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Europe’s worries cast shadow on the Bay State

The European crisis is rattling confidence among Massachusetts businesses, which depend disproportionately on trans-Atlantic commerce

Peter and Maria Hoey for the Boston Globe

Business is good at Heat Trace Products in Leominster. Owner and chief executive Wayne Canty just returned from a trip to Russia with new orders to fill.

But Canty admits that he’s proceeding carefully with any expansion plans and holding off hiring for two open positions. He recently decided to convene company managers early next month to consider whether the company’s plans for the future should be fine-tuned.

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The primary reason for the caution, and the hastily organized strategy session?

“Europe,” he said.

Heat Trace is not alone in its concern about the economic crisis in the 17-nation eurozone, the future of the euro currency, and the impact on state, national, and global economies. As Canty shows, uncertainty caused by this crisis that never seems to get solved is leading companies to put expansions and hiring on hold, slowing the recovery.

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Since the crisis flared again in April before the Greek elections, both the Massachusetts and national economies have downshifted dramatically. Last month, the state shed jobs for first time since November, while employment growth in the three months from April to June slowed to just over 4,000 jobs from nearly 29,000 in the previous three months.

The level of worry among Massachusetts businesses was captured earlier this month when Associated Industries of Massachusetts, the state’s largest employers group, released the results of its June business confidence index. Confidence among Massachusetts businesses experienced the second sharpest drop in the 21-year history of the survey, driven by deepening concerns about the future — largely because of Europe.

“The very sharp drop suggested that the situation in Europe is beginning to affect Massachusetts in a more dramatic way,” said Sara L. Johnson, senior research director of Global Economics at Lexington forecasting firm IHS Global Insight, and a member of AIM’s board of economic advisers. “The eurozone situation is certainly rattling confidence.”

Luciano Manganella, who owns the local clothing chain Shop 344, said his sales seem to fall whenever the crisis in Europe intensifies. Since the crisis began nearly three years ago, revenue at his 10 stores has been “up and down, like the stock market.” he said. “It seems that when Europe is down, we are down.”

As a result, he’s putting off any plans to expand his 100-person workforce.

“We are not going anywhere because no one has any idea on how to fix the European economy,” Manganella said. “We are stuck, and we know it.”

The crisis in Europe began in late 2009, when mounting government debt in Greece raised the specter that the country could default on its bonds and imperil financial institutions holding those bonds. The crisis has since spread to Spain, Portugal, Italy, and Ireland and into the banking system, threatening the kind of global financial meltdown that followed the collapse of Lehman Brothers in 2008.

Several European nations have sunk back into recession, with unemployment rates well above the US average. In Spain, 1 in 4 workers is unemployed; in Greece, better than 1 in 5 is not working.

Massachusetts is particularly vulnerable to conditions in Europe, because it relies more heavily on European commerce than other parts of the country. Europe accounts for 40 percent of Massachusetts exports, about double the US average. More than two dozen Massachusetts public companies get at least a third of their revenue from overseas, mostly from Europe, according to the financial reporting firm Standard & Poor’s.

European companies invest billions of dollars in Massachusetts and employ more than 100,000 here. European tourists account for nearly half of all spending by international visitors in Massachusetts.

But the number of Western Europeans flying into Boston in the first four months of 2012 was down 2 percent from a year ago, according to the Commerce Department. Across the country, the number of visitors from the region was down nearly 11 percent in April.

Patrick Moscaritolo, president of the Greater Boston Convention & Visitors Bureau, said the local tourism industry is in “a state of high alert,” although he doesn’t expect to see the full impact of the European crisis until later this year.

Europeans tend to book flights and hotels far in advance, and those planning trips now may be more cautious about traveling, Moscaritolo said. Visitors worried about how far their euros will go will probably have shorter stays and spend less while they’re here.

“Instead of having breakfast, lunch, and dinner at high-end restaurants, they may end up hitting a Starbucks or Dunkin’ Donuts for breakfast,” he said.

Perhaps the greatest impact of the European crisis comes from uncertainty that is leading many businesses to hunker down. Even companies doing well may be putting off permanent hiring until the European situation stabilizes, said Andre Mayer, senior vice president of research at AIM.

“Uncertainty has a huge impact on companies,” Mayer said, “and the European situation is nothing if not uncertain.”

DMT Diamond Machining Technology in Marlborough makes sharpening tools for consumer and industrial applications and relies on Europe for about 25 percent of its business. Mark Brandon, the company president, said DMT has seen a slowdown in orders from many of its European customers. So far, Brandon said, he doesn’t see any need “to do anything drastic,” but he’s keeping his eyes on Europe.

“We’re still in wait and see mode,” he said.

Europe is also a key market for the state’s biotechnology and drug industries. The continent accounts for nearly 40 percent of the market for many drugs and medical devices, about the same share as North America, according to industry estimates.

The big fear is that European governments, which largely determine drug reimbursement levels for their national health programs, could reduce payments for biotech treatments as they face pressure from financial markets to control deficits.

“The economic situation is quite important to the biotech industry,” said Paul Clancy, chief financial officer of Biogen Idec, the largest Massachusetts-based biotechnology company. “We are very empathetic to the real tough situation the governments have in managing their budgets.”

Aron Ain, chief executive of Kronos Inc., a Chelmsford company that makes human resources software, said he, too, is following the European situation and other events, even though the company is growing at a fast clip in Massachusetts and abroad. Kronos employs about 3,600 people worldwide.

“I can’t say that a global slowdown won’t impact us,” Ain said. “I watch it really closely, that way we don’t become a casualty of it.”

Kenneth Rogoff, a Harvard economics professor who has studied 800 years of financial crises, said all businesses would be smart to keep a close eye on Europe.

“The situation in Europe is a huge weight on our shoulders, no doubt about it,” he said. “It’s not just the loss of trade, it’s the existential risk, the chance that the whole thing will explode.”

Katie Johnston, Robert
Weisman, Jenn Abelson, and Megan Woolhouse of the Globe staff contributed to this report. D.C. Denison can be reached at
denison@globe.com
.
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