MOST of us don't fully understand what is happening to the Euro but it is quite simple - let me explain... 

All countries (including those such as Spain, Italy and Ireland) need a certain amount of money to run the country - to pay for social services such as hospitals and the police, to pay government employees' salaries, to pay for an armed service and so on.
In an ideal world, all this money is obtained by getting an income from taxes of one form or another. In the case of Spain, Italy and Ireland not enough money has been obtained from taxes so the various governments have borrowed money from banks.

The governments issue a document called a ‘bond' and it records that the government owes the bank a certain sum of money, payable with interest at a certain date. In the case of these three countries, the payments are due shortly.

In Italy's case the chances of the government actually paying the banks back according to the agreement is about zero. The gross domestic product (GDP) of the whole of Italy (gross domestic product = the total value of goods produced and services provided in a country during one year) is less than the total amount of money owed to the banks and thus even if the whole GDP was taken as tax then the debt will still be unpaid.

So what will happen? Quite simply Italy will not pay the banks in time and possibly neither will Spain or Ireland. By a process too complex to explain here this may well mean that the currency of Europe, the Euro, will fall in value against other currencies, including the rand.

The upside is that going on holiday to Italy will be cheaper than before; the downside is that European goods and labour will be so cheap that they can compete locally so South African contractors and suppliers will have to fight off European competition. This means you and I will have to compete hard.

What to do? If you are in business, try and get rid of as much debt as you can. Things are not going to turn up ‘just like that' or because ‘there has to be an upswing'. There doesn't ‘have to' be anything.

Then make a projection as to how your cash flow will go this year, given the worst case and, yes, make plans to retrench some people. This last is very difficult but rather have a plan which you don't have to implement rather than have one that is put together at the last moment.

Who to retrench? Well, if it was me, I would look at not who I could do without but who would make the most significant difference to my cash flow if they went. Thus getting rid of the cleaners and the minor workers will cause much inconvenience but not make much difference. Putting staff on ‘short time' is a good way of building up resentment so that they will steal and drop you in the future. Don't do it.

So, who to retrench? There's always somebody who is overpaid and doesn't put in a full day's work. That's the one - or ones - who should go.

How to do it? Call them in and say; "I wish this didn't have to happen. But look, we can't go on with our present cash flow. You are the person who most likely can get another job or start up on your own. Here's some money and.... good luck." And give them two months pay in advance. Three if you can afford it. Hard? Naturally it's hard. Will they hate you? Will they be resentful? Yes, to begin with but in a few years the world will turn.

If you are fair (and not nasty) then you will find that most people bear no grudges.

Then, further saving: Tell everybody that there will be no salary increases until you can afford it. And try to get on.
Oh, none of this is a good thing. But it's not as if you control the national or global economy, is it?

And, whatever you do, make sure you comply with labour legislation.

Make a plan now, even if you never use it...

machoy@iafrica.com