Risks caused by Euro collapse


3

I am running a start-up business in Denmark. Denmark is not a part of the Euro, but the currency has been pegged to the Euro for many years. I believe that there is a significant risk of a collapse of the Euro, and I am not really interested in discussing this risk. What I am after is what the possible consequences to a collapse could be? As I do not expect to find information specific to Denmark, I am very interested to general information for businesses in the Euro-zone.

A way to read about this would be to read scenarios from larger companies about the consequences of such a collapse. I believe especially Shell is putting significant resources into creating such scenarios, and I would be most interested to read such scenarios or your qualified opinion on the consequences.

EDIT: By collapse I mean that a significant number or all of Euro-zone countries return to their old currencies, which they had before the Euro.

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asked Jun 18 '11 at 03:04
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David
1,567 points
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  • That is a really good point. I will consider this! – David 9 years ago

1 Answer


6

Assuming the Danish economy is fundamentally sound:

  • I consider this a reasonable assumption due to the maturity and structure of the Danish economy.
  • The peg to the Euro likely keeps your currency artificially low within the general zone due to stronger economic growth.
  • The korune is likely to appreciate due to people seeking less risky Euro currencies.

It's more likely to unraval with individual countries withdrawing than catastrophically collapse. So fluctuations can vary depending on which countries withdraw or remain:

You're concerned about countries using the Euro that are major trading partners.

Top export partners (2009): Germany 17.53%, Sweden 12.68%, UK 8.49%, US 6.05%, Norway 6.01%, Netherlands 4.84%, France 4.57%

Top import partners (2009): Germany 21.07%, Sweden 13.18%, Norway 7%, Netherlands 6.97%, China 6.22%, UK 5.53%

Of these partners using the Euro: Germany, Netherlands, France

Exports seem to trend 5-10b greater than imports for 2009/2010. While both imports and exports are close in number, it can still cause economic pain if Danish exports become too expensive.

I think you're probably fortunate that Germany is the largest partner since their economy is fundamentally strong and healthy. Your currency probably may not "hyper-appreciate/depreciate" against a "Deutch Mark". And even if the korune appreciated significantly, exports would not be critically hit due to German ability to absorb price increases.

Benefits of current structure that mitigate risk:

  • A lot of economic integration with significant trading partners who also have respectable economies. This makes the relationships more adaptable to changes. (The weakest partners listed would be France and China.)
  • Dealing in multiple currencies is part of business as usual for you. You wouldn't have to adjust to this as much as a country leaving the Eurozone.
  • Your economy and its businesses might already be more diversified in regards to its currency holdings.
Protections:
  • Evaluating your sources of risk. (This what you're doing now, good job.)
  • Risk management by spreading cash holdings over a basket of currencies such as GBP, USD, Swedish and Norwegian crowns. This is easier and safer than an often futile strategy of trying to forecast currency movements.
  • You can buy currency futures to smooth out future known income.
  • Diversify your source countries of income if possible.
Avoid: Speculating or forecasting. You'd be gambling in a game with quick experienced traders and hedge funds who can move markets. Economic turmoil, such as a Eurozone collapse, creates economic inefficiencies that they're trained to take advantage of.

Disclaimers:

  • Of course, this analysis could go deeper and consider other factors. Feel free to critique or add to this. I put my thoughts out hoping to learn something.
  • Primary sources of your business income matter. If you could provide more information on this, it would help. Also, the primary sources of your customers' income matters too.
  • Interest rate movements between countries can result in a lot of fluctuation. Interest rates also depend on other interdependent factors. Lots of feedback.
  • Fundamental health means that an economy is more able to adapt and compete within a market system, not their current economic luck. (China has strong growth, but as a developing economy the fundamentals aren't there.)
  • A lot of flows make predictions hard to make. Prepare for bad times, but don't be so conservative that you don't take profitable business risks.
answered Jun 18 '11 at 06:53
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Hemm
201 points
  • Thanks a lot Hemm. I totally agree with your general economic analysis, and thank you for making it as, I have not been able to mentally reduce this problem into its smallest pieces. What I am more worried about than the general economy, is the financial system. I am basically worried that this is where the big problem could arise, and I cannot begin to imagine the consequences. One fundamental question is, what would happen to the banks if the Euro failed? And, how would this effect the rest of the economy? My customers are financial institutions, which make this even more relevant. – David 9 years ago

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