The Impact of the Euro Crisis on Australian Business - Case Study Example

Euro Crisis Name Course Lecture Date 1.0 Introduction The inability of some European countries to service their foreign debt is a major topic in world business nowadays. The Euro zone seventeen countries form 17 per cent of the world’s economy (Dawson 2011). According to some observers the present fluctuations in financial markets are mainly caused by the crisis. International policy makers like the G7 and G20 have met to and deal with the crisis. The main purpose of this paper is to measure the effects of the crisis on Global and Australian business. While some people may think that the Euro debt crisis has nothing to do with Australia this is far from the truth. Although Australia’s strongest trading partners are in Asia this does not mean that Australia will not feel the effects of the crisis. The impact of the Euro crisis will and is already being felt by Australian businesses and industries just like elsewhere in the world. Furthermore, the reports traces the possible cultural causes of the debt crisis and how it can be associated with the financial management culture of the countries involved in the crisis. 2.0 Global Impact of the Crisis The rest of the world will sooner or later have to deal with the impact of the Euro Crisis. In the views of Massa (2013), these effects are likely to be felt in three distinct ways: Financial Contagion: With European banks experiencing balance sheet problems, coupled with volatile security markets and a consequential reduction in investor confidence, credit will be harder to access and some investments may be cancelled. According to news reports some European companies are shying from foreign investment as they try to shore-up home operations (Johnston 2012). Low Demand: Growth has stalled in the countries involved in the Debt crisis. According to Hartwich (2012), the Eurozone crisis is resulting in a massive social crisis. Austerity measures including job cuts means disposable incomes are lower. Demand for exported goods in Europe will thus go down. The most affected country will be China, the dominant global exporter. According to The Wall Street Journal (2011), Chinese manufacturing will suffer greatly. Already, China impressive growth is already slowing down. In effect, countries that supply China with raw materials are also likely to suffer. Therefore most business that export their products to Europe are will record slow business until the crisis is resolved. The Oil industry and oil producing countries will be particularly affected by the Euro zone crisis. The Organization of Petroleum Exporting Countries (OPEC) expects oil prices to reduce due to the crisis. Further, reduced demand in for oil in Europe will also impact oil prices in emerging economies. A 1.60 lakh barrels per day fall in oil demand was expected according to The Telegraph (2013). The US businesses that have major investment in Europe have also felt the heat as demand for their products decrease. The crisis in Europe has been directly felt through lost trade, as lower European incomes reduce demand for U.S. goods. The euro zone is the third largest export destination of the United States, accounting for 15 percent of total U.S. goods exports and one-third of service exports (Dawson 2011). It is estimated that a quarter of the earnings of the US’s top companies comes from Europe. On the other hand, US banks debts to Europe’ major trading partners are being also affected by the Euro zone crisis. In contrast, Australia’s trade links with Europe is not as strong. Euro depreciation effects will also means businesses that rely on exports to Europe are affected. For countries with currencies pegged on the dollar, the exports will become less competitive (Massa, 2013). On the other hand, businesses in Euro pegged countries will see the competitiveness of their exports go up. 3.0 The Eurozone crisis and Australia 3.1 Economic impacts Unlike most developing countries Australia has weathered the Global Financial crisis and recession without a substantial dent on growth. Despite the GFC Australia continued to record an impressive 2 percent growth (Hartwich 2012). Unemployment also remained low meaning and there were little effects on disposable income. This meant that the Australian businesses continued to perform far better than global peers. There was a boom in the mining industry as Global demand for Australian minerals continued to increase. Similarly, the Reserve Bank of Australia does not expect the Australia to suffer any significant adverse effects from the Euro zone crisis (Hartwich 2012). According to the RBA’s deputy president Australia has a prudent and well capitalized banking sector, good government financing and limited financial and trade ties with European countries (Hartwich 2012). Chart 1: Australia’ Trade partners Source: http://eeas.europa.eu/delegations/australia/press_corner/all_news/news/2012/20121112_goods_services_en.htm