Oil Price, Swiss Franc, and Greek Elections Bring Economic Uncertainty to Europe – Again

It’s been a tumultuous start to the New Year in terms of the economic situation in Europe. We have seen the oil price dropping by some 50 percent over the past few months, and we are now seeing the negative consequences of that in terms of lay-offs by oil firms and large suppliers to the industry. Schlumberger, for instance, announced job losses last week. Here is Bloomberg:

“Schlumberger Ltd. (SLB), the world’s biggest oilfield-services company, tackled the “uncertain environment” of plummeting crude prices head-on by cutting about 9,000 jobs and reducing costs. Anticipating lower spending by customers this year, Schlumberger is decreasing its workforce by 7.1 percent and seeking to lower operating costs at a unit that helps producers find oil and natural gas, the Houston- and Paris-based company said in an earnings report Thursday.”

Then we have the election in Greece next week, which is looking critical not only for that country but for all of Europe. If Syriza, the leftwing party currently leading in the opinion polls, form a government, they have promised to re-negotiate the country’s huge debts. With unemployment at 26 percent, who could blame the Greeks for thinking a different approach might be worth a try? The EU and other countries have said that won’t be possible; we will be in a classic negotiating standoff, and we will have to see who blinks first. Germany for instance has said it would rather Greece left the Euro than got relief on the money the country owes.

But if that did all lead to a Greek exit from the Euro, the question would then be; who next? Portugal? Italy? Maybe even France, if le Front National gain further traction, and again, with a moribund economy going nowhere, their message of protectionism and nationalism is becoming more attractive by the day.

Then last week, to everyone’s great shock, Switzerland announced they would no longer peg their currency to the Euro. With the European Central Bank likely to announce a major programme of “quantitative easing” (QE) – printing money, to you and me - the cost of in effect holding down the Swiss Franc was becoming too much for their central bank to bear.

The immediate result was the Swiss Franc rising by 30 percent instantly. Whilst it did drop back, it is still 20 percent higher against the Euro than a few days ago. The implications of this will take a while to work through the system, but it is the suddenness that is a big part of the problem, with some investment and currency funds suffering badly. It is bad news of course for Swiss exporters and visiting skiers (like us); and anyone who has a contract that requires payment in Swiss Francs, and has not covered that exposure, is going to need a lot more money than they expected!

Yet, it is quite possible to take a more positive view. The oil price crash, although it has affected stock markets negatively, must in the medium term be a positive for more firms than it is a negative. And it is good news for any country that is a net importer of oil – most of Europe, Japan and China for a start. In the UK, for the average car driver, it is worth some £400 a year – a substantial additional sum in their pockets, available for spending elsewhere.

Even the Euro troubles might mean we are at the beginning of the end for the Euro. And even that, whilst meaning a lot of short-term turbulence, would probably be good news for many European countries.

In the meantime, procurement professionals need to be looking very hard at a number of issues. Which products (or even services) that we buy should be getting cheaper because of the oil price decline? Suppliers aren’t going to come and volunteer to cut their prices, you need to make that happen. Then, consider which currency risks you may be exposed to? Do you have Swiss suppliers? Or even suppliers who themselves are using Swiss sub-contractors? Then what happens if the Euro drops another 10 percent when QE kicks in?

And perhaps most importantly for the CPO; if your CFO or CEO asks you these questions next week, do you have a good answer ready?

Share on Procurious

Discuss this:

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.