Europe: threats to stability and the path to opportunity

Date: 04-01-2016

Tagged as: ArticleGameplanEuropeStrategyTechnologyRisk

 

Recovery in Europe is gaining momentum but threats to stability persist, says Ed Nusbaum, Global CEO of Grant Thornton International. In this article, Ed highlights four key challenges to stability and considers what the current environment means for British businesses.

About the author

Ed Nusbaum is the Global CEO of Grant Thornton International, a global accounting organisation with 40,000 people in 130 countries. In 2010, he was named by Accounting Today as one of its 100 Most Influential People in Accounting.

Ed Nusbaum

Europe at a Glance - Ed Nusbaum

Ed Nusbaum - Europe threats to stability and the path to opportunity - Infographic

Although Europe’s economy is clearly in the process of recovery and some serious progress has been made, it is still early days. Grant Thornton’s Future of Europe 2015 report1, which was based on survey interviews with more than 1,100 regional executives, shows that optimism is very strong – that’s a positive sign, but views are quite diverse across regional economies. Progress appears to have been strongest in Ireland, Spain and Germany, but of course there are some clear weaknesses – such as the situation we have seen in Greece.

A crisis of confidence?

The report shows that in the second quarter of 2015 optimism among business leaders rose to its highest level since before the financial crisis - a key indicator of confidence in the future and an expectation of positive revenue growth over the next 12 months.

However, it also shows that there are still some areas of concern. Hiring levels have dropped, research and development investments have fallen, and salaries haven’t grown substantially beyond the rate of inflation. Debt levels also continue to remain very high in southern Europe, with more than half of young people out of work in Greece and Spain.

Of course, political issues pose a significant risk to business confidence. They create uncertainty, causing business leaders to be more cautious of investing in new factories, additional locations and research and development. Issues threatening to damage the economy, such as the migrant situation - a major discussion point of 2015 - also cause unrest. So it’s little wonder that this, along with the falling price of oil and other geopolitical situations explored below, paints an uncertain future.

Four key challenges

Research carried out for the Future of Europe 2015 report highlighted four key challenges for the region:

Energy security
We expect that shortages of food, water and energy are likely to be the main drivers of global conflict in coming years. In Europe, energy security is the greatest of these threats and subject to intense debate and scrutiny.

Grexit contagion
A default would put significant stress on creditor economies, most notably France and Germany. Brexit is an even greater concern for businesses across Europe, given the comparative size of the economy.

Blurred borders
Tensions are rising in a number of areas - around transfer pricing policies in a digital economy that overrides physical borders, for example, and debate around the free movement of workers.

Neighbourhood policy
EU neighbourhood policy was severely tested in Ukraine and relationship-building remains a complex issue.

The UK has done an excellent job in responding to issues in Europe, in my opinion, having had a key role to play in scenario planning. Some risk and uncertainty remains – but that process has definitely left the UK economy in a much better position. Businesses can follow that example – scenario planning gives your strategies real depth and resilience.

It’s also important to remember that the current environment also represents opportunity. For example, the UK has one of the highest online shopping penetration rates in Europe, which suggests an ability to tap into some of the blurred borders issues and make UK businesses more optimistic about their future. Similarly, we are starting to see more midsized and smaller companies looking for international opportunities to expand as physical borders pose less of a challenge.

Technology matters

The world is changing; technological advances and disruptive innovators have totally changed the face of business, and the way we all view opportunity. The UK has tapped into the technology sector very well, but there are many lessons to be learned from other countries. Germany, for example, has been effective at maintaining a manufacturing base that complements Switzerland’s success in manufacturing technology practices. I would say that inspiration can also be taken from the Italian focus on design.

The success of these regions doesn’t diminish the leadership role that British business has played in various sectors, including technology and financial services in particular. Britain should be proud of its achievements, but what will continue to make it successful is learning from what works well not only in Europe, but also the rest of the world.

Education and awareness

There is a key opportunity to look at what is being done globally and take inspiration from the best ideas, whether from big business, small business or even universities. One of the distinct advantages of the UK is its world-class universities, producing great thinkers and developments in business, science, technology, engineering and medicine – the list goes on – and all of this should be capitalised on.

Going into 2016, my tip for businesses in this environment is to embrace change and look for innovation wherever you can find it. As the world continues to evolve, use this knowledge to keep pace and adapt. You must always consider the bigger picture in everything you do.

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