Having conducted three recent scenario sessions (in Switzerland and Germany) in the last month to consider the current European debt crisis, I find most notable that the range of futures conceived by deeply experienced European and global business people all turned up bleak in the near to medium term.
It is rare not to imagine in any thorough set of scenarios one that is relatively positive. The theory and the practice of scenario thinking suggest that there should be an upside where the most important uncertainties resolve in a constructive and positive fashion, even in ways that will surprise you.
In this case, however, positive scenario construction was frustrated by some obvious obstacles and the negatives seem to logically feed on themselves.
Could you imagine European leadership converging to solve the problem in time? Could you see a super financial institution (IMF or ECB on steroids) emerging in time with the relevant power and legal frameworks in place to satisfy the investing world?
If the ECB really could “print money,” would that solve the problem?
Could you imagine that the Greek populace would move quickly to accept austerity and then change entrenched cultural and political behaviors to deliver on it? Would a populace vote for a decade of lower living standards to remedy past excesses (a question the US may have to face at some point)?
As uncertainties mount and assets continue to flee the danger zone, can you imagine a European recession being avoided? Would the south be much worse off than the north, or would all suffer equally together?
These were some of the issues that made a near-term positive outcome hard to construct. And negative implications are then difficult to explain away. If Greece cannot be “saved,” then what about Italy? Would Berlusconi get out ofthe way in time, or fashion a solution that was not in his own (problematic) image?
As some banks become more troubled, will they all be rescued or will some be allowed to fail? (Not Dexia, apparently.) What would be the results of that, either way?
Little wonder that markets remain roiled as these questions continue to rankle. Of real significance for the client involved was the sense of urgency around asset decisions to be taken in the Euro-zone regarding real estate and other business interests. These decisions are of course proprietary but the overarching implication was to act sooner than later and not in the vain hope of a magic bullet. Kicking the can down the road stops working when you run out of road, and Europe is already there.
One source of insight and perhaps comfort is that in Japan in 1997 - a similar strategic moment in a country's history where internal reform was required that the country could not actually manage - a scenario process for Morgan Stanley revealed a similar dilemma. It was not in the nature of the country to get out of its own way and markets would not be kind.
It turned out that money could be made in the anticipated “bad scenario” if the firm developed a robust approach to it and followed through on it. (They did, and saved themselves from a costly ($1.2B) acquisition that a competitor dove into, much to its later chagrin.)
Taking action at such points in time requires nerve in the face of uncertainty, conviction about the course to set and resolution to follow it. We shall see as Europe's sovereign debt crisis continues to play out whether the early pessimists fare better than those who are still hoping for a solution to emerge and who continue to believe Europe can get there from here.
Uncertainty continues to dominate the news but the need to act resolutely remains.