The Impending Unraveling of the Euro: Weathering the Storm
The restructuring of the euro is unavoidable, imminent, and arguably already happening.
In 2012, I expect individual EU countries to revert back to their own currencies and begin the difficult work of getting their respective economic houses in order. The European Central Bank and other Federal banks around the world are encouraging financial institutions to “de-leverage,” suggesting that a euro breakup isn’t so much a “what if?” scenario as it is a question of “when and how?”
The “when” is most likely very, very soon. The “how” presents two alternatives: 1) An overnight dismantling of the euro that cripples the global financial system, or 2) A gradual breakup that, while not without impact, allows companies and financial institutions to take preparatory action to protect assets. Thankfully, at this point, this is the most likely scenario.
So, what can you do now to make sure you will be able to safely weather the impending euro storm?
- Understand your foreign exchange exposure. Your survival depends on it. If (and more likely, when) individual EU countries revert back to their own currencies, these “new old” currencies will not be pegged to the Deutsche mark with individual weights toward GDP. When this happens, it will be vitally important for multi-national companies to truly understand the relationships of buying, selling, trading, and loaning goods and services within the17 EU countries, and how operations in those 17 countries will be impacted by transactions that extend beyond the euro zone.
- Above all else, be prepared. To protect earnings and shareholder value, boards need to brace for drastic change and extreme volatility. The first step is to give CFOs a mandate to gain a thorough understanding of the true financial exposures associated with all currency pairs, not just euro exposures to the dollar. Every business should also be running “what if?” scenarios to prepare for the new euro or euros. It's the prudent thing to do. After all, you wouldn’t leave a door or a window open when there's a winter storm coming. And you shouldn’t try to weather the euro crisis without identifying every point of entry for financial exposure and risk.
As stewards of fiduciary responsibility for managing the financial health of their organizations, CFOs need to be prepared, and being prepared for the impacts of the euro crisis means having a disaster recovery plan in place. What is your disaster recovery plan?
I will be speaking on the future of the Euro on a Proformative webinar on March 6th which will also discuss how to effectively manage currency risk, and features a case study delivered by brent Callinicos, VP, Treasurer, Google.
Comments
Company: Rexanto
Wolfgang,
Allowing for your relative expertise in this space (and that is meant with genuine appreciation), I do think that there is a scenario 2.5...partition.
Dismantling the EUR would be directly costly, would potentially weaken growth in the effected countries, along with sacrificing the value created that the EUR represents. So, for example, reinstitue the Drachma in Greece et al (allowing that would serve only to prevent future problems, not solve current ones), but proceed with fiscal union in the remaining core, which I think was a very-unstated premise of the EUR in the first place.
You might be addressing this possibility in your webinar, to which I look forward, and I wondered if you might give us a preview of this option in a future blog?
Company: FiREapps
Thank you for your kind words and considered response. The partitioning scenario you suggest is certainly valid and I think would be a pragmatic and welcome approach. The issue is that I think that window of opportunity closed roughly 12 months ago.
If countries such as Greece could be convinced to willingly leave the core states, it would likely increase the chances of the euro’s continued viability.
While this kind of partitioning may be possible, tough questions need answered in the short term:
• Greece leaving the euro at this point is like someone who’s bankrupt walking away from their only remaining banking relationship. How likely is Greece to do this?
• Fundamentally, Greece is more a symptom than the real problem. What about the much bigger issues of Italy and Spain?
• Finally, the euro wasn’t structured to allow for member countries to be forced out so any partitioning would have to be voluntary – as your post suggests. What incentives would Italy and Spain have to voluntarily leave the euro?
Another consideration is that the political landscape has shifted over the past several months and the window of opportunity for a “core” euro may have already closed because:
• It’s not clear that France and Germany are currently aligned in their views on the future of the euro
• Dealing with Greece quickly and decisively would have set a precedent for others such as Portugal, Italy and Spain – but that opportunity was lost
• With elections coming up, it will be tough to marshal the political will across core member states to remain cohesive while putting pressure on others to willingly leave the euro
For the euro to work, a cohesive fiscal, monetary, political and social policy is required and there is little evidence that such unified governance can be achieved in the current political climate.
I welcome your participation in the upcoming webinar with Google and Treasury Strategies where we can explore this further.
As I very much enjoy these macroeconomic discussions, I’m reminded daily that most corporations are not currency speculators. They focus on their core business and that means financial viability and predictability. As such, their goal is “not to predict the future but to be prepared for it.“