I regret that I have had to write so much on Greece and the Eurozone crisis but it is the biggest economic and political test for Europe since world war two. It makes the advent of the iron curtain seem like a minor irritation.

I am of the view that long term solutions must now prevail and to this end Greek exit from the Eurozone is in everyone’s interest. Yes, the pain will be enormous to start with but after 3-5 years Greece will stabilise and above all be its own master and be able to manage its own economic destiny which within the zone it cannot do – any more than any other eurozone country can with hands fiscally tied very firmly. The fiscal pact of last December will only go to make matters worse. Poor countries will stay poor just as southern Italy has stayed poor since its joining with northern Italy 150 years ago. Note the lesson.

Increasingly the acceptance of Greek exit is growing and I can envisage this becoming a tidle wave with a self fulfilling prophesy outcome. Runs on the Greek banks are bad enough but a run on the Euro and other Euro banks will be a deciding factor.  So if you hold some Euros perhaps you should consider this..

In the UK, businesses should be looking at their currency exposure and balance of export markets. Over exposure to Europe poses a higher risk now so seek to balance revenues by expanding in other markets where possible. Or setting up factoring in some EU markets to reduce risk even though this may erode revenue somewhat.

Do seek to trade with countries in Europe but outside the Eurozone more. Buying from the Eurozone is more secure but don’t forward buy currency so much now – the Euro is likely to slide to 1.30 to the £ before to long.

A final thought on Greece, if it exists within a year (very possible in my view) then an exit mechanism will be in place that so far is nonexistent. Some other countries may opt out as a result. This may even include Spain but Ireland and Portugal must be candidates. Economics may be the pressure but politics as in Greece is the driver. If three states leave then a total break up would not be out of the question – though rather less likely.

Meanwhile the US debt has climbed to $16.4 trillion having been allowed to rise above $14.3 trillion only 9 months ago. The rate of debt growth in the US is alarming. Interesting to note that US debt is at 102% of GDP whilst Spain’s sovereign debt is just 65%, that’s 20% less than Germany. Yup, as ever sentiment drives the numbers – so stay dispassionate.

Managers should for sure be coaches and influencers – they need to be team guides, not team controllers. But where is this taking us?

Why is the old model failing?

The reason is this: We are in an age where senior executive pay has mushroomed and where the spotlight on these people means that their life expectancy is getting shorter. The expectation placed upon these people is huge. But here is the paradox and fatal flaw. The expectation and pressure on more junior management is insufficient. It is insufficient because sub consciously organisations have all but given up on being able to create organic and dynamic high performance leadership. The result is that ‘C’ level people are working 80 hour weeks in part to paper over the cracks that exist in the rest of the organisation.

This is a very serious failure and means that not only are leaders being ineffective but they are also in danger of being overtaken by new business models that will compete and win through organisational as well as product excellence.

Of course, even today we can see businesses that are very effectively led precisely because they lack strong product differentiation.

When more businesses wake up to this issue and opportunity there will be a re-balancing of power and authority. Employees will have more autonomy and be accountable to peers rather than more senior people. Indeed, the concept of seniority will be further diminished from today’s flat structure concept. Cultures of pure accountability will emerge.

Employees will adapt with remote working and more dispersed people collaborating virtually.

People will be trained in initiative skills rather than task skills. The technology led world will demand and allow a more trust-based model. The socially media connected world will help fuel this acceleration of change.

Communication tools and skills will rise but so too will many tools develop to enable this.

All of this is coachable. So one thing will not change – the value and power of coaching as a leadership principle. Herein lies a key to adaptability and change too.

Now the banks that took these loans have felt able to subscribe to haircuts on sovereign and private Greek bond defaults except that the defaults are not what they are called; they are CDS’s. Swaps of devalued bonds for new bonds. So 1 Trillion and some smoke and mirrors and we have a solution, or do we?  This all depends on Greece actually fixing its structural deficit issues, its austerity programme and this allowing a 360 Billion Euro debt or 160% of GDP to come down to 120% of GDP in 8 years.

About 100Billion has been saved already by bond value write offs but Greece is heading for being a non economy. Its decline is a staggering 7% pa and 51% of its youth is unemployed and 20% of the rest also out of work. Its ability to trade out of trouble looks poor.

