In recent weeks political uncertainty and fears Greece may leave the Euro have caused the single currency to tumble in value, pushing Sterling/Euro exchange rates to their highest in 3.5 years. In this month’s currency feature we will look in detail at how the political uncertainty has weakened the Euro, and what the future may hold for Pound/Euro rates
Why has the Euro suddenly weakened?
Political uncertainty; Greece are yet to form a coalition government, as the leader of Greece’s left-wing Syriza bloc has stated that to form a coalition they have to end their support for the austerity terms. This has increased speculation that Greece may leave the Eurozone which is a big worry as Spain, Portugal and Ireland may look to follow suit. In France, the new president is also looking to reduce austerity and focus on increasing growth which has led to a lot of uncertainty regarding the economic recovery within France and the Eurozone. Analysts warn market attention could soon switch to funding problems in other peripheral euro zone countries. These events combined have significantly devalued the Euro, pushing GBP/EUR exchange rates to a 3.5 year high.
What would happen if Greece left the Euro?
For a few years now, everyone has been asking what would happen if Greece left the euro and reverted to the Drachma. It’s not something that would happen overnight, however it is looking increasingly likely. The more uncertainty we see in the euro zone, the more the euro could weaken. While the question of Greece leaving is real one, the fact remains that there is no mechanism to do so. The possibility was never envisaged when it was created in 1999; to exit the euro it would have to leave the EU. There would probably be an interim period after which any Euros would be converted to Drachma at a pre agreed rate, much like when countries switch to the Euro.
Supply and demand would then dictate the new currency’s value. The likely result is the new currency would fall through the floor and inflation would spiral. So the best case scenario of Greece leaving would leave Greece with no buying power and high inflation. However, with its currency so weak the idea is that the economy would then grow. Of course at the moment all of this is speculation, and given there is no mechanism for them to leave, even if they decided to do so tomorrow it would take many months before any potential return to another currency would be implemented. So let’s look at the more immediate effects we may see.
Will Pound/Euro rates continue to rise?
Many analysts are predicting the Euro will continue to weaken. Indeed I would agree that even after Greece and France have political stability, focus will likely return to other countries such as Spain, Portugal and Ireland. If they also shun austerity it may cause the Euro to continue falling in value. Taken on its own, it looks like the Euro will continue to weaken, however this doesn’t necessarily mean GBP/EUR rates will continue to rise. The UK is in a double dip recession, and it’s important to realise there is no inherent strength in the Pound; growth is stagnant and our trade deficit is growing.
The only reason the Pound is supported is that the markets see it as a safe haven relative to the common currency. It’s the ‘best of a bad bunch’ and it’s this keeping rates supported. A continued contraction in the EU will ultimately affect the Pound; despite the UK not being in the single currency we are inexorably linked to the Eurozone. The Bank of England are pinning their hopes of recovery based on exports and a strong pound is not conducive to this, so there is also the risk the Bank pursues further Quantitative Easing to weaken the Pound and keep exports competitive.
If you need to buy or sell Euros, what should you do?
Forecasts range between €1.15 and €1.30 for the next 12 months, illustrating how uncertain things are. Whatever your requirements, the volatility could cost you dearly if you simply leave things to chance. The best course of action is a free consultation with a currency broker so you can discuss the options available to you. You can then make an informed decision on which option is right for you.
Contact the Foremost Currency Group now on 01442 892066, and quote A Place in the Sun