Dangers of Euro Fever for SMEs

Written by: Mike Laven
Published on: May 08, 2012

Dangers of Euro Fever for SMEs

The crisis engulfing financial markets has had a major impact on sterling. Global forces have made the UK’s currency gyrate in ways that was unheard of in the years before the crisis. Since 2007, sterling has dropped significantly against a basket of currencies.

The sovereign debt crisis in the European Union has made the euro a particularly volatile currency. Most American Forex traders until very recently would have known little about Greece, apart from perhaps a few history lessons about Alexander the Great at school. Now they are spending their working days transfixed on the latest plans for a European Union bail-out of the debt-stricken country.

The fortunes of the euro are a testament to the tremendous uncertainty surrounding the ability of countries in the Eurozone – notably Greece, Portugal, Spain and Italy – to repay their debts. In one week in November, the pound rose 2.6 per cent against the euro in one day, from 1.1380 euros to 1.1695 euros. Against the US dollar the euro moved from 1.4170 to 1.3600, a downward movement of 4 per cent in just 24 hours.

A backdrop of such uncertainty surrounding the currency of the UK’s biggest trading partner represents a major risk to the nation’s small and medium-sized businesses (SMEs). UK firms that trade primarily with countries in the Eurozone are finding that the volatility of the euro is making it very problematic to accurately make business forecasts.

First and foremost, the volatility of the euro can make predicting future cash flow very difficult. For example, if the pound strengthens against the euro a UK clothing maker may find it cheaper to service any manufacturing or material costs emanating from the eurozone. But if Marks & Spencer department stores across the eurozone display these clothes, the buying power of customers will have been reduced. The prices of the clothes will be less competitive, resulting in a fall in sales across the Eurozone. But if sterling declines against the euro, salaries denominated in euros, manufacturing costs, raw materials, and payments to vendors all rise.

Uncertainty over what the euro will be worth can also make it difficult for a business to budget for the future in a turbulent economic environment where contracts can fall through, forcing a business to change its plans. These new harsh realities have made it more important than ever before to hedge currency risk and ensure the exchange rate you use to buy your euros is the most competitive around.