Many investors see the only route to saving Greece (and the Eurozone) as being a return to the drachma.

The move to jurisdiction over most of the outstanding bonds to UK from Greek law and the fact that most new debt is to the senior debt holders such as the European Central Bank and European Investment Bank who remain unwilling to add to their holding means that Greece is losing ‘wriggle room’.

Greece, the ECB and Germany have kicked the can down the road again – with the strategy being ‘hope’. Not much of a plan.

Italy and Spain may need further support but this is going to get harder and harder as more and more good money follows bad money into Greece. It is time to cut loose before too many people say ‘you have left it too late’. I am reminded of the chimera – a Greek creation too:” An individual who has received a transplant of genetically and immunologically different tissue or – A fanciful mental illusion or fabrication.”

Not the usual blog but so many people are asking me about this topic…

1. Ignore all accepted wisdoms and assumptions about you business, the market , competitors and customers.
2. Dig into service levels of your business and add 25% to the quality and standards given
3. Be your own customer – ‘mystery shop’ yourself to understand how the customer is treated and how that can be improved.
4. Talk to every customer you can; find out what they would like from you in service and products
5. Look at how customers want to trade with you. Frequently? By phone? On line? Etc etc
6. Increase the value of what you offer by adding zero cost elements to the service given. Yes, they DO exist.
7. Look at how you can increase on-line business
8. Join LinkedIn and industry groups and links in the site.
9. Put yourself on face book and maybe even Tweet!
10. Maximise the team’s customer focus – top to bottom of the organisation, inside out.
11. Train everyone in commercial excellence – maximum sales/quality/profit delivery.
12. Examine very closely what your competitors do to perform well
13. Examine why competitors fail – there are as a many lessons in failure as there are in success
14. Steal ideas from other industries. The world is full of gold nuggets.
15. Examine how to retain existing customers better
16. Look at lapsed customers and how to recover them.
17. Create an internal demand for innovation ideas
18. Give your team the freedom to create a winning culture
19. Lead with a culture of accountability
20. Use Stephen Archer’s ‘From Good to Great to Exceptional’ programme to move the whole team into the growth mode – overnight!
21. Go to point 1 and go round again and again…

UK: growth will return after a technical recession in the first half of the year. The UK economy will increasingly looks like the more attractive of Europe aside from Germany and Scandinavia. Inflation will fall to 3%; the pound will gain strength against the dollar and Euro by about 5%. Unemployment will peak at 2.9million. We will have a ball with the Queen’s Golden Jubilee and the Olympics where the UK will win 26 gold medals.

Europe: The Eurozone will go into a minor recession but will emerge again by the year end. The debt crisis will only just have a clear resolution by Easter by which time the mechanism for expelling Greece (they will not volunteer to leave) will be in place. The ECB will buy sovereign bonds having bought private bank bonds in 2011 to the tune of half a trillion Euros. Italy will have a torrid year and suffer the effects of austerity measures – large scale public disorder. And maybe a new opera and Ferrari. The Eurozone will then achieve some stability and the crisis will have passed.

USA: The economy will continue to recover through the electorate will continue to feel less well off. Depending on the republican nomination, Obama will just be re-elected in November – even if he is pitted against Romney. The debt will reach $16 trillion but few will care – much. The US recovery will help Obama be re-elected and the global economic confidence to lift.

World: Assad of Syria will be gone by June and there will be a quiet revolution in Iran that will depose Ahmadinejad. Pakistan will continue its bad relations with the US and be more isolated in the region. The new Chinese Premier will preside over growth but not double digit in 2012.

Other: There will be a flood/earthquake/tsunami/volcanic eruption. Perhaps, just perhaps an improvement in national matters will give us back the capacity to be shocked by these events. Cyber attacks, commercial and geopolitical will rise and be a cause of rising international tensions. ‘The Artist’ will win best picture at the Oscars. That dog deserves its own Oscar!

So there are some predictions but no one will be less surprised than me if they are all wrong!

As to today’s solutions, it’s a case of damned if you do and damned if you don’t re-structure the Eurozone. Leave it alone and the illness festers and likely gets worse. Attempt a cure and the cost may be un-affordable or fatal.

