I was shocked to read in Friday's Wall Street Journal (Dec. 7, 2012) that businesses are rapidly retreating from Southern Europe, specifically Greece, Spain, Italy and Portugal. And worse, have "no plans to scale back up later." That's a disaster for them today and far worse longer term. And perhaps a business lesson for us.
According to the article, "Sinking consumer spending and government austerity programs are at the root of the problem" .
As one CEO explained "For our business to expand in any market, it has to have three things: a growing population, growing affluence and countries with intact government budgets." In much of Europe "we have none of those conditions, and it won't get better in the next few years." The WSJ commented that in Italy new investment is hampered in part by bureaucracy. And a study by BDO International pointed out "There has been a flight to safety...But in Europe there aren't many safe havens left." In fact, a survey of international CFO's concluded it "was riskier to invest in Greece than Syria" (emphasis added by me).
Why is consumer spending down? Obviously because of high unemployment and pervasive spending fear among the employed. Additional factors include contracting populations (environmentalists take note: economically, more people is good); overly generous government, union and private employment agreements (8 plus weeks paid vacations and full retirement at 50-55) which are no longer supportable; and perhaps poor work ethics caused by negative incentives (high taxes and inviting welfare benefits).
Why government austerity? As any intelligent household knows, spending far more than one's income only works so long. These Southern European governments are now discovering that spending far more then their tax base can support has its limits too. Borrowing billions worked for awhile, but the limit has now been reached. Germany will support them temporarily, but only if they see an end to it, hence: government austerity, i.e., spending less.
Further, the larger the debt these governments have incurred - and worse, increase in the future - the greater burden, unfair and unsupportable, on later generations. Someday, somebody has to pay for all this, no? Plus, the almost guaranteed risk of significant inflation, even hyper-inflation, is there. Governments, including ours, tend to like and encourage inflation as it lowers their cost of paying off the old debt. But inflation is a killer for older retired folks and severely distorts the overall economy. My folks sold a NJ home in 1970 for $58,000 that resold a few years ago for over $2,500,000. And that's mild inflation.
So what is the lesson for us?
Well, I'm not a PhD economist nor an elected politician, too practical for the first and too honest and outspoken for the second! I am an internationally experienced businessman. I think there are real lessons - and danger signs - for us as business leaders watching these developments in Southern Europe and elsewhere. Is the United States following a similar disastrous course? It's critical, I'm postulating, that we pay close attention, use our business experience, smarts and common sense to understand what's going on, their causes, and, most important, their implications for our businesses, economy and everyday lives.
We business men and women clearly know how make things happen while balancing income and expenses. We know how to successfully introduce dramatic life-changing innovations over and over again making the world a healthier and better place. We know how to incent, excite and motivate people, including our fellow employees, and while doing all this, meeting real needs and fixing real problems. We know how to work hard and enjoy it, getting satisfaction from our accomplishments and learning from our failed efforts.
Politicians and governments, to put it mildly, are not particularly adept at these activities. We business folks are. I don't have any magic answers. But, I suggest we need to be active, vocal, and visible in providing guidance, input and constructive criticism to our government officials at all levels: local, state and federal. And rally others sharing our concerns. Take action: democracy is not free or guaranteed.
I was truly upset when I read what is happening now in Southern Europe. It's tragic. I feel so sorry for these people and their dismal future. And the effect this dreary future will have on the rest of Europe and further, including possibly us. But they live in democracies and have brought it on themselves. They made decisions; in hindsight, poor decisions. We can learn. The United States today is a long way from a Greece. It's up to us as business people to keep it that way.