Chart 2: Australia decreasing trade ties with EU Source: http://ec.europa.eu/trade/policy/countries-and-regions/countries/australia/ Therefore, Australia is among the best placed countries to weather the European debt crisis successfully. Furthermore, Australia is simultaneously experiencing a resource boom that enables it to maintain moderate economic growth (Battellino 2011). In the views of Hartwich (2012), the same factors that enabled Australia weather the GFC will also enable the country emerge unscathed from the current crisis. Australian Banks are less likely to engage in risky schemes as the finance sector is heavily regulated. Moreover, the Australian Government guarantees customer deposits in financial institutions in a bid to avoid the sub-prime credit scenario. However, the European crisis is likely to reduce the availability of credit in Australia. In turn, the real estate industry including mortgages will be affected. According to Hartwich (2012), the housing industry is a strong contributor to Australia’s impressive growth rate. Recently, Standard and Poors downgraded the credit rating of Australia top four banks. The main impact of the Eurozone is mainly on the financial industry where concerns about distortion in interest rates are mounting (Hartwich 2012). ANZ bank complained that the decisions and philosophy of the RBA did not consider such factors as the Euro zone crisis which were affecting the Australian banking industry. ANZ said would no longer be following the RBA directives to the banking industry. This move by the ANZ is expected to affect the stability of the Australian banking system (Gluyas 2011). Furthermore, European banks in Australia are taking a more cautious approach while loaning out money. BNP Paribas stopped offering syndicated loans in Australia. BNP Paribas move was aimed at solidifying its capital base (Uren 2011). With Australia’s economy being export led, the effects of the Euro zone crisis on China are expected to spill over to Australia (Hartwich 2012). China is the chief importer of Australia commodities which are further processed and exported to Europe. As demand dampens in Europe, Chinese exporters will suffer, forcing them to cut production. This in turn means Australian businesses that export to China will be adversely affected. While Australia was able to spur growth in 2009 through a stimulus package, additional government spending is out of the question this time (Hartwich 2012). Around the world Governments are afraid of increasing sovereign debt lest there are unable to service it. 3.2 Political Australia may be forced to contribute to IMF’s bailout of the EU economy (Hartwich 2012). In most cases citizens are not comfortable with government’s assisting in foreign problems. Furthermore, Europe may tighten trade barriers in the agricultural market in an effort to protect it from foreign competition this may prompt renegotiation of trade deals between the two countries. 3.3 Legal As part of the bailout, Australia should relax its immigration rules to allow more European immigrants in the country (Hartwich 2012). With recession expected in the Euro zone countries unemployment will increase meaning these people will seeks jobs elsewhere including Australia. Thus, Australia needs to relax its immigration policy to tap this skilled labour. 3.4 Social Australian society should be ready to receive more European immigrants (Hartwich 2012). While Australian society mainly comprise of people of English descent it should be ready to receive Italian, Greeks and Spaniards and Portuguese immigrants from the main countries hit by the crises. 3.5 Cultural Impact The Euro zone crisis has shown the importance of prudential management of business and ethical conduct in management (Hartwich 2012). To prevent such a crisis Australian corporate world will have to insist on ethical running of businesses. 4.0 Contingency planning for Australian businesses Should Australian the Australian economy experience a credit crunch or a slowdown in growth, the approach discussed below will enable businesses survive. 4.1 Diversify into new revenue lines: When recessions occur, businesses cut spending while governments spend more in an effort to stimulate production (Roberts 2003). The Governments in the European countries are expected to introduce stimulus packages to jumpstart their economies. Australian companies should target business with these governments to take advantage of this government revenue. 4.2 Consolidate spending: According to Pearce and Michael (2006) businesses should spend frugally to cut costs and cover for reduced sales. Most businesses spend large amounts of money on entertainment, travel and stationery. In order to cut costs businesses should renegotiate their supply contacts in a number of key areas. Businesses that involve a lot of air travel should ask their employees to use their frequent flyer mile to cut travel expenses. 