The causes of the crisis are far clearer than the likely outcomes and herein sit some answers. Ireland, Portugal and Greece have had to be bailed out but only Greece has an insoluble debt crisis – largely because its economy has been (and still is fiscally) so badly run. No one believes that Greece is a worthy member of the Eurozone.

So long as Greece is in the Eurozone the bond markets will worry about contagion. Take Greece (and Cyprus – heavily locked into Greek debt) out of the Eurozone and the fear over Italy, France, Belgium and Spain etc will fade. Sarkozy will most likely go in 2012 and Monti will surely stabilise Italy. The Eurozone would then gain stability and credibility and time will be bought for economic recovery. This time will also permit behind the scenes re-calibration of Eurozone standards, controls and monitoring.

So my solution, even at the huge cost to Greece (and foreign debt holders that it will mean), is that Greece should be expelled from the Eurozone. Yes, this means a mechanism will be created that could be adopted by the others PIGS and even Italy but a political mechanism to prevent a rush to the exits should be included.

Excluding just Greece will be enough to restore bond confidence and even keep the CRA’s at bay. I would hope that in 4 weeks we can see an announcement of an exit for Greece. Of course they need a year to work this through but a 50 page plan should do it. This is an emergency in case no one has noticed. After all, Maastricht is how many pages and how useful?

Greece is hardly in a position now for entitlement to the Eurozone bailout. It would be best to provide a slow drip ECB bail out as a farewell gift on the way out of the Eurozone door.

Currency markets see the Eurozone as Germany which is why the Euro remains so strong. Bond markets see the Eurozone as the PIGS. These views will converge towards the PIGS as Germany struggles to be able to financially or politically support the rest of the Eurozone – unless a radical solution is found.

This type of confidence will influence new product development, decisions about expansion, investments, marketing, debt or financing. This is where caution creeps in, though ‘gut feel’ or from economic data. Business leaders are quite used to the normal economic cycles of economic recession and have largely learnt to weather the conditions and batten the hatches somewhat as the mood or economic indicators dictate.

But this recession and downturn is very different.  No one has ever seen anything of this nature though the actual recessions in the UK, EU and US have not been dramatic, they have however been sustained, unpredictable and fraught with new types of doubts derived from credit and liquidity issues at the bank and sovereign level. The fuel crisis of the 1970s was a shock and the depression of the 1930s was far worse.

But this time we are seeing chancellors looking and sounding scared; Ben Bernanke is sounding unsure and in short, no one has the answers to solve the financial crisis that has been unfolding in many phases since mid 2007.

The crash of late 2008 led to the recession of 2009 and the usual drop in external confidence.  But therein lies a huge paradox, it partly speaks to the lag effect but throughout 2008 the financial crisis was very serious though it never reached into the commercial or consumer economy in a significant way.  2010 looked like being the recovery year and enough people believed it for external confidence to rise and help the recovery.  Then it all slowed down again in late 2010 and growth in the western world has been flat ever since. In part, this is due to the confidence knock that the Eurozone crisis has caused as well as the stagnant US economy. In truth, the recovery was always fragile, like the confidence which was also fragile during 2010.

Now – we are seeing repeated evidence not only of a general weak external confidence in the economy but more seriously a weakening self confidence on the part of business leaders and their leadership teams.

Understandably perhaps since the scale and nature of the downturn does not have precedent and no one is predicting the time of full global recovery. Financial and economic commentators are generally gloomy and the Governor of the Bank of England has been unwisely pessimistic in his pronouncements.

This has led to a loss of external and internal confidence.  This is manifested in terms of leaders deferring even decisions that have little or no cost implications. Business leaders are sitting on their hands – as if hoping that the storm will pass and that they will be able to ride on the coat tails of the sunnier economic climes to come.  Many business are suffering and leaders simply do not know what to do or when and their self confidence has taken a knock. There are two clear manifestations of this:

Firstly, UK and US corporate are sitting on more cash in their balance sheets than at any time in history. In the US case, the figure is $20 trillion. That’s 50% more than the staggering US debt of $14.3 trillion. No wonder Obama is imploring businesses to invest and hire.

This is a remarkable and unwelcome state of affairs. Corporates are taking the view that cash is the safest insurance against any further economic shocks. This is to damage the economic cycle. The larger businesses need to be investing to support the collectively larger small businesses. The wider economy is lacking the growth opportunity that it would otherwise have as a result

Innovative and bold incentives as well as political pressure will be needed to break this cycle before it causes long term damage.

