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Strong euro, weak pound
Friday, December 12, 2008 @ 1:01 AM

The pound has touched an all-time low against the euro - meaning that the eurozone currency is now worth just under 88 pence.

Euro notes and coins were physically introduced in 2002, although the currencies of the initial 11 member countries were first joined in 1999 when their value was fixed in euro terms.

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 pound struggling?

Investors have been losing faith in the UK economy which now seems to be moving rapidly towards recession.

The trouble in the credit markets seems to have hit the UK harder than other countries, especially as the financial sector accounts for a bigger part of the UK economy.

And with consumers having borrowed heavily in the good times, and the government now facing a huge budget deficit, currency traders were in no doubt that the UK economy was in trouble and the time to start selling sterling had arrived.

Another reason is that the Bank of England has cut interest rates in the UK from 5% to 2% in the space of just three months.

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

Why is the euro doing so well?

Given the weakness of the pound, there has been a flow of money into the euro.

The euro is an increasingly attractive currency for investors compared with its rivals - not only the pound, but also the US dollar.

And the European economy, while showing undeniable signs of being gripped by slowdown, is less burdened by debt than the United States or the UK.

The lower size of government deficits, the lower expectations for inflation, and the higher interest rates paid by the European Central Bank have also made holding the euro more attractive.

What will the impact be people taking holidays in Europe?

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

And this week, some outlets were only offering 110 euros for every £100 you wanted to exchange.

However as regular travellers between the UK and the continent will attest, 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 about 88p now, it was worth 71p at its physical launch in 2002 (and 57p on foreign currency markets during 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 UK manufacturing sector in these difficult times.

The eurozone accounts for about 60% of UK exports.

However, if the pound was to fall too sharply, it could lead to imported inflation, as the price of goods from abroad would rise.

Can we expect parity between the euro and the pound soon?

Some currency analysts are speculating that by the end of this year or early next year, we may be headed for parity, where one pound buys just one euro.

However, with the downturn set to grip continental Europe, others expect the euro will weaken.

One key factor is whether the Bank of England continues to cut interest rates more quickly than the European Central Bank.

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, by helping to keep inflation under control.

And while the dollar is gaining strength right now, 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.

Source: BBC



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4 Comments


mike said:
Saturday, December 13, 2008 @ 5:11 AM

If the UK was to join the Euro how is the rate set at which it joins?


ROB said:
Saturday, January 3, 2009 @ 8:28 PM

As an Englishman retired and living in France who has and still is paying Tax and National Insurance in the U/K. I am one of those who has written to add my annoyance at those who think we should not receive the Winter Fuel Allowance.
Heres another reason why we should.
Like many others the bulk of my savings are still held in a U/K based bank. Many of did not panic and move it, and as a result have lost a lot of money with the plunging pound. (A friend has just returned from the far east and reported that Sterling is so weak that no one wants it, they prefer the Euro).
Food for thought:
Those who preached about going into the Euro plus the Bankers and some well placed Politicians, who had been forewarned long before the public of the forthcoming crisis with sterling.
I wonder how many of them had some of their own personal wealth changed into Euros and moved to certain banks in Luxembourg where the full capital is protected by the government, and where the accounts are kept with complete discretion even from the tax authorities. I am not inferring that any U/K banker or politician with integrity would stoop that low and be classed as 'Rats Deserting a Sinking Ship' or 'Inside Traders'. This particular set up with Luxembourg does really upset the President of France. I think he must feel that many of the very wealthy French have salted away funds far from the tax mans hands.
We hear the media reporting on meetings between the banks which have been bailed out with our money, with Mr Brown and Mr Darling telling them they must start lending and not pay out bonuses. What has happened is the banks have received all our money for the bailout slashed our savings account interest, and it seems has still payed bonuses 'Were deserved' QUESTION: Who really calls the shots in this crisis?
In conclusion I direct this at Mr Brown.
When my pension fund was earning well with the strong markets you plundered it and have left us with a depressed market and consequently wiped out a proportion of our pension. I retire in 2010 so it will nor recover. In England you have to pay for many services which for some reason are free in Scotland - Wales - Northern Ireland. How they raise the revenue with their population for these free services seems to be a mystery to me, unless the English taxpayer bears some of the burden. But the point I am getting at is that many of us go without to save. And now for example if we have to go into and old peoples home our savings can be taken over to pay for the care, plus we pay more to cover the cost of the other residents that do not, for many reasons have their own savings. (I have been informed by a manager of a nursing home that they have to do this to stay in business. The local authority tells them that they do not receive enough funds from central government). I think if Mr Brown was honest he would tell us that whatever we go without during our work life to put in a pension fund and or a savings account for our old age we will still end up in poverty because he will just take it all away in tax to pay for everyone else.
With the rise in the population of the elderly and the falling number of places for the elderly are we going to end up with old people discarded and considered less than human more than they are now (Our care services for the elderly are one of the worst in Europe).
I have always been a supporter of Labour/Liberal type politics but if this is the future vision of 'New Labour' lets have an election and then relegate the Labour Party to the history books never to rise again.
Mind you I have noticed that the parliamentary expenses have taken a bit of a bashing. Perhaps some have seen the writing on the wall and are grabbing what they can while they can.



Rainer said:
Thursday, January 8, 2009 @ 9:01 AM


I think the actually weak pound situation is now the result and the bill of the permanent
british ignorance to join the EURO years ago. Now its a bit too late, because the weak pound
doesnt fill up the EU requirements anymore to join in, I am sorry to say that, but thats the reality.
A very bad and dramatically situation for all UK pensioners living abroad in the EURO-zone.




Rob said:
Thursday, January 8, 2009 @ 8:57 PM

The interest rate cut again and now my savings in the u/k bank is earning a fraction of the interest it was 2 months ago, so much for saving for retirement. Add this to the raid by Mr Brown on my pension fund, makes me think what was the point of going without all those years, saving to make retirement more comfortable.
But what made me really sick was a comment on BBC television this morning by a man who was saving £400.00 per month on his mortgage because of the rate cut, and when asked what he would do with the savings he replied I will either save it or spend it on some luxury for the house. So the extra interest earned by pensioners savings which are needed to support a poor state pension, who need the extra money for food and heating, has instead been donated to a person who obviously had a good job, so he has the choice of adding it to his salary or to buy something nice for the house.
Well done! Brown and Darling you have made us retired people foot the bill yet again, and all because you could not control the excesses of the banks. I think it is pretty obvious to us all now that if the banks told Mr brown to stick his finger in a light socket he would ask them if he could lick it first. You just won't be happy until we retired folk are bled dry and living in absolute poverty.


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