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How would a Eurozone recession affect the Pound
20 October 2014

You might think that a Eurozone recession will make the Euro cheaper, thus giving better rates for sending international payments in Euros. But, there are many issues surrounding the UK's ties with Europe and the Euro and what may happen should the single currency fall back into recession – the relationship is more complex than at first glance.

Due to the UK's close ties with Europe in terms of trade (50% of the UKs exports are bought by Europe), one might expect a Euro decline to have a negative effect on imports and therefore manufacturing and sales in the UK – this outcome would of course lead to a decline in the strength of the Pound against the Euro amongst various other major currencies.

Another thing to factor in, is the loans that the UK government and banks have provided to Europe. If one or many of the Euro-zone countries were to default on the sum owed due to a localised recession, or a large European bank collapsed, this would also leave the Pound in a very exposed and vulnerable position, with confidence in the UK of being able to surmount the problem, very limited indeed.

Geographically speaking, the UKs link with Europe is not only physical due to proximity but also has mental association – The UK, although not in the Euro-zone IS in Europe and so are very often (perhaps too often) mentioned in the same breath. If a recession were to happen in the Euro-zone, a negative knock on to the UK is, to an extent, inevitable due to confidence surrounding lack of international trade and exports, potentially leading to unemployment figures increasing which would lead to exchange rates for the Pound being negatively impacted.

Market behaviour has shown for a long, long time that when something minor or moderately negative occurs, politically or economically in the euro-zone, the Pound is just as likely to increase in strength than decrease. Largely this is because, ultimately, the UK is seen as a separate entity to the rest of Europe and as such, has a more secure government, superior deficit reduction plan and is also a currency that is in no danger of vanishing from the face of the Earth... so far! But in the case of a Eurozone recession, if the 2012 dip is anything to go by, unfortunately the reliance of the UK on Europe as a trading partner is more important in the case of a recession, and the Pound is likely to fall as much as the Euro - so it remains unlikely that the exchange rate for buying Euros will do anything other than get worse, if the economies of Germany, France and the rest of the bloc, continue to teeter on the brink of the dreaded 'R' word.

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