The second manifestation is that M&As are occurring at a surprisingly high level given the conditions. Company cash is being used on a higher number of deals than the economic conditions would suggest would be likely. Why? Again, it’s a form of protectionism and with cash can come growth through acquisition.

However, acquisitions do not add value to the economy; they usually lead to shrinkage as the combined resources are consolidated. M&As rarely lead to net aggregate growth. They do however, make CEOs look good and shareholders get an extra hope kick. Investment banks are of course a key driver in this behaviour – they are doing very well from M&As.

Meanwhile, innovation, organic growth drivers and performance progress resulting from good leadership are taking a back seat. This will lead to reduced global competitiveness and a sapping of the enterprise culture.

Clear thinking is needed on this and it is incumbent on boards and shareholders to wake up to the unfolding disaster. The problem is currently being ignored – mainly because very few people recognise it.

The engagement of management is vital if companies are to increase performance and develop externally focused enterprise initiatives.  Leadership must regain its grip on its own raison d’etre as well as the purpose of business.

Since the recession, UK companies are hungrier than ever for strong leadership. Now even the good leadership is being challenged; too few examples exist of leadership courage.

In February, Henley Business School reported that developing leadership skills was a top priority for 2500 HR and learning professionals this year. But although leadership seems to be the holy grail of private and public sector organisations today and pursued incessantly, it remains persistently elusive for many organisations.

Where are they going wrong and how can they adapt themselves, their management and teams in order to foster a culture that cultivates leaders capable of making courageous yet low risk decisions?

The answers lie in: Focus, simplification, structure for organic growth; balancing the short term and long term demands of shareholders and stakeholders; respect for the wisdom of your own people.

How can this be, is it that hard? The reality is that we have something of a ‘perfect storm’. The sovereign debt situation has been made into a crisis by market fears. In the case of Portugal, Ireland and most notably Greece, there has been an inability on the part of these Eurozone nations to survive without significant outside financial help. In the case of Greece it seems clear now that it will be unable to meet its debt obligations even with the help it has had. The fear of contagion has materialised as the price of Spanish and Italian debt has been running at record high levels. Rating agencies are fuelling the fire and the situation is compounded by a weak US economy and an even weaker recovery policy outlook for the US.

So what is the problem with the Eurozone? It cannot reach agreement on what to do about Greece. Whatever decision is made is either a rock or a hard place. The only prize that really matters is to re-build some confidence in the Euro. Luckily, at the moment, the weakness of the US economy is helping to prevent the Euro crumbling in value. But it is on a knife edge.

The nub of the problem is that the politicians are driven by self interest or EU ideology or both and the finance ministers are paralyzed by indecision – helped on by the uncertain behaviour of politicians. The financial options are all painful and massive in scale. This is a new EU crisis the likes of which have not been seen since 1945; no one has been here before so experience cannot bolster decision making. The problem is further compounded by the fact that Germany’s chancellor Merkel is up for re-election next year as is Nicolas Sarkozy. Meanwhile Italy with a debt of 119% of GDP is run by a libidinous megalomaniac straight out of central casting. All EU member states need to ratify the next Greek rescue package but this is threatened by the German electorate, the Finns and the Slovakians. If the next Greek rescue fund is not sanctioned (even though this one at 8 billion EU’s is only a patch job) then Greece will default and all bets are off as to what happens next. See my previous blogs for views on how this could have been prevented this year.

So at a time when the EU most needs clear thinking and bold leadership we actually have myriad committees and deferments of decisions. This is no way to run a region, country, market and of course the same would apply to a company.

But bold decision making is not encouraged in politics or, perversely in business so it requires someone very very brave or foolhardy to make it in this situation.

The lessons for business are as follows.

Don’t start anything without knowing the potential outcomes and exit plans (the EU has no exit mechanism for Eurozone members).

Keep things to manageable size.

Many businesses are effectively unmanageable and get by with luck, fortitude and forbearance.

Keep units to a mananagebale size and do not allow a business to breed contagion of one bad decision to another division.

Keep process simple and decision making even simpler.

