PARIS — Is the euro zone on the brink of another crisis?

This story first appeared in the January 5, 2015 issue of WWD. Subscribe Today.

As political turmoil hits Greece, with an early general election on Jan. 25 that has cast its international bailout into doubt, the currency bloc is once again looking vulnerable.

A lot has changed since 2010, when international institutions flew to the aid of the ailing Greek economy. The uncertainty rippling through markets since the country called the early elections highlights the challenges facing the euro zone, which has never fully recovered from the 2008 financial crisis.

A combination of sluggish growth, low inflation, high unemployment and weak investment has some observers predicting a pattern of chronically slow expansion in the single currency zone, which on Jan. 1 welcomed its 19th member, Lithuania.

Friday brought further bad news: The euro zone’s manufacturing activity expanded in December, but the final figure was revised downward. Markit’s Eurozone Manufacturing Purchasing Managers’ Index, or PMI, rose to 50.6, less than the 50.8 estimated initially, from 50.1 in November.

“The crisis in Ukraine and a renewed lack of confidence in the ability of euro-area policymakers to revive the region’s economy appear to have been the main catalysts to fuel increased economic uncertainty, causing companies to grow more risk-averse and pull back on expansion plans,” said Chris Williamson, chief economist at Markit.

The European Central Bank recently slashed its forecast for euro-zone growth in 2015 to 1 percent from 1.6 percent previously. ECB president Mario Draghi told a monthly news conference in December that even that forecast may be too optimistic and that the region can expect “a modest economic recovery” at best.

“The risks surrounding the economic outlook for the euro area are on the downside. In particular, the weak euro-area growth momentum, alongside high geopolitical risks, has the potential to dampen confidence and especially private investment,” Draghi said.

“In addition, insufficient progress in structural reforms in euro-area countries constitutes a key downward risk to the economic outlook,” he added.

Analysts fear the radical leftist party Syriza, which is running ahead in Greek polls, could halt economic reforms and end austerity measures if it comes to power. However, senior European Union officials have sought to downplay the risks.

“It is a completely different environment,” Spanish economy minister Luis de Guindos told Spanish radio station Onda Cero last week. “[The uncertainty in Greece] won’t have the same impact as it did three or four years ago, at the beginning of the crisis,” he argued.

De Guindos was equally upbeat about the prospects in Spain, even though its consumer price index fell in December for the sixth consecutive month, raising the specter of deflation in the euro zone. Inflation for the currency area as a whole stood at 0.3 percent in November, down from 0.9 percent a year earlier.

De Guindos said the outlook in Spain was not consistent with outright deflation, which would imply consumers are postponing new purchases until prices fall further.

“What we are seeing, this negative inflation rate, is the fundamental consequence of a single external factor, which is the evolution of oil prices,” he said.

“I think it’s an opportunity,” the minister continued. “It increases our available income, reduces our imports, improves the purchasing power of households, makes us more competitive. It is something we should take advantage of.”

Though the weak euro is doubtless good news for the area’s exporters, retailers appear to be headed for another difficult year.

France is a case in point. Since 2008, the market for women’s ready-to-wear in the euro zone’s second-largest economy has fallen by 20 percent in value terms, and there is little prospect of improvement in 2015, according to François-Marie Grau, managing director of the French Women’s Ready-to-Wear Federation.

“The economic crisis continues,” he said. “The unemployment rate is still rising as economic growth is not strong enough for the French economy to create jobs, and in parallel, we still have these problems of government debt and the public deficit in France, so the tax pressure has also increased.”

Bargain-hunting has become the norm, though French clothing retailers hope that a change in legislation that bans clearance sales outside of strictly regulated dates, which comes into effect this year, will have the effect of curtailing promotional activities.

“Discounted items now account for one out of two women’s ready-to-wear items sold in France,” Grau noted. “The new legislation will perhaps strengthen the appeal of the traditional nationwide sales, though these probably still take place too early in the season.”

The outlook is equally gloomy in Italy: Its economy is set to expand by just 0.5 percent after a forecast 0.3 percent drop in 2014, according to the latest predictions from the Italian National Statistics Institute.

In his traditional end-of-year speech on Dec. 31, outgoing Italian president Giorgio Napolitano addressed Italy’s economy.

“I believe that there is dominant and widespread anxiety for our economic conditions,” Napolitano said. He encouraged Italians to stick with the European Union, noting, “Nothing could be more unrealistic and dangerous than certain calls for a return to national currencies through the disintegration of the euro.”

In a separate speech, Italian Prime Minister Matteo Renzi insisted the country would bounce back. “The element that strikes me the most is this sense of worry, fatigue and lack of confidence that isn’t just an economic issue. It is, above all, a cultural, social and civic matter of everyday life,” he said.

