Eurozone will follow the UK slump

Posted on: 16 February 2009 by Gareth Hargreaves

Independent financial advisor Peter McGahan assesses the current state of the European and global economy.

I am just about to scoot off with the family for a skiing session in Andorra and having left my financial brain behind I am now enduring the implications of currency exchanges.

The words ‘how much?’ come to mind.

It used to be when you went into any Eurozone area and you were given the price that you calmed yourself with knowing that the discount would apply (currency difference), so that pint was all the better. With almost parity with the Euro threatening, foreign holidays are, at best, very expensive.

So what is the potential outcome for currencies over the next few years and are we likely to see sterling strengthening? Sterling strengthening considerably is unlikely but against the Euro it is likely.

Given the relative strength of the country and lack of debt, the Norwegian Krone will continue to be strong. Norway has enormous surpluses per capita which in today’s climate will make it a safe haven but a very expensive place to go on holiday. If you want to give up alcohol go there. The yen, given the terrible economy has very low debt, so it's no surprise it's been an attractive buy.

The UK is highly vulnerable and dependant on financial services and property and its debt to GDP (its economy) is high so it will be under pressure for some time.

I suspect that interest rates will remain low for up to two years (they need to) during which the public will use the cheap borrowing to reduce their debt. This near zero interest rate policy will keep sterling under pressure.

The US dollar surprised many but that was more to do with the US repatriation of capital from abroad and getting it back onto ‘terra firma’ given the potential global issues.

It probably follows that there is likely to be a global ‘zero interest rate policy’ with no country wanting their currency strengthened in a non-growth market so US investors are happy just to have the cash ‘at home’. It may also be that they see the opportunities for cheaper deals at home and feel the need for quick access to the liquidity.

The Eurozone is the most interesting bit. There are many countries in the Eurozone who are showing massive cracks and weaknesses. The authorities however have been amazingly stubborn to take any action to ease interest rates which will probably cost them in the long run.

The Euro has remained level against the dollar but against sterling as well as a range of other economies it has been very strong. Its effective trade weighted currency index is almost 7% higher than the start of the year. As a consequence all this monetary tightening is not good news for the Euro area, especially those countries within it that normally enjoy export lead growth.

Consider also that holidays are now extremely expensive for those coming from sterling denominated countries and you can see that the ECB will have to lower interest rates very quickly and introduce other financial inputs to stimulate the area.

Just as sterling looked unhealthy at the beginning of last year, so too the Euro looks very unattractive for 2009.

And so we can expect our European holidays to become cheaper next year.

Aside from that, if you have any previous currency from overseas holidays that is lying in your drawers, you can sell it back. Coins are not taken but currency such as the Punt, French Francs, German Marcs, Greek Drachma, Italian Lira and so on will still have a value and you can transfer them to sterling.

It's reported there are still millions of pounds in currencies sitting around in houses where people believe they are actually worthless so fish them out, although I will keep my Italian lira for memory sake.

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