Finally, give leaders the full remit to lead. Conditional leadership requirements lead to conditional success or complete failure

Can leadership and skill reverse the trend?

Back in March I gave a key note at a conference on this subject. It raised a few eye brows. To most people, particularly those in the US, this has been an unthinkable concept. However, the scale of the US debt and the unfortunate manner of its interim respite has brought the US into sharp focus.

The US decline is not just about improving completion from the BRICS and others. But I will end on some notes of optimism. The similarities to other debt laden countries are uncomfortably similar; perhaps France with 85% debt to GDP is closest to the US with 65%. The key difference between the US and France compared to Greece is that there is no serious concern about solvency. But questions are being asked and the Chinese are now less happily in for the long haul with US debt.

The US will lose its place as the global Hyper Power (in fact, it probably lost its place as Hyper Power after 9/11) but also its place as the lead Superpower. Given that 100 years ago the United Kingdom was the world superpower, should the US worry, is this just the macro waxing and waning of the world economy? The UK’s decline was precipitated by WW1, costly enough in itself. The US decline is far more complex and has an uncertain end game and it may not have been helped economically by its heavy presence in military actions over the past decade.

So why will it cease to be the lead superpower?

-Militarily, in the international context it has been compromised at least since 1975 when the Vietnam War finally ended. It’s authority as a global citizen has been further weakened in the past 15 years by Iraq, Afghanistan and its very uncertain touch in matters such as the very recent Middle Eastern changes. The US was once seen as the cavalry – now it is viewed with far greater caution, suspicion or even fear.

-Politically, Obama has move a long way downhill since his promise of ‘yes we can’. His authority since the mid terms of 2010 has dissipated enormously. Worse that losing power in congress has been the weakening of the republican by the tea party that effectively derailed a more globally attractive debt package. The tea party may be a minority but their role in Washington in recent weeks is a major reason for the S&P downgrade. The rating agencies now view the US as unable to manage the difficult decisions due to political paralysis. The political structure, even the constitution, is also holding back the US, a presidential term of 4 years is too short.

-Confidence was once an abundant feature of the US but since 9/11 this has been shaky and with the more recent economic debacle this has taken an even bigger knock. The climate of ‘anything is achievable in the US has been severely tested by the reality that; ‘anything’ can also mean 9% unemployment and numerous other economic woes. The loss of confidence in banking and property has greatly undermined the US economic fabric.

-Competition from the European Union (in combination, a bigger economy than the US) and from old foes like Japan, Korea but more recently, and critically, China has meant that the seemingly natural pre-eminence of the US as an economic power is threatened. The European Aviation and Aerospace industry has as joined up entity across several large countries shown that the EU can be commercial threat to the US in large, advanced industries. The same applies to automotives

-Growth is driven too much by M&As than organic means. 70% of M&As fail to meet key objectives and yet investors are highly attracted to the risk. Without core organic growth the US will struggle to compete and trade its way out of the current situation.

-China, we all see that they will overtake the US in GDP terms having already taken the number two position ahead of Japan in 2010. China will most likely overtake the US within a decade and India will follow suit within the next 20 years after that making the US 3^rd in the world rankings.

-The US is in poor economic shape. If the US was a business it would be underwater. Its deficit is running at $1.4trillion and its debt is ten times that and heading north. Debt is rising at >$2b per day. Think of the interest cost.

-China. It owns 40% of the US debt and supplies 30% of the US imports. Even China has cut its lending to the US expressing fears about the US’ ability to serve its obligations.

-Structural weakness. Wall Street is dragging down the international competitiveness of the US by its short termism and focus on revenue rather than value growth. Regulations, legal frameworks also reduce competitiveness.

-The US business culture is outmoded. It is sluggish, bound by an ‘entitlement culture’ and ineffective leadership mechanisms in corporations. Too few businesses see themselves in the context of the world markets. Its insularity is therefore at risk of starting to really damage it. 40 years ago it had the first signs that Japan would take a large slice of its automotive market but it has still not changed enough to take on the challenge.

-The talent coming out of US education system is now behind many emerging nations and this is proving a challenge to employers needing world class expertise. The US is 35^th in the OECD world ranking for high school maths competence. Its immigration position is loading up the social security cost obligations more than it is providing value from skilled resources. Yes, its top graduates are world leading.

