opposed. Themajority of business leaders from otherrelatively debt-free economies, Estonia(56%) and Finland (50%), are also opposed.Conversely, some of those business leadersin the eye of the eurozone storm – Spain(82%), Greece (69%) and Ireland (63%) –are, perhaps unsurprisingly, more eager tosee debts pooled.Integration40% wantfurtherpoliticalintegrationThe future of Europe: IBR 2013
The future of Europe 9Integration could cause frictionOutside the eurozone, there is much more scepticism about furtherintegration: 29% of other EU business leaders are opposed, led bySweden and the UK (both 55%).Support for political union is way down at14% across these economies, but 32%favour greater economic integration led byPoland (54%), Lithuania (40%), Denmark(37%) and Latvia (34%).The results draw into sharper focus thefears that the ultimate impact of theeurozone crisis will be the creation of atwo-tiered European system where the 17eurozone ‘ins’ make decisions excludingthe 10 ‘outs’. Splits have alreadydeveloped, normally centring around theUK. In late 2011, UK Prime Minister,David Cameron, vetoed a newintergovernmental treaty to put strict capson government spending and borrowingbeing written into EU treaties. However,all other EU members – excluding theCzech Republic – pressed ahead andsigned the Fiscal Compact in early 2012.Indeed, the UK’s relationship with Europehas become so strained that Mr Cameronhas promised to hold a referendum on EUmembership by 2017 if returned to powerafter the next election.The future of Europe: IBR 2013% of businesses open to furtherEuropean integrationSource: IBR 2013EU split onintegration29% outsideeurozoneopposedSpain 98%Finland 97%France 95%Italy 95%Germany 91%Greece 90%Belgium 89%Netherlands 88%Lithuania 85%Latvia 83%Poland 82%Estonia 79%Denmark 75%Ireland 68%United Kingdom 41%Sweden 27%
NetherlandsThe future of Europe 10At a time of such uncertainty in Europe, it would beunderstandable if countries both inside and outside the EU hadshelved plans for further enlargement. No country has joined sinceBulgaria and Romania acceded in 2007 but on 1 July 2013 Croatiawill join and other nations – such as Iceland, Montenegro andTurkey – remain in negotiations. The eurozone itself may grow:Latvia has applied to become the 18th member of the euro whilstDenmark and Lithuania are part of the ERM-II mechanism(although the former has a formal opt-out).Support for the euro to survive remainsstrong within the currency bloc – 94% ofbusiness leaders want to see the eurosurvive, up from 92% in 2012. Just 6%want their economy to leave, led by Italy(10%) although even here exit sentimenthas declined over the past 12 months(down from 16%).Moreover, 78% of business leaders arenow positive about the overall impact ofjoining the single currency, up from 71%in 2012. Business leaders in Ireland (88%),Germany (86%) and Finland (85%) aremost positive about the overall impact ofjoining the euro; peers in France, theNetherlands (both 64%) and Italy (67%)are much less positive – below Greece(73%) and Spain (82%).ExpansionThe future of Europe: IBR 2013% businesses who think that overall their country’smembership of the euro has been positive€Source: IBR 2013IrelandSpain FinlandGermanyBelgiumGreeceEstoniaeurozoneItalyFranceNetherlands64%64%67% 73%74%76%78%82% 85%86%88%
The future of Europe 11% businesses who want to see euro surviveand continue to expandHowever, 39% said yes, but that no morecountries should join in the near future, upfrom 37% 12 months previously.Businesses in troubled Southern Europeare amongst the most eager to see the euroexpand. Greece (60%), Italy (59%) andSpain (43%) are all willing to welcomenew entrants, as is Belgium (48%). At theother end of the spectrum, just 18% ofbusiness leaders in Ireland – which israpidly assuming Latvia’s role as the‘poster boy’ for austerity – agree. Theremaining AAA-rated eurozoneeconomies of Germany (28%), Finland(25%) and the Netherlands (21%) arealso less eager