Future of the eurozone: what it means for business

WHILE THE financial industry in the UK is clearly the most exposed to the fall-out of a potential break-up of the eurozone, every business stands to feel the impact, from small enterprises to large multi-nationals.

The worst case scenario, in which some or several major economies left the euro, would result in the introduction of new or existing currencies. The introduction, however temporary, of a new or second currency would have a significant impact on the retail industry, for example. VAT and sales tax would potentially be affected, as would advertising and merchandising which would need to be changed to accommodate prices in new or dual currencies (for an agreed period of time). There is also an impact on point of sale systems, direct, internet and mobile commercial channels as a result of the currency change. Implementing these changes across all systems, infrastructure and processes would be costly and time-intensive and it would likely be the retailers themselves who would have to foot the bill for this.

At first glance it could be argued that telecoms businesses would not be affected so adversely by the break-up of the eurozone. It would arguably be less difficult for them, compared with other industries, to deal with dual currencies, but accommodating the functionality of delivering customer bills and balances or payment top ups to their mobile phones could be challenging. Many telecoms offers are marketed through price comparison sites, as are insurance services, so the knock-on effect of changing currencies would also affect the price comparison algorithms and businesses behind them. And, if currencies like the drachma or lira were reintroduced, several extra zeros would need to be added to prices, which would require changes in all relevant systems and processes to accommodate this.

Small businesses across all sectors, which are important component of boosting UK growth, are also going to be affected. They will likely have to adapt or upgrade their bank accounts to reflect the changes in different currencies, invoicing (which already consumes a big part of small businesses’ time and resourcing) will become more complicated and small businesses will have to hold different types of currencies, or they will have to rely on a third party to help ease the foreign exchange management burden. There will also be a potential additional burden of revised taxation and audit charges.

The introduction of a new or dual currency would also likely bring about higher rates of inflation and deflation as people struggled to get to grips with the re-priced value of commodities. All companies will need to consider their contracts with trading partners and counterparties in the countries exiting the euro. This is complicated enough in one country, but if several European countries leave the euro and introduce a new currency, there will be even more confusion over the value of goods as economies struggle to convert one new currency into another.

Lastly if the European economies fail to generate sustainable economic growth, we face the strong risk of a double dip recession which would potentially cause social unrest of the kind that we have been seeing in Spain and Greece. While the UK does not belong to the eurozone, it is inextricably linked to numerous European economies meaning that the crisis will affect us in a similar way to our European neighbours.

As a crisis of some extent seems increasingly likely, it is time to act now i.e. it is essential that businesses across all sectors put the necessary measures in place to deal with it as efficiently as possible, from a business strategy, structural and technological process perspective.

Tony Virdi is VP and head of banking and financial services for the UK & Ireland at Cognizant