Saturday, 7 July 2012

Weak Euro or weak £

The graphs say it all, we may not be part of the Euro but we are tied into the system. I thought it was no coincidence when on the same day Euro rates were dropped, the Bank of England announced another £50 billion round of quantitative easing, so I started to dig deeper. Before Sept 2008 the Euro hovered between 65 to 70p, since the global bank crash of 2008 when UK interest rates dropped to almost zero, the Euro has maintained a value of 80p to 85p with the occasional spike to 90p..

News sources in 2012 would have us believe there is a Euro crash at the moment and we all assume from that they mean the Euro is weak but if you read the following extract written in April 2008 you will appreciate that an 80p Euro can be described as STRONG.


Q&A: Why is the Euro so strong????? (date April 2008)

Holidaymakers will find their pound does not go so far in

The pound has touched an all-time low against the euro - meaning that the eurozone currency is now
worth 80 pence.

Euro notes and coins were physically introduced in 2002, although the currencies of the initial 11 member countries had their values fixed in euro terms as early as 1999.

There are now 15 eurozone countries, with a total of 320 million inhabitants.

But why is the currency so strong now and what does it mean?

Why is the euro doing so well?

Put simply, the euro is an increasingly attractive currency for investors compared with its rivals.

The US dollar is in freefall because of problems in the
US financial system, driven by the credit crisis.

Interest rates in the
have been slashed in recent months, as the Federal Reserve tries to stave off a recession.
And the Bank of
England has cut interest rates in the UK to 5% from 5.25%.
(10 APRIL 2008)

Rate cuts generally encourage investors to switch to other currencies which have a higher rate of return.

As a result, there has been a flow of investments into the euro, as well as commodities such as oil and gold.

What will the impact be people taking holidays in

Well, your pound will not buy as many euros, making things more expensive for you.

The euro has been edging higher for some time.

But the price of a baguette at the boulangerie, an espresso on a
Milan pavement cafe or a beer in a Spanish bar may come as a shock for anyone who has not been to Europe for a while.

While a euro is worth 80p now, it was 71p at its physical launch in 2002 and 57p at its all-time low in 2000.

But how about the broader economy? What will the impact be?

Overall, a strong euro is good for the
UK economy.

It makes imports from the eurozone more expensive, while
UK exports become cheaper to those paying for them in euros.

This is clearly a boost to the
manufacturing sector.
"Given the eurozone accounts for such a large percentage of
UK exports, companies should be taking significant advantage of a weaker pound," said Jeegar Kakkad, senior economist at manufacturing group EEF.

"Whilst there is a twinge of concern about higher costs of imported raw materials, the benefits from greater pricing power should outweigh these."
The eurozone accounts for about 60% of UK exports.

Does the strength of the euro bolster the case for the
UK to join the currency?

This argument is shrouded in politics and patriotism, as well as economics.

One drawback is that the European Central Bank's interest rate applies equally across all 15 eurozone countries, whether their economic growth levels are sluggish or breakneck.

But the euro has many things in its favour, especially when it is at such highs.

It seems to be a safer bet than the dollar at the moment. Even the former head of the US Federal Reserve, Alan Greenspan, has said that it is conceivable that it will one day "replace the dollar as reserve currency or will be traded as an equally important reserve currency".

There is also a strong argument that joining the euro would help lure more foreign investment.

And while many eurozone residents also expressed opposition to the euro when it was introduced, it is proving popular with citizens as well as business, especially those involved in cross-border trade.

So what is the truth? It would appear from the graphs that there is an inverse relationship between the value of the Euro and the level of UK interest rates. The UK rates are so low that quantitative easing is necessary to maintain a weak pound against the Euro and help exports, but a real Euro crash would not make a strong pound, just expose our weaknesses and send the pound into free fall. Sad to say, that the British public are being fed this mis-information as an excuse to leave the EU.

1 comment:

  1. There is also a strong argument that joining the euro would help lure more foreign investment. But surely they can buy cheaper now than if we were join?