The effects on UK business if the euro fails

Large-scale devaluation
John Whiting, tax policy director at the Chartered Institute of Taxation, thinks a return to 17 different trading regimes would add to problems of accounting for profits and losses within each jurisdiction.

UK companies could also be hit by a devaluation of the currencies that emerge from the ashes of the euro, particularly in low value-added sectors such as textiles and basic materials, says CEBR’s McWilliams.

“The currency movements could be very large,” says ING’s Bright. He sees Spain, Portugal and Ireland devaluing 65 percent against sterling, Italy depreciating 45 percent, France 40 percent and Benelux, Austria and Finland falling 30 percent against the pound.

“If the Italian, Greek, Irish and Spanish currencies fell relative to the UK pound, it would be very difficult for the few remain­ing clothing producers in the UK, for example. A lot of agricultural products could be imported a lot cheaper as well.”

A recession of the magnitude forecast by ING would impact companies that export to the eurozone as domestic demand crumples. A deep recession combined with a signifi­cant appreciation of sterling against the region would see export levels fall massively, possibly in excess of 25 percent.

Jonathan Michael, managing director of JMCL Consulting, which advises clients on procurement, says this would place a huge burden on companies.

“On a practical level, all contracts and agreements would need to be redenominated and massive implemen­tation and reprogramming steps would need to be taken,” he says. FDs should take action now to protect themselves against that twin threat to orders and supply, Michael adds.

Bittersweet schadenfreude
By the same token, overstocking if you are servicing eurozone customers is a danger, as a double-dip recession will suppress demand, while over-reliance on a single supplier is a risk to be avoided by lining up contingent suppliers from o utside the eurozone.

Shifting production out of the eurozone to cheaper, less unstable regions may become favourable for many companies at the same time, further accelerating any euro collapse – though that is the point at which some economists see parties including the International Monetary Fund stepping in.

It is worth remembering that there may be gains for UK companies that import as sterling rises – a bittersweet schadenfreude.

“One could argue there’s an opportunity there,” M&C Saatchi’s Blackstone says. “You could say that Spain now has clear labour, and high-quality labour – and you would still have free movement of labour in Europe. Fortunately, we’re sterling and most businesses are set up to be used to a sterling/euro exchange rate of €1.45, so we have quite a margin to go.”

There is also a feeling that, while the future of the single currency is in the balance, no one wants to say anything that tips it towards collapse.

This may explain why many companies and business organisations are not openly addressing the issue. The Institute of Directors (IoD) and the Confederation of British Industry, the leading employers’ organisations, have both stated that while a euro crisis would have major implications for British businesses, they don’t believe it is a pressing policy issue.

“There are serious problems, but I think there is a general sense that if it does break up it won’t be in the next year and that minds are focused elsewhere,” a spokesperson for the IoD tells Financial Director. Many of the FDs this magazine approached to discuss the idea of a euro collapse and its fallout declined to comment, seeing it as purely hypothetical – even after the Too Big Too Fail years in which institutions no one could have envisaged would fall succumbed with unthinkable speed, and with lasting, global ramifications.

We found one naysayer. Mike Smith, finance director at Irish law firm Eversheds O’Donnell Sweeney, believes the system will survive.

“Whether we like it or not, the euro is embedded in the eurozone and the cost to a country of coming out would be so huge that it could not be worth it,” he tells Financial Director.

“I say this as an ex-pat FD now working in the eurozone and in a country that has been tipped to come out of the euro. With the multi-speed economy in Britain, are we in danger of seeing sterling breakup? Perhaps we will see a new currency in Scotland or Wales or Lancashire,” he says, tongue only slightly in cheek.

But that does not mean FDs should avoid planning for such a crisis. “Companies should be prepared on both a macro and micro level,” says JMCL’s Michael.

It could be some time until businesses will know whether Capital Economics’ doom-mongering was right. At least this gives companies time to plan for the worst – unless they are too fixated on today’s problems to prepare for the potentially much bigger ones of tomorrow.