The euro

Posted on August 4, 2015 · Posted in Business Month

A walk around the centre of Athens does not evoke a sense of crisis at the moment. Nor does a boat trip to the islands. The tourist season is underway and on the surface, all seems well, with lots of visitors crawling over the Parthenon. Even the street sleepers that were so evident when I last visited Athens three years ago, are less obvious today.

Beneath the surface though, the sense of crisis is very real and damaging the value of the euro. It is the topic of conversation across Greece – will the country stay in the euro, or does it face the dreaded ‘Grexit’? While the population seems loyal to the newly elected anti-austerity Syriza government, other eurozone governments – led by Germany and strongly backed by Finland – seem determined to force compliance on Greece, even if their demands lead to the break-up of the euro. No wonder the euro has lost value in recent months.

It is not only the Greek fiscal crisis that has pulled the euro’s value down – so, too, has the European Central Bank’s programme of quantitative easing (increasing the money supply). Eurozone QE is buying €1.1trn of bonds, at a rate of €60bn a month. Based on the experience of QE programmes in the UK and the US, this will push up asset prices (including stocks and top properties) – though it is less clear that it will boost the eurozone economy.

Meanwhile – and ironically – most of the rest of the eurozone is benefiting from the Greek crisis. The euro has fallen 25% against the dollar in the last year and by about 15% against sterling. Largely as a result of this, Greece’s dedicated enemy in the austerity argument in the eurozone is raking in the profits. Last year, German exports to the US rose by 6.5%, while those to China jumped 11%. The cheap euro is good news for German exporters.

But there are losers as well as winners when it comes to the currency roundabout. And Northern Ireland is near the top of the pile of those losers. Shoppers from the South who swarmed into the Derry and Newry shopping centres during the days of weak sterling and high euro valuations have stopped making the journey. Instead the cars head the other way, to Letterkenny and Dundalk, as Northern consumers buy petrol, diesel, food and clothes across the border.

Tourists that might in the past have booked holidays in the North, are now making reservations in the South. Here they are influenced not only by the weak euro, but also by the difference in VAT rates – the Republic charges just 9% VAT on hotel stays and restaurant meals, compared to 20% in Northern Ireland.

Our manufacturing sector is also damaged by the weak euro and the ECB’s quantitative easing programme to hold down its value. Dr Esmond Birnie, PwC chief economist in Northern Ireland said that we are particularly affected by this given that the eurozone is the UK’s largest export market, while Northern Ireland’s exporters now face even tougher price competition from the Republic in the food processing and tourism sectors.

But, Birnie points out, the injection of extra money will not, in itself, fix the eurozone’s economic problems. “There may be some benefit to European growth from a weaker euro, though this will also result in higher import prices, squeezing consumer spending,” he argues. “Fundamentally, QE does not address the major structural factors holding back eurozone recovery. Growth is very weak in France and Italy, the second and third largest economies using the euro and collectively accounting for nearly 40% of eurozone GDP.

“Businesses are reluctant to invest, labour markets remain inflexible and governments have been slow to undertake much needed economic reforms. Until these issues are addressed, we are likely to continue to see disappointing growth in the euro area economies.”

Stephen Kelly, chief executive of Manufacturing NI, also expresses gloom. “With 55% of exports into EU markets, Northern Ireland’s manufacturers are hugely experienced in dealing with the movements in currency exchange provided these are relatively small movements,” he explains. “What we’ve seen, particularly since last autumn, are very large shifts, almost on a daily basis, in the euro value after a number of years of relative stability. This has created some difficulties.

“With the slide in the euro value to 2007 levels, there is an opportunity to purchase raw materials, particularly cross-border, but for the wider economy that has an impact on NI suppliers. And, we are hearing that many [manufacturers and suppliers] are sacrificing margin in an effort retain customers. As a border economy, many risk losing long-term contracts for supply to similar businesses in the Republic. This is particularly noticeable in the important food sector where buyers for supermarkets and others are freer to choose the source of their supply.

“For the larger sales in engineering and construction related industries, suppliers are having to carefully manage their flow of currency and work harder to demonstrate additional value.

Right now, how manufacturers manage their currency is as important as how they manage their productivity and their raw material sourcing. It has that impact on profitability and sales sustainability.

“Our manufacturers are used to currency fluctuations, but the pace and the scale of the shift in the euro’s value has for many come at just the wrong time – just as business conditions were beginning to pick up and investments being made. Squeezing margin is hopefully a temporary issue, but it does reinforce the need to take action on the costs of doing business here in NI. Action is needed on areas which impact on our manufacturing competitiveness, particularly energy prices in order to sustain and secure our critical manufacturing sector.”

For the moment it is impossible to predict how events will play out in the eurozone – and, accordingly, what will happen to the value of sterling compared to the euro. Greece may be pushed out of the euro – and if it does the euro may plunge further, as speculators bet on other countries also falling out. Or, just possibly, everything may go so well in the eurozone that the euro begins to recover strongly. For the moment, though, that looks the least likely outcome.

Box

A year ago, a euro was worth 83 pence. Today it is hovering a little above 70 pence. Goldman Sachs has predicted it could go down further to 65 pence. It is a similar story with the euro’s value against the dollar – 12 months ago a dollar bought 70 cents in the euro – now they are heading apparently towards parity. But the euro has been here before – back in 2007, when everything seemed well with the world’s economy.