to see further expansion,although attitudes have softenedconsiderably in both Germany (15% in2012) and Finland (8%) over the past12 months.Together with Ireland (68%), theNetherlands (52%) and Germany (44%),business leaders in France (46%) are moststrongly opposed to more countriesjoining the euro in the near future.The future of Europe: IBR 20132012 2013 Source: IBR 2013EU business leaders outside the singlecurrency are also slightly moreenthusiastic about the existing eurozone:82% now want to see the euro survive, upfrom 79% 12 months ago. However, theirenthusiasm does not stretch to adoptionby their own economies. 85% of UKbusiness leaders do not want to join theeuro, up from 83% in 2012. There havealso been ever sharper upswings innegative sentiment in Sweden (58% to69%), Poland (28% to 39%) and Denmark(32% to 37%).Whilst 71% of Latvia’s business leadersexpect to join the euro in 2014, 43% inneighbouring Lithuania do not see ithappening until 2016 at the earliest.Danish and Polish businesses are lessconvinced: 49% and 45% respectively donot think they will before 2018. InDenmark the proportion of businessleaders who think their country will neverjoin increased from 26% to 39% over thepast 12 months, a swing matched bySweden (38% to 50%).Growing the eurozoneSentiment around expansion has, however, sharpened amongsteurozone businesses over the past 12 months. When askedwhether they would like to see the euro survive, 38% said yes,and that it should keep expanding, up from 31% in 2012.GreeceItalyBelgiumSpaineurozoneEstoniaFranceGermanyFinlandNetherlandsIreland62603259304853433138–333732152824212018825euroadoptionappealfades
The future of Europe 12The biggest decline in perceivedimportance of the EU was observed infast-growing Turkey (88% to 63%). Justover a third of businesses in Norway(37%) and Russia (36%) believe furtherintegration of their countries’ economieswith Europe would be an advantage fortheir companies.Businesses in Turkey see the increasedmarket for exports (56%) as the biggestadvantage of further integration withthe EU, although with membershipnegotiations seemingly stuck, trade withthe Middle East has soared. Over the pastdecade, Turkey’s exports to post-conﬂictIraq have grown by 25% a year, making itthe country’s second largest market afterGermany. Businesses in Armenia (46%)and Georgia (32%) also view the size ofthe single market as a potential advantagefor their business.The future of Europe: IBR 2013For businesses in Russia, whosegovernment enjoys somewhat fractiousrelations with the EU, leading to visadifﬁculties and import tariffs, the keyadvantage of further integration would bea decrease in bureaucracy (38%). For thosein Norway, which sits in the EuropeanEconomic Area but does not beneﬁt fromthe free movement of labour, the keyadvantage would be easier access toqualiﬁed personnel from other countries(32%).Whilst any of these nations would haveto join the EU before they could adopt thesingle currency, it is interesting to note thateven with the eurozone crisis ongoing, onein ﬁve business leaders would like theireconomy to eventually adopt the euro.Business leaders in Georgia (35%),Armenia (31%) and Turkey (26%) are mostkeen. However, whilst sentiment inGeorgia (18% in 2012) has risen over thepast 12 months, it has fallen in Turkey(from 32%), perhaps reﬂecting the former’sdesire to move away from Russianinﬂuence and the latter’s pivot towards thefaster-growing and increasingly openmarkets of the Middle East.% businesses who believeintegration between their countryand EU would be positive for theiroperationsGeorgia68 79Turkey88 63Armenia61 51Norway– 37Russia– 36Switzerland24 28Fading appeal of the EUOutside the EU, there is evidence of the declining importanceof the trading bloc. In 2012, 62% of business leaders believedimproving ties with the EU would be of beneﬁt to theiroperations but that proportion fell to 52% this year.ExportmarketappealsTurkeylessinterested20122013Source: IBR 2013