LBS logo London experience. World impact.

Greece could become the "North Korea of Europe"

16 May 2012

1432Greece’s problem is administrative, and leaving the Euro will only weaken the resolve to tackle it, according to a London Business School expert.



Michael Jacobides, Sir Donald Gordon Associate Professor of Strategy and Entrepreneurship, says the stakes, for Greece and Europe alike, could not be higher, with the potential of the country becoming “the North Korea of Europe”

Speaking at a time of political uncertainty, where Greeks are expected to go to the polls for the second time, Dr Jacobides commented on the impact on business activity if Greece were to leave the Euro.

“Lack of confidence, lack of trade, lack of investment may end up being the key drivers of a sharp Greek downturn, which can create a vicious circle before any positive effect of devaluation is felt,” he said. “Devaluation benefits are also likely to vanish pretty quickly through inflation, as they have in the past."

If Greece leaves the Euro, he believes Greek firms will be hit, in the short term, from the contraction of credit and ensuing panic.

“It will provide to the Greek political class the ability to take over the banks, print drachmas and control the economy even more. So the most insidious impact on Greek firms will be the growth of state control and contraction of private activity, as credit, too, will be politically controlled. This will lead Greece down a dangerous path of aggravating, and not resolving the structural problems that put it in this messy spot.”

He feels firms in the wider Eurozone will suffer, with the uncertainty discouraging investment and consumption.

“Many of their production investments are depreciated, costs may fall and a Euro depreciation will increase competitiveness,” he explains. “However, this sober reality means firms may well change their current capital expenditure plans. The crisis may offer an opportunity to re-think where and how they can add value. “

But even in times of uncertainty, he argues there may be some positives for companies.

“Necessity is the mother of invention, so a crisis might enable existing firms to rethink their routines and think more creatively about how they can transfer their skills and services to growing markets, especially working with or expanding into the BRICS."

Read more of Michael Jacobides’ commentary on Greece on Business Strategy Review and the Huffington Post.

London Business School’s Brandon Julio, Assistant Professor of Finance, has researched the effects of political uncertainty on corporate investments. Read more on our news pages and in this Bloomberg Businessweek article.