APICS Supply Chain Management Now

EU's Struggling Economy Has Far-Reaching Implications

By APICS CEO Abe Eshkenazi CSCP, CPA, CAE - September 30, 2011
All major news organizations continue to report on the economic plight of the European Union (EU). The distressing situation in Europe promises to influence economies around the world.

Consider the first lines in an Economist article from this week: "Bad news about the euro area now streams from all directions. European finance ministers flunked hard decisions on combating the debt crisis at a meeting in the Polish city of Wroclaw on September 16th and 17th and instead floated the irrelevant idea of a tax on financial transactions. Italy's credit rating was downgraded this week by Standard & Poor's."

Of course, Greece gets its own paragraph in the magazine. The Greek government and international financial institutions can't agree on what the country needs to do in order to get its next bailout installment. Regardless, it needs to cut costs. On September 21st, officials announced higher taxes, faster public-sector layoffs, and the trimming of some pensions.

"The outlook for the euro-area economy is deteriorating fast, which augurs ill for attempts to wrest the finances of indebted countries under control. At best, there will be a wrenching slow-down; at worst, a relapse into recession."

And I can't leave out this sentence from the Economist, which sums up the direness of the whole euro economic outlook: "A vicious feedback loop between growth, sovereign-debt concerns, and banking woes is now in train."

A number of options now are under discussion in Europe. One option would be Greece defaulting and leaving the euro. If this happened, Greece would replace the euro with a "new drachma" currency, which might lose value against the euro. With so much EU and other European capital investment in Greece, this would be a shock to all of Europe.

Another option is for Germany to leave the euro and create a "new deutsche mark." This might protect Germany from more debt obligations, but this could be almost as bad as the aforementioned option. If Germany exited the euro, other nations might follow. The economic patterns of all of Europe and around the globe rely on an integrated Europe. The European economy could suffer and inhibit recovery elsewhere for years until a new economic and trading order developed. Interestingly, as I write this, news comes that Germany's parliament approved an expansion of the European Financial Stability Facility, a significant step to limit Greece's debt crisis from escalating to other nations and financial institutions. While noteworthy, there are other hurdles to overcome if there is to be constructive and sustainable economic recovery.

Austerity is the solution that most European leaders favor. There is increasing talk of a huge bailout fund to help address the problem of banks struggling with Greek debt. But such a fund may need trillions of euros to cover the contingency of more countries defaulting. Plus, leaders don't agree the EU should be this powerful. Management of such an enormous fund could effectively dictate fiscal and monetary policy to EU states. 

The economy and the supply chain

What does all of this mean for operations and supply chain management professionals? Global supply chains thrive in a stable and prosperous European customer market, capital market, and political environment. Uncertainty in these areas forces more short-term rather than long-term capital supply and demand planning, investment, production, distribution, planning, and risk-taking. Long-term investment for long-term prosperity becomes less important to most. Also, the value of a company's inventory, accounts payable, and accounts receivable may rise or fall as currency uncertainty continues. Lastly, credit for major investment in factories, machine tools, and expensive goods becomes more expensive and rare.

Operations and supply chain management professionals play key roles in uncertain times like these. They need to be efficient with assets, add as much value as they can to value chains, and forecast and respond as accurately as possible to changes in supply and demand. Doing this adds value back into the global economy, creating more prosperity that could pay back existing debt.

The 2011 APICS International Conference & Expo theme becomes more and more relevant as the negative economic news persists__"Achieving Sustainable Productivity: Meeting Customer Demand in an Unpredictable World." It's not too late to commit to joining APICS for this important conference, October 23-25, 2011, in Pittsburgh, Pennsylvania. Register at http://www.apics.org/careers-education-professional-development/events/conferences

In other news

How APICS Operations Management Now relates to you

Operations management is everywhere. Today, operations management professionals have unprecedented impacts on the global economy. Consider these questions and how today's edition of APICS Operations Management Now relates to you and your career.

  • Has the EU crisis impacted your supply chain? How are you preparing for short- and long-term consequences of continued European economic instability?
  • Aside from Greece or Germany leaving the euro or continued austerity measures, what are some other options for ending the crisis? How does your background in operations and supply chain management inform these options?
  • How can you continue to add value to the global economy and create prosperity?

Comment

  1.