Economic Views, Eurozone December 2011

View from the top

The Eurozone crisis has developed from a problem in a few peripheral countries to a full blown financial and sovereign debt crisis engulfing the whole region. European countries have taken initial steps to tackle the crisis. However, more is needed to rebuild confidence among investors and provide for a sustainable economic future for the region. It is still unclear how this will play out, but the Eurozone that re-emerges next year is likely to be very different to the one we know today. The implications for businesses within and outside the region are vast.

Five key trends to look out for in 2012

  • Next year is likely to be dominated by uncertainty and potential volatility.
  • The fallout from the current phase of the crisis is likely to plunge the Eurozone back into recession.
  • The euro is likely to depreciate against other major currencies as capital flows towards safe havens.
  • Governments across the region will tighten spending, especially the most profligate.
  • There will be pressure for renewed competitiveness and genuine restructuring of rigid labour and product markets.

We advise businesses to stress-test their plans against a range of scenarios

We have developed four distinctive scenarios that we recommend our clients use to prepare for the potential outcomes from the crisis which could take place next year.

A large scale debt restructuring (Scenario 2), a Greek exit from the Eurozone (Scenario 3) or the formation of a new currency bloc (Scenario 4) would see the region enter recession next year. Only in a scenario where the ECB intervenes through a policy of aggressive monetary expansion (Scenario 1) do we expect to see Eurozone growth in 2012.