-Innovation, with a few notable exceptions is the US innovation strong enough to take on the new world players? I am sceptical. Whilst Wall Street’s demand for quick fixes comes into play the most innovative (risky) R&D products often get parked. 27 of the top global innovators are now businesses outside the US. This number rose by 15 in 2010 alone.

So what is the good news?

The US has the ability and the freedom to turn itself around. It has just not recognised the shape and scale of the issues and the significance of the crisis though the S&P rating has woken many up.

So what can the US do to turn around and climb back up towards a pre-eminent position? Or at least a position where it stays at the top table with a strong voice.

The structural issues are in the hands of Government and it will probably need more QE, some tax rises and of cost budget cuts – most conspicuously in defence.

Leadership is seen as the big driver of performance and I would suggest that this is the number one key to a high performance business and economy.

The US has some exceptional leaders and it has a lot of people who are seen as exceptional. The propulsion of leaders to the front is needed now and fast. In Washington a new political paradigm is needed – even if only for a few years.

Ultimately the US leaders of medium to large organisation need to be freed of short term goal pressure and the excessive processes, complex structures, poor accountability cultures and legislation.

The US needs to totally re-calibrate its leadership model in most medium to large businesses in order that the performance of people can be improved and therefore the organisations can be raised.

To move the culture requires total, white knuckle honesty and courage. Values have to be established, aligned throughout to the business goals and the markets in which the business trades. Culture change is often seen as a luxury and a soft exercise. The reality is that it is one of the hardest and yet most valuable things a company can do.

Leaders also need to appreciate that their employees really are the future of the organisation and invest in them, whatever the economic situation. If leaders treat all of their staff as leaders then business effectiveness will rise dramatically.

Organisational behaviours stem from leadership and culture. US organisations can be and need to be more outward looking and global thinking.

The US needs to establish an education channel to help management see their business in the global trading and finance grand scheme.

Training for commerce in an international context is needed in high school, not business school. The next generation of leaders and managers has a job on its hands to make the US competitive but if it imitates previous generations there will be no progress. The US should set up 500 business academies for high school graduates. Not universities and not for MBAs. This would establish higher education and international commercial skills.

Finally, more US businesses should look at financing away from Wall Street. Remote share holders have different motivations to those that the leaders need to have; long term investment and growth. Sure, Dow companies can point to this being the case too. But the pressure on leaders is so huge on the 12 week cycle that the required laser focus on long term goals is nearly impossible.

We now have a far better perspective on the impact of the austerity and tax measures and we have some sight of whether the country can grow with austerity. The answer to the last question seems to be no; well, at least not yet.

Unemployment is stable which given public sector layoffs is one of the only bits of good news. With growth averaging 0% over the past two quarters and inflation north of 4% the condition of the economy cannot be called rosy. The trade deficit is not good and the weak pound is not helping as much as we would expect.

I think inflation from here will fall back more to 4% though gas and electricity prices will give another spike. It was no surprise to me that inflation fell last month. Commodity and oil prices have stabilized and the desperate competition for customers in many sectors is squeezing prices – and profits.

We are past the worst within the UK but despite my usual bullishness I cannot help feel that a double dip of sorts is likely.

Consumer demand remains fragile, consumers are feeling the squeeze and it is hitting spending.

Other factors precipitating a second dip are the weakness of the US economy which is an important trading partner and the chronic weakness of the periphery of the Eurozone. Even trade in the BRICs has softened. So a worldwide slowing will affect us.

The coalition can only play a long game with the UK recovery which means that they have to tolerate these weak quarters and even a second recession; I have suggested before that we may see a blip rather than a dip – three quarters of -0.05% would be a blip but the reality is that technically it’s a dip. I think that is the risk now. The next three quarters may very well be at about -0.05%. However, if the Eurozone solution turns into a credit and bond crash then all bets are off on ours and the US growth prospects. The Eurozone contagion will ripple around the planet, it is already happening in fact.

The final cause of a second dip will be a climate of self fulfilling prophecy and lack of confidence. Everyone becomes a little more cautious and – as a result – most indicators go the wrong way. That said, we must not overreact to in inflation – this is in many ways a good sign of energy in the economy. We need energy put into enterprise and exports – fast.