Future of the Eurozone and what it means for banks
The Eurozone that may emerge from the current crisis is likely to be very different from the one we know today, with one of three possible outcomes, says Tony Virdi, VP and head of banking and financial services for the UK & Ireland, Cognizant.
The first is the status-quo, where all the Euro member states successfully implement tighter fiscal integration and none opt out of the Euro. The second is a contracted Eurozone, which will see some members opt out with agreed terms. The third – and most feared – is total disintegration, resulting from the failure to reach an agreement on fiscal integration and will lead to a number of major economies leaving the Euro. Any and all three options will result in significant turbulence.
For most, a status-quo version of the existing Eurozone is the preferred scenario, and the reforms agreed in December 2011 to embrace tighter fiscal rules and monetary expansion, represent a step in the right direction to resolve this crisis. However, based on the challenges that have come with implementing these reforms in some Eurozone countries, the changing political climate, the ongoing weakness of a number of European banks, and the increasing reluctance of stronger countries to ‘bail out’ financially weaker or politically unstable countries, it is very likely that the ‘contracted Euro’ scenario will be the one that becomes reality.
So, what does this mean for banking and financial institutions?
The introduction of the Euro in the late 90s provided a great deal of experience of changing from one currency to another, and provides a strong basis to tackle the challenges associated with any countries leaving the Euro. However, it is clear that a contracted Euro will have a widespread impact on both operational / IT processes and underlying solutions, requiring additional resource and experience to plan and deliver the necessary changes in a cost-effective and efficient manner. The key impacts are market infrastructure, regulatory, customer and operations, resulting in several significant process and system changes.
In terms of customer impact examples, in core banking, client on-boarding and management processes would need to be changed; client accounts would need to be reset to accommodate multiple currencies, and the data migrated. In addition, any changes in account terms and conditions would need to be planned and communicated to clients effectively. The impact on pension funds could be huge. For example, the potential redenomination of long-term assets (such as government or company bonds), which had already been redenominated from the original national currency into the Euro, might pose significant challenges.