A Pound for a Euro

As well as the collapse of investment markets, the value of the Pound against the Euro also plummeted, to the extent that we are now at virtual parity, making all of our forthcoming European holidays very much more expensive.

Whilst a lower Pound is good for the manufacturing / exporting industries that we have; our main export markets are also in serious trouble, which rather negates the effect. We have seen major falls in Sterling before; In 1931 with the exodus from the Gold Standard, which allowed the UK to grow when the World was in depression, but in 1967 the devaluation of the Pound led to rampant inflation and had the opposite effect on the economy.

In 1992, when the Pound was ejected from the ERM, pundits predicted a return to the late sixties and major problems, but it actually provided the impetus for a 15 year economic boom in the UK that has only just ended. So will we see a further collapse in the value of the Pound verses the Euro? No, we think not!

The European Central Bank, guardian of the Euro, has its own problems, as all of their major economies are in recession. France and Spain suffer from massive balance of payments deficits, but because they share a currency with Germany (who has a massive balance of payments surplus), they are at present balancing each other out - for the moment. Whilst it is far from certain, the ECB will probably need to cut interest rates further to stimulate the economies of Europe. This in turn will reduce the money flow into the Euro that is currently supporting the currency.

That will eventually cause currency investors to look elsewhere for better returns (the Dollar under Obama perhaps?), which will reduce the value of the Euro, and we can all look forward to our summer holidays with more value in our pockets.

We would not be surprised to see an early return to 1.25 Euros to the Pound by summer (a return to a Euro being worth 80 pence). The Euro may even fall further, dependant upon the ECB’s policy for interest rates, so for now, people who are paid in Euros are smiling, but the Pound will recover, and we expect it sooner rather than later.