Italian luxury executives remain circumspect, noting that high-end consumers are rapidly evolving, wherever they are.

“On top of the ongoing difficult international economic environment, the luxury goods market is undergoing a certain readjustment, the extent of which is not yet entirely clear,” Prada SpA chief executive officer Patrizio Bertelli said last month, after the firm revealed its nine-month profits plummeted 27.6 percent.

Brunello Cucinelli, founder of his namesake fashion company, noted an “increased awareness” in customers, especially those around age 30, who “ask where the product is made. Their sensitivity is different from two or three years ago. They want to know about the company” and require information about its values.

“It’s a moment of renaissance, and there is more demand for quality and less for quantity,” Cucinelli said.

Michele Norsa, ceo of the Florence-based Salvatore Ferragamo company, highlighted “the mobility of consumers. This is the most important thing. It’s no longer about the quota of local spending but the movement of shoppers.”

He said it was up to companies to monitor when and where consumers go and “make their products available at any moment” customers feel like shopping. “It’s a challenge, but it’s fun. There are cycles, and spending is influenced by fashion trends and habits, but geography is pivotal,” Norsa said.

With markets increasingly interlinked, the ripples from the euro zone are set to hit British shores.

“The euro-zone breakup story could come back very hard next year, posing risks to the U.K. growth outlook. This will jangle the markets’ nerves and could offset the positive domestic story,” said James Knightley, senior U.K. economist at ING and member of the KPMG/Ipsos Retail Think Tank.

In its latest report, the Retail Think Tank forecasts retail sales will grow at most by 2 percent in 2015 as consumer confidence remains fragile. U.K. sentiment is likely to be weighed down by a general election in May, amid fears that a new government could raise interest rates and value-added tax.

Further concerns for U.K. retailers heading into the new year include the ongoing promotional atmosphere, the impact of e-commerce and a “thrifty” culture.

Julie Palmer, partner at Begbies Traynor, a consultancy that specializes in recovery, corporate finance, investigations and risk management, said while the consumer mood is “more confident than it has been for some time,” that hasn’t translated into a corresponding uptick in consumer spending.

“Consumers have changed their habits,” Palmer said. “They’re used to saving cash, and [that’s seen] as not necessarily a bad thing. We can only deal with so many possessions, and the culture now is that it’s fashionable to be thrifty.”

A recent Begbies Traynor report found that the number of U.K. retailers polled between Oct. 1 and Dec. 17 who reported suffering “significant” financial distress was up 54 percent versus the same period last year. Food and clothing retailers were the worst affected, it said.

Palmer wrote in the report that, even against a backdrop of low inflation, a drop in oil prices, income growth and rising consumer confidence, the retail industry is now dealing with “a ‘new normal’ where consumers will only part with their hard-earned cash for significant discounts.”

George Wallace, ceo of the retail consultancy MHE Retail, called the decision by U.K. retailers to bring Black Friday promotions to Europe “retail suicide,” as it eroded many retailers’ profit margins early in the season.

“It’s weak retailing. It’s saying, ‘I don’t have a strategy to sell at full price,’” he argued. Wallace pointed to some clothing retailers at the higher end of the British high street, such as Reiss, that have focused on product and are “content” with a steady level of volume and selling more at full price.

Another issue set to destabilize retailers in 2015 and 2016 is the impact of e-commerce, he said.

“Retailers in small- to mid-sized towns have been virtually devastated,” said Wallace, noting that as shoppers turn to online shopping, many stores outside major shopping areas are not able to remain profitable when faced with falling sales and the fixed costs of rent and staff.

“There will be big social costs, with a big impact on employment, as retail is such a large employer,” Wallace said. “It’s going to be a bigger headache for politicians than for businesspeople, but that’s going to be a big challenge in 2015 and 2016.”

However, the prospects for the region are not all gloomy.

“We think that 2015 holds a lot of promise,” Ernst & Young said in its latest quarterly EY Eurozone Forecast, published before the Greek crisis erupted.

“The euro is still relatively strong, but it has begun to weaken, and the effects of this should begin to be felt more substantially next year. Several euro-zone governments are beginning to ease austerity programs, which should help domestic demand to grow. The sharp fall in world oil prices will also be welcome news to both households and businesses,” Mark Otty, area managing partner, Europe, Middle East, India and Africa, wrote in the foreword to the report.

“As we’ve been reporting for some time now, the euro-zone nations that went through the most pain but did make necessary reforms — Spain, Ireland, Portugal and Greece — are showing very promising growth that is looking more stable every month. The countries that were less prepared to take the hit, such as France and Italy, are looking very slow in comparison. So, amid the gloom, there are glimmers of hope,” he concluded.

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