There has been endless discussion in the news pages about the pressure on the euro, and even some wild talk about the end of the euro altogether, with a return to individual currencies. The discussion has been political, but business voices have been quiet on the issue – perhaps because most European businesses know that the end of the euro is unlikely to happen. It would be a disaster for business. The fact is, European business can’t afford to lose the euro.
Britain may be a trading nation par excellence, but as an island nation outside the euro zone, we don’t see the benefits the euro has brought to businesses on mainland Europe. The national borders of individual countries now mean little or nothing to businesses. As an island, we are separated from the other EU nations, and so except for Ireland, we don’t see that trade crosses borders so frequently that the borders might as well not be there. (This is also true on the island of Ireland, where shoppers and drivers cross the borders regularly to save money on shopping and fuel as prices and exchange rates vary).
The euro means that a business can sell from the Algarve to the Baltic, knowing that it doesn’t have to allow for exchange rate variations. This makes business planning easier – businesses hate instability and unpredictability, so the single currency removes a major uncertainty. Businesses feel more confident in investment decisions and so their businesses are more likely to grow. Those of us who run businesses in the UK and export know how volatile currency markets can be – if an exchange rate can change by several percent in one day and 10% in a couple of weeks, it makes us cautious about investment. Of course some businesses use the futures market to cover themselves, but any business that deals with different currencies usually set money aside to allow for exchange rate changes.
An end to the single currency would see businesses all across Europe returning to that system of contingencies – which often can be several percent of sales and much of a company’s profits. The money involved would be vast – imagine how much money companies like Audi, Volkswagen, Carrefour and the pharmaceutical companies would have to keep in the bank. The result would be a massive reduction in profits, and so investment by these businesses would plummet. It would lead to reduced employment and pressure on wages, reducing consumer spending.
UK businesses would also be affected directly by the loss of the euro. Currently they only need to worry about exchange rate fluctuations with 1 currency. Nearly 50% of our trade is with the EU, and an end to the Euro would mean UK businesses would have to allow for fluctuations against 17 currencies. So UK businesses would have to put profits aside as well. Fees to change sterling into this wider range of currencies would be higher, and so would banking fees. And, of course, the massive economic instability caused by the end of the euro would mean sales would drop.
Nothing is certain, but no matter what the political or financial pressures, I think an end to the euro is extremely unlikely. Not because its fundamentals remain strong (we forget that the eurozone as a whole has lower public debt than the US, Japan or the UK, it has a trade balance in equilibrium, it has throughout its ten years of existence had a stable and low inflation rate), but because business across Europe simply and literally could not afford to lose it. It would undoubtedly cause business failures and increased unemployment, and reduce consumer spending. No matter what the debates amongst economists and politicians, in the real world of business, the cost of the end of the euro would be too high a price to pay.
Martin runs online and mail order businesses in several European countries. Despite being UK based, he does not find it easy to trade in the UK as the exchange rate instability of the pound makes business too unpredictable!