The collapse of the single currency is by no means the only denouement of the ongoing eurozone crisis (although Deutsche Bank now believes it to be a 'very likely scenario'). In reality, there are myriad potential outcomes, one being a protracted ‘muddling through’ with little decisive action from either the European Central Bank or the euro area political elite. Muddling through, after all, has been the primary policy driver to date — so why change things now?
Whatever happens, what's certain is that it will have a major impact on the UK's businesses — the euro area is our largest trading partner.
If we muddle through and the euro remains, the single currency could weaken significantly. Alternatively, and as as we saw in 2007–2008, the euro could in fact strengthen due to the markets' preference — in times of economic stress — for the biggest and most liquid currencies.
Indeed, there are deeply polarised views on where the pound will be versus the euro in 2013, with some analysts expecting the pound to be as low as 1.13, others seeing it as high as 1.42. That's if the euro is still around, of course.
If the euro goes pop, the euro area would almost certainly fall into a deep and long-lasting recession, as sovereign economies and governments (re-)adjust to the new, nationalist paradigm.
None of this is helpful, of course. As business owners, your primary challenge is not theory but the practical management of the crisis, protecting yourself against currency movements, the business climate and, in extremis, the euro's collapse. The important thing is to prepare.
Any business dealing with the eurozone, and therefore exposed to this currency risk, should look at its policy mix and may wish to consider a combination of specialised insurance, forward contracts and option contracts.
Forward contracts enable businesses to fix the exchange rate for a period of time in the future to establish a firm costing level (and thereby protect margins); some option contracts give businesses the right – but crucially not the obligation – to deal at all.
As the euro crisis goes through the gears, we expect to see option contracts in particular grow in popularity. They offer businesses an all-important get-out if the going gets tough. Did I say if?