What Does the Position of the Euro Mean for British SMEs?

As the European Sovereign Debt Crisis continues, the Euro remains volatile. This volatility has an impact on wider global economic activity, but it is also significantly impacting the trading activities of British SMEs. Europe is Britain’s main trading partner, and the biggest export market for manufactured goods. Adverse conditions in the Eurozone have thus impacted the confidence of UK SMEs when doing business internationally. With all of UK’s trade capitals European countries, UK SMEs are apprehensive about their ability to profitably trade with their neighbours.

The European Debt Crisis is just one piece of the puzzle. At home, the Pound Sterling is weak against all major currencies, and high inflation rates are further damaging the confidence of trading SMEs. UK businesses are being encouraged to participate in an export led recovery, but the volatile nature of the Euro poses a number of challenges to SMEs who are involved in international trade.

Challenges posed by the European Debt Crisis

The biggest challenge that British SMEs face is dwindling confidence in their trade relationships with Europe. Many British SMEs have highlighted that they are looking to decrease their trade activity due to the unpredictable value of the Euro and the threat of default and collapse from affected European partners.

With British SMEs shying away from trade, this can both significantly reduce the ability of SMEs to increase their sales, and scare off SMEs looking to expand into international markets. This decrease in trade confidence could have wider implications for the UK’s economic recovery.

Falling confidence can largely be attributed to a knowledge gap on how businesses can protect themselves from an unstable market when transacting internationally. Over half of UK SMEs do not protect themselves from currency volatility by implementing hedging strategies when they do business overseas. This impacts their ability to manage the inherent risks associated with foreign exchange.

How SMEs can make the most of the current economic climate

While conditions in the Eurozone and the rollercoaster movements of the wider financial markets do present certain hurdles, there are opportunities for British SMEs to use a weaker Euro and the current economic climate to their advantage.

Risk management tools afford SMEs some control over exchange rates. Rather than being at the whim of a fluctuating Euro, SMEs can use Forward Exchange Contracts, Limit Orders or Options to specify and lock in favourable exchange rates before they actually make the transaction. This allows for more accurate business forecasting, and protects businesses from fluctuating exchange rates.

The European Debt Crisis also presents UK SMEs with the opportunity to explore other trade partnerships outside of Europe. Businesses can look towards BRIC nations (the newly developed economies of Brazil, Russia, India and China) and capitalise on growth opportunities there.

It is also advantageous to British SMEs that compared to Europe, the British economy appears to offer a more stable and attractive investment.

The European Debt Crisis and a volatile Euro has decreased the confidence of SMEs in international trade. But by adopting risk management strategies and looking towards markets outside of the region, there is opportunity for SMEs to overcome the hazards of currency fluctuations and profit and grow from international trade partnerships.

This information is brought to you by UKForex Foreign Exchange Services. It is not intended to constitute financial advice of any kind.

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