Italy?s recent push to pass an austerity package is the latest indication that the European economy is increasingly unstable.
As the EU tries to control the bleeding and, most urgently, prevent Greece from defaulting, it?s time that North American businesses recognized the potential impact of what is happening across the pond. This is particularly critical for businesses along North America?s West Coast, which in 2007 turned a blind eye to the looming financial crisis until the collapse of Lehman Brothers and its shockwaves forced them into the harsh new reality.
Back in 2007, before the beginning of the recession, East Coast financial nerve centres were getting very anxious about market dynamics. In preparation to weather the storm, they began pulling back, shoring up reserves and planning for a precipitous decline in revenue. On the other hand, West Coast companies went about business as usual, and many suffered terribly when the economy dipped into a recession in late 2008.
As the EU continues to descend into financial chaos, the risk premium across all asset classes, and really, across all aspects of the economy, is increasing dramatically.
The impact of the EU crisis is compounded by other factors. For one, major growth economies – notably BRIC nations China and Brazil, are starting to slow down. The U.S. itself is also stirring uncertainty in global markets. Congress? inadequate response to the U.S. budget deficit sent markets into a nosedive in July and August. Continued inaction and the resultant uncertainty have anxieties bubbling just below the surface. Contributing to this is the impending U.S. election, the outcome of which could affect the direction of U.S. economic policy.
As these factors compound on one another, warnings are being raised across the East Coast, just as they did in 2007 before the recession.
As they should have then, West Coast businesses in Canada and the U.S. need to take heed. Unfortunately, it might take another significant blow before the West Coast wakes up to the harsh possibilities ahead.
There are a number of factors that contribute to this. For one, many West Coast regions, notably the Pacific Northwest, are fairly provincial markets, and the insular attitude of many companies might prevent them from seeing the writing on the wall until it?s too late.
The heavy influence of technology in Vancouver, Seattle and Silicon Valley, and the strength it has shown in the past couple of years, might also be providing a false sense of security to companies across all sectors, as tech financing and M&A contribute to the perceived strength of markets on the West Coast. Throughout 2011, M&A activity in the tech sector has exploded. U.S. and Canadian companies have led the world in deal volume and valuations, particularly in cross-border transactions. With lots of capital flowing into the West Coast and the economic growth it is fuelling, companies across diverse market segments have been slow to awaken to increasing risk and uncertainty.
While these risk factors don?t necessarily mean that we?re doomed for a repeat of the last recession, past experience should dictate a more cautious outlook and prudent approach by West Coast businesses until these economic concerns play out.
To continue proceeding with business as usual would be tantamount to fiddling while Rome – and the rest of Europe – burns, and as that same fire threatens our economic borders. ?