4.3 Staff performance: During periods of economic downswing employees need to do their best for their organizations. The company should let off poor performing workers while encouraging those who perform well to better their performance. However, companies should put in place programs that humanize the staff lay-off project. These programs include assistance in finding new vacancies or transitioning including a good send-off package. 4.4 Cash Flow Management It is important to have a healthy cash flow during lean times. Companies should strive to ensure majority of their creditors pay up within the 30 days period. If outstanding invoices extend to 90 and 120 days a collection plan should be implemented (Pearce and Michael, 2006) Reigning in cash flow problems is key to surviving recession for any business. 4.5 Quality Products and Affordable Prices Quality products always attract buyers despite prevailing economic problems. During recession businesses should focus on improving product quality while maintaining high quality (Roberts 2003). In relation to competitors businesses should be proactive to competitor’s actions making sure they remain ahead of them. Zara a clothing retailer in Australia has excelled at offering high quality clothing at affordable prices (Završnik 2007). 5.0 The Role of Culture in the Eurozone crisis According to Browne (2013), the differences in culture between Red light culture and the Green Light culture set the stage for the Euro zone crisis. The Greece were not following fundamental rules and regulation of financial management and they even failed to pay their taxes. Greece is a green light culture where policy makers have little regards for the rules that form the fundamentals of the global financial structure (Featherstone 2011). On the other hand, Germans continued to strictly follow prudential management rules. Consequently, Greece is caught up in sovereign debt crisis while Germany remains the most financially stable nation in the Eurozone. Furthermore, the Greek economy was dominated by corruption and the publicly engaged in a deeply rooted culture of evading tax. 6.0 Conclusion The European financial crisis cannot be ignored by any country in the world. As seen in this report, the debt crisis has devastating effects on businesses in Asia, America and Africa. The debt crisis particular impacts countries which have strong trade ties with the Euro zone especially the USA. In contrast, Australia has shifted most of its international business to Asia. However, slowing demand of Chinese commodities is likely to affect Australia export growth as Australia supplies China with raw materials. Secondly, credit access may become more difficult in Australia as European banks withdraw financing in order to shore up their capital bases. Some Australian Banks are worried that the RBA is failing to factor in the Euro debt crisis while making policy decisions. BNP Paribas on the other hand will no longer be issuing syndicated loans in an effort to reduce exposure and shore up its financial base. Australian businesses need contingency planning in case the Euro zone crisis spills over to Australia, to deal with dampened consumer spending. Contingency planning will enable Australian businesses weather the crisis despite lower consumer spending. Most importantly, Australia should maintain its prudent economic management culture to ensure it does not fall into a similar debt crisis. References Battellino, R 2011, Europe's crisis develops, what happens next? 15 December 2011, Accessed 2 January 2014, http://www.abc.net.au/unleashed/3732632.html,. Browne, O 2013, ‘A Different Take on the Euro Zone Debt Crisis: Blame It on the Sun’, The Huffington Post, Accessed 2 January 2014, http://www.huffingtonpost.com/obrien-browne/a-different-take-on-the-e_b_1212418.html? 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Hartwich, OM 2012, Faraway, So Close: How the Euro Crisis Affects Australia, Centre for Independent Studies, Canberra Johnston, E 2012 ‘Feeling the squeeze: European banks pull $7.5b from Australia,’ The Sydney Morning Herald, 12 March. Massa. I 2013, How the eurozone debt crisis could affect developing countries, The Guardian, Accessed 2 January 2014, http://www.theguardian.com/global-development/poverty-matters/2011/oct/21/eurozone-crisis-developing-countries Pearce II, JA, & Michael, SC 2006, Strategies to prevent economic recessions from causing business failure, Business Horizons, vol. 49, no. 3, pp. 201-209. Roberts, K 2003, What strategic investments should you make during a recession to gain competitive advantage in the recovery?. Strategy & Leadership, 31(4), 31-39. The Wall Street Journal, 2011, China’s hard landing, Editorial comment, Wall Street Journal, 2-4 December 2011, p. 11. Uren, D 2011, ‘Tony Abbott’s distortion of IMF role beggars belief,’ The Australian, 7 November. Završnik, B 2007, Critical success factors for international fashion retailers entering foreign markets, Fibres Text. East. Eur, 15(4), 13-17. Read More