The Euro, procurement risk and should we listen to the experts?

We thought we were being quite brave saying back in April that procurement should be on the lookout for Black Swan events like these:

Will the Eurozone collapse with some countries going their own way and back to local currencies? Might countries default on their debts?

We thought these were extreme ideas - now it looks like we were perhaps overly optimistic..  So, when we’re looking forward, what can we learn from the recent past?

1. It’s clear that you can’t believe anything said by anyone in authority:

“Greece will not default on its debts. The statement came from Greek Finance Minister Evangelos Venizelos at a press conference in Athens …”

2. Or indeed by the experts – as David Bloom from HSBC said in April, on CNBC, “I don’t think there will be default” (in Greece) “or contagion”.

3. Events that seem impossible can within weeks seem almost inevitable. The breakup of the Euro was seen as a frankly ridiculous and incredible idea even weeks ago. Now we hear that banks around Europe are working out the details of how it might all happen and the consequences. We’re into serious contingency planning mode, with some commentators estimating the probability of a break-up at over 50%.

4.The politicians have no answers - it’s easy to think that they have some master plan up their sleeves and just at the right moment it will be revealed to huge sighs of relief all round. Don’t bet on it. We see no evidence to suggest they have any more clue than we do in terms of getting out of this mess.

5. There is a fundamental and insoluble dilemma here. Will Germany and the German people accept liability for the debts of Southern Europe? Will Southern Europe accept France / Germany running their economies for the next 5 years at least, during which time Germany will define just how much austerity they have to suffer?  We suspect the answer is “no” to both these questions, and as these are the only two options that preserve the Euro, that answer leads inexorably to some sort of breakup of the Eurozone.

6. The UK is not immune to the consequences but has very limited ability to affect any of this. And it is somewhat arrogant for UK politicians to give lectures to anyone suggesting what they might do...

So, what can procurement people do?

  • Start taking legal advice on contracts denominated in Euros and what might happen if there is a breakup.
  • Look at adjusting stock levels, ordering cycles etc in the light of a generally increasing risk profile for goods sourced from pretty much anywhere outside your home country.
  • Factor major potential currency swings into commodity price forecasting.
  • Keep a close eye on key suppliers, particularly smaller firms, who may be vulnerable if the economy sinks rapidly on the back of this turmoil.

On that last point, there is scope for buyers to help key suppliers in various ways (which incidentally fits with our “Procurement Activism” theme very well) – and we will be featuring options such as Supply Chain Finance more strongly here in the coming weeks, as we think it may become increasingly important through 2012.

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First Voice

  1. Life:

    On point 4, although they might be wrong, I think (some) politicians do believe they have an answer although it’s the sort of answer that takes some time to pull off. Options being break up of the Euro in short to medium term (followed by chaos, civil unrest at least or even war), or keeping the Euro together.

    The former is seen by polititians as a very real option – note the crackdown following the August riots for example, which was exceptional, intentional and preparatory. Hence a strong preference for the latter.

    The latter is only achievable by financial “firepower” that won’t be available from outside Europe until Europe has put its hand in its own pocket. The only people in the Euro with “pocket” is Germany, the population of which for all sorts of reasons don’t want to play. The only way to get to political acceptance is to convince them that its in Germany’s interest: 1) There is incredible urgency, 2) If Euro fails we will 3) Our neighbours actually want this (history) 4) There is no alternative and so on. It will take time, and a lot more perceived urgency, to pull this off, but I don’t see anything in recent events (or at least how they are being reported) that deviates from this play book. At the end of the day there might simply be not enough money anyway, which may give rise to another bullet point for procurement professionals to ponder in so far as they have any responsibility – keep an eye on your bank!

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