The most recent EU summit took place in late June, leading to an agreement among leaders to create a joint banking supervisory body for the Eurozone and implement a planned bailout fund for struggling banks.  While analysts have applauded these steps as key achievements toward steadying markets in both the short and long term, questions remain with respect to the future of the Eurozone and its impact on existing and new transactions for Canadian companies.

Preparing for the unknown future of the Euro requires an understanding of the factors that may affect your business. There are various potential outcomes to consider:  Will one or more member states pull out of the Euro?  If a member state pulls out of the Euro and adopts a new currency, how may this affect existing transactions?  Will obligations expressed as payable in the Euro be re-denominated into a new currency?  What can be done to secure and improve the situation for future transactions?

While the answers to these questions will depend on how events play out in the Eurozone, preparation is essential.  Understanding the range of circumstances under which a member state can pull out from the Euro (i.e., removal or consensual departure), the type of legislation that may be passed to deal with the issue, the terms of the transaction in question, and the courts whose jurisdiction the transaction falls under, are important safeguards to ensuring as much predictability and stability as possible.

European commission building; Brussels - Belgium

Thus far, Canada’s approach to the Eurozone crisis has been one of non-intervention.  This, however, has not insulated the Canadian economy from ill-effects of the crisis. In its 2012 Financial System Review, the Bank of Canada described Europe as the principal threat to Canada’s financial stability. Indeed, Mark Carney, Governor of the Bank of Canada, warned that high levels of household debt and overvalued real estate make Canada’s economy particularly vulnerable to a potential Eurozone collapse.

While European leaders seem to be taking steps towards addressing their debt crisis, Canadian businesses must develop an awareness and understanding of how their transactions will be impacted by Eurozone developments. Proactively setting the groundwork will minimize adverse affects and protect transactions and investments.

Jenny Yoo, a summer student at Norton Rose Canada, also contributed to this post.