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How Uncertainty is Impacting the Euro

Rising unemployment and uncertainty in the eurozone have impacted small businesses in Europe and the international businesses that trade there. The eurozone has already entered into its second recession in four years, as debt-ridden countries in southern Europe, such as Greece, Spain and Italy, continue to struggle.[1] Mounting public protests, rising unemployment rates and a dipping gross domestic product (GDP) have many Europeans asking for relief.[2]   

“What we are seeing in Europe, we’ve never seen before,” says Alfred Nader, vice president of Corporate Strategy and Development for Western Union Business Solutions. “It’s not like we can pull out an economics book and find an answer.”

How the Uncertainty Started

The European debt crisis has directly impacted the growth of U.S. exports to the eurozone, which account for 18 percent of American exports.

To know how to navigate these economic conditions and the impact on the euro conversion rate, it’s important for small business owners to understand how Europe got here in the first place. The structure of the eurozone is central to the crisis. It’s as if all of the eurozone countries — Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain — were considered a single economic entity.[1]

“The markets perceived lending risk as being very low because they assumed that the larger core countries, such as Germany and France, would step in to support other countries if they were to get into too much trouble says an Analyst from Western Union Business Solutions. “The perception was that the euro area was collectively responsible for individual borrowing.” 

For awhile, countries like Greece, Spain, Portugal and Ireland were able to borrow beyond their means because foreign investors assumed other eurozone countries like Germany and France, who co-signed on to the eurozone, would be willing and able to foot the bill if any country got into trouble, says an Analyst from Western Union Business Solutions.

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As global trade fell in 2008, investors became nervous and began to transfer money out of countries like Greece, Italy, Portugal, Spain and Ireland.[3] “The markets became afraid that these countries might become insolvent some time in the future,” sas an Analyst from Western Union Business Solutions.. This is because certain countries, like Greece, weren’t able to cover their interest payments and needed rescue packages to pay off the debt.

Meanwhile, more investments were diverted to countries such as Germany. “Germany’s competitive exports, strong current account position and stable balance sheet made it a safe haven in the sense that investors felt comfortable in lending to the government,” says an Analyst from Western Union Business Solutions.

Even though every country in the eurozone is connected and uses the same currency, they still remain sovereign entities. That means all eurozone countries have individual credit ratings based on agencies like Standard & Poor’s or Moody’s, which grade each country on a scale from AAA for the highest grade, most secure countries, to D for countries that are experiencing financial difficulty.[4]

Less Inventory and Shorter Cycles

As foreign investors became less likely to invest, companies that conducted business in Europe created shorter inventory cycles to manage risk. Companies began to proceed with greater caution. “When businesses are more hesitant to invest, you see a drop in growth, a drop in competitiveness and drop in demand for various products,” an Analyst from Western Union Business Solutions says.

“In Italy, the birthplace of premium coffee and espresso, we saw a drop in demand for products consumed in cafes and restaurants. More people switched to home-brewed and instant varieties, and the global supply chain for higher-end arabica coffee was impacted. Benchmark prices plunged, while demand for lower-quality robusta beans rose. “This compressed margins in coffee-exporting countries and also damaged growth for companies that build commercial coffee machines.”

The European debt crisis has directly impacted the growth of U.S. exports to the eurozone, which account for 18 percent of American exports.[5] The dollar has appreciated as much as 15 percent against the euro, as foreign investors who once sought out European markets have switched to U.S. Treasury securities. In other words, “Large institutional funds shifted billions of dollars out of euro-denominated instruments into dollars.” For a time, this made U.S. exports less competitive in global markets.[5]

[5]There was also a psychological impact. “[The eurozone] was the second largest economy in the world,” an Analyst from Western Union Business Solutions says. “As investors lost their appetites, so did businesses and consumers around the world.”

That will likely change in the future, because when consumers go through a period of uncertainty they often cut back on those major purchases. But once that uncertainty is lifted, that pent-up demand is unleashed, and they begin purchasing again, says an Analyst from Western Union Business Solutions.

Monitor the Market

Business owners can monitor the situation by opening up a dialogue with their trading partners who live in European countries. the Analyst suggests talking to suppliers and buyers, and asking what they see in the future. “Of course, this is based on their gut understanding,” he says, “but it does help.”

And instead of entering into a long-term contract, consider going into something shorter. For example, creating contracts that cover three to six months may help a business react more quickly to changes in currency value than continuing to engage in one-year contracts.

“My friends aren’t entering into anything in Europe that is long term; they just don’t know what is going to happen,” Nader says.

However, it’s also important to remember that times of uncertainty can also be times of opportunity. “In a sense, Europe may be the new emerging market in the years ahead,” says an Analyst from Western Union Business Solutions. “Expectations are currently so low, we may be surprised by its strength in the future.”

[1] “Eurozone slips back into recession,” Nov. 15, 2012, CNNMoney

[2] “Understanding the European Crisis Now,” June 14, 2012, The New York Times

[3] “Euro debt crisis: should investors prepare for a Greek exit,” May 27, 2012, The Telegraph

[4] “S&P Cuts Credit Ratings for Nine Euro Zone Nations,” Jan. 13, 2012, CNBC

[5] “Disciplined borrowing needed to fix European crisis,” July 22, 2012, The Boston Globe

Live Cross Rates

USD 69.2140 1.3102 0.7847 53.3150 1.0000 0.8805
CAD 52.7990 1.0000 0.5987 40.6750 0.7626 0.6718
AUD 50.1090 0.9483 0.5680 38.6030 0.7234 0.6374
EUR 78.5490 1.4869 0.8906 60.5130 1.1343 1.0000
GBP 88.1480 1.6687 1.0000 67.9070 1.2730 1.1216

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