Eurozone crisis and its impact on Indian companies
The European Monetary Union was a moment of triumph for nations used to holding on to the coat tails of a superpower like the US. But in the rush to create a common currency, many potential trouble points were swept aside by nations basking in euro glory. The 2008 meltdown has exposed those fault lines. ET Intelligence Group reviews the impact of the crisis on Indian companies with significant exposure to Europe.
If you thought recent economic data emanating from the US was bad, look over to the other side of the Atlantic and you'll see things are a lot more worrisome there. And what's worse is that India Inc as a whole appears to have greater exposure to the euro zone than to the US going by our exports. As of March 2011, 10% of our total exports were to the US while 18% were to Europe.
When Winston Churchill called for a "United States of Europe" little did he think that this unification would be so disastrous!
In an effort to form a monetary union among European Union member states, the European Central Bank was established in 1999. Thereafter, a single currency - the euro - was introduced which replaced other regional currencies completely. Over time, several member states joined the exchange rate mechanism by bringing their currencies and monetary policies in line with the euro.
But when this single currency was created, it now appears that, the founding members had not fully taken into account the ramifications, if any, of uniting strong and weak countries alike. A crisis of the magnitude we are seeing today was not envisaged at that time, and therefore, no process for correction was evolved. As a result, all EU member countries find themselves in a mess today -regardless of the strength of their economies -as the stronger ones have no option but to keep bailing out the weaker ones.
All was well till the global economic crisis of 2008 showed that the fault lines in the over-leveraged economies of Europe - a result of weak governance - ran very deep.
By late 2009, Greece had announced that its budget deficit was actually 15.4% of its gross domestic product (GDP) - and not 3.7% as stated earlier. And by mid-2010, this shipping and tourism dependant economy had to seek help from fellow euro zone members and IMF to avoid default.
It soon became apparent that the budget deficits of Ireland, Spain, Portugal and Italy were also in the danger zone. Despite a string of bailout packages and a number of austerity plans from these beleaguered nations, the problems have only worsened.
Most European economies are growing at an extremely slow pace, if at all. Their banks continue to post losses and stock market declines persist. They not only have to deal with high fiscal deficits, but also with pension deficits as a result of an ageing population and low birth rates.
In Germany, the region's strongest economy, GDP growth fell from 4.6% in March to 2.8% in June. Consumer confidence dropped from 110 to 100 since January 2011. In France, GPD growth fell from 2.1% in March 2011 to 1.6% in June, and consumer spending in the manufacturing and retail sectors is also decelerating. In the United Kingdom, GDP growth declined from 4.7% in December 2010 to 4.6% in March 2011. Meanwhile, consumer confidence, industrial production and manufacturing have been rapidly declining.
If you thought recent economic data emanating from the US was bad, look over to the other side of the Atlantic and you'll see things are a lot more worrisome there. And what's worse is that India Inc as a whole appears to have greater exposure to the euro zone than to the US going by our exports. As of March 2011, 10% of our total exports were to the US while 18% were to Europe.
When Winston Churchill called for a "United States of Europe" little did he think that this unification would be so disastrous!
In an effort to form a monetary union among European Union member states, the European Central Bank was established in 1999. Thereafter, a single currency - the euro - was introduced which replaced other regional currencies completely. Over time, several member states joined the exchange rate mechanism by bringing their currencies and monetary policies in line with the euro.
But when this single currency was created, it now appears that, the founding members had not fully taken into account the ramifications, if any, of uniting strong and weak countries alike. A crisis of the magnitude we are seeing today was not envisaged at that time, and therefore, no process for correction was evolved. As a result, all EU member countries find themselves in a mess today -regardless of the strength of their economies -as the stronger ones have no option but to keep bailing out the weaker ones.
All was well till the global economic crisis of 2008 showed that the fault lines in the over-leveraged economies of Europe - a result of weak governance - ran very deep.
By late 2009, Greece had announced that its budget deficit was actually 15.4% of its gross domestic product (GDP) - and not 3.7% as stated earlier. And by mid-2010, this shipping and tourism dependant economy had to seek help from fellow euro zone members and IMF to avoid default.
It soon became apparent that the budget deficits of Ireland, Spain, Portugal and Italy were also in the danger zone. Despite a string of bailout packages and a number of austerity plans from these beleaguered nations, the problems have only worsened.
Most European economies are growing at an extremely slow pace, if at all. Their banks continue to post losses and stock market declines persist. They not only have to deal with high fiscal deficits, but also with pension deficits as a result of an ageing population and low birth rates.
In Germany, the region's strongest economy, GDP growth fell from 4.6% in March to 2.8% in June. Consumer confidence dropped from 110 to 100 since January 2011. In France, GPD growth fell from 2.1% in March 2011 to 1.6% in June, and consumer spending in the manufacturing and retail sectors is also decelerating. In the United Kingdom, GDP growth declined from 4.7% in December 2010 to 4.6% in March 2011. Meanwhile, consumer confidence, industrial production and manufacturing have been rapidly declining.
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In such an environment it becomes extremely difficult for businesses to run profitably. And it's not just European companies that will bear the brunt. There are a number of Indian companies that have significant exposure to Europe. If they haven't already been affected, earnings for these companies are likely to be impacted in the future. But the key question is to what extent?
NAME- DEEPAK KUMAR JHA
PGDM(3rd sem) 2010-12