Walking a tightrope over the streets of San Francisco

Today is a key day in my US road trip.  I am presenting to members of the Northern California CoreNet Chapter and the Urban Land Institute at the PG&E Auditorium in the beautiful city of San Francisco.  My task is to provide an outlook for the EMEA office market from the standpoint of a corporate occupier. Fellow speakers from all the major service providers are doing so for other regions of the globe.  But there is no doubt that there is an intense focus on Europe given the ongoing debt crisis (although interestingly in the introverted mainstream press here in the US the crisis is somewhat absent).

In thinking about my presentation, it struck me that the city of San Francisco presents a perfect metaphor for Europe. It does so in perhaps three ways.

First, San Francisco is of course a city that suffers from more than its fair share of fog. In Europe over the last year we have had a substantial fog of our own. It is an analytical fog brought on by a myriad of often contradictory economic indicators or studies. It has therefore proved somewhat difficult to fully quantify the magnitude of the problems facing European economies; the precise direction that those economies are heading; or indeed the pace at which these economies are proceeding. The fog has become a real pea-souper given the political rhetoric and positioning that is so often associated with these metrics and interpretations. As I have said consistently since arriving here, the political economy of Europe is far more of an issue (and of greater interest) than the pure economics.

Second, it is clear that Europe since the global financial crisis in 2009 has been on a long and winding path to recovery. It’s a path that makes navigating San Francisco’s famously winding Lombard Street look pretty straightforward. Indeed all streets of San Francisco, offering as they do inclines at every turn, point to what is ahead for Europe – a long, gradual and challenging climb back to prosperity.

Finally, despite the aforementioned fog, it is abundantly clear that Europe has a sizeable debt problem. Dealing with this whilst maintaining some degree of economic growth, makes escaping from San Francisco’s notorious off-shore penitentiary, Alcatraz, seem like a bit of a cake-walk.

So as I take to the stage with my peers, I aim to tell it exactly as I see it. It pays to be straight but bold in these situations. I believe that Europe, and the Eurozone more particularly, continues to walk uneasily along a tightrope. On one side of the rope is a return of corporate and consumer confidence amid a political resolution of the crisis and a mild but sustained upturn in fortunes built on the back of the private sector investing some of the cash pile it has built up over recent years of repair. There is about a 1 in 5 probability that Europe, when it falls from the tightrope, falls in this direction.

On the other side of the rope is a much darker place where the crisis deepens, a bank, banks, country or countries fail leading to a full or partial break-down of the Eurozone and a deep and sustained recession that reverberates globally emerges. The probabilities are stronger – about 30% and rising – that Europe slips from the tightrope into this darker place. The bets are strongest that Greece will be the one to fail – particularly if a deal cannot be struck with private creditors. This Greek Tragedy might be, if one takes a longer term and broader perspective, the very stimulus required for politicians to bring an end to the muddling through mentality that afflicted the year of summits in 2011 and provide a real leap forward. The risks of not doing so will mean that the fog becomes thicker, the path evermore steeper and twisting and escape even more unlikely.

The ramifications of this are significant for everyone in the auditorium today. Although only 12% of US exports are to the Eurozone and the US is a relatively closed economy with total exports only representing around 10% of GDP; the much-repaired US banks will be exposed to the Eurozone periphery to some extent. A breakdown of the Eurozone – either partial or full – could serve to dramatically alter the current US GDP growth forecast of 2.5% for 2012 and leave a pre-election US economy walking a tightrope of its own.