Sterling-Euro Parity Forecast For 2010?

06.01.10

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The Centre for Economics and Business Research (CEBR) has forecast that parity between the Pound and the Euro could be reached in 2010. How the markets react to the UK?s public finances will be th

The Centre for Economics and Business Research (CEBR) has forecast that parity between the Pound and the Euro could be reached in 2010. How the markets react to the UK?s public finances will be the main determining factor as to whether Sterling falls below the Euro.

Much depends on the forthcoming general election. The markets were betting on the Conservatives winning the election as they have indicated that they would take a positive stance on spending cuts and reducing the UK?s ?178 billion budget deficit. The incumbent Labour Party had been vague about future spending cuts and argued that withdrawing Government support too quickly could be damaging to the recovery.

There has been a significant gap in the opinion polls with the Conservatives being favourites to win the next election but more recently the gap has narrowed and the outcome is less certain. The CEBR warns that if the Conservatives? lead drops off well into the single figure zone the markets ?will have kittens and probably start a Sterling sell off? thereby causing the Pound to plunge.

The CEBR?s chief executive, Douglas McWilliams, explained that ?Whether the markets react to the UK?s fragile public finances before they react to the divergence of performance in the Eurozone will determine whether Sterling drops below parity with the Euro. If I had to bet, I would bet on the side of parity being broken.?

Meanwhile the ratings agencies ?are looking for an excuse to downgrade the UK Government from its AAA rating,? McWilliams said. ?There are far too many variables and far too much uncertainty for us to have a very firm view about what will happen. But opinion polls are volatile ?and it would be unusual for there not to be at least one wild poll showing Labour doing well, even if the underlying views are different.?

The CEBR forecast was published on 28th December, the day after a letter was published in The Sunday Times from several leading economists attacking the Government for its ?irresponsible? failure to set out a convincing plan to reduce the UK?s budget deficit. They said that there was a ?heightened risk? of Britain?s sovereign debt rating being downgraded.

When the CEBR?s forecast was published the Pound was trading at around 1.10 against the Euro after hitting a record low of 1.02 a year previously.

Euro?s strength in balance

On the other hand, the exchange rate also depends on the strength of the Euro, which is under threat from fears about sovereign debt downgrades in the Eurozone. Countries like Greece, Spain, Portugal and Italy are putting a strain on the monetary union. The major international ratings agencies have downgraded Greece?s government debt rating and Spain and Ireland could face a similar fate.

The European Commission has warned that soaring budget deficits and low growth “are feeding into significantly higher public debt levels.” Average Eurozone public debt could reach 84% of gross domestic product in 2010 and 88.2% in 2011, well above the EU?s Stability and Growth Pact?s limit of 60%.

Commentators are beginning to talk about the likelihood of EU countries being forced into economic reform. The Euro was launched eleven years ago and there are questions about how long its strength will last. The 16 Eurozone countries are joined by the common currency and monetary policy but each country sets its own fiscal policy. Yet one currency across such a varied range of economies with Germany considered as the cornerstone of the Euro doesn?t allow for flexibility according to each country?s fiscal needs.

?The Euro has also got a potential downside, because to be frank it has not worked,? McWilliams said. ?When it was set up, it was assumed that economic performance between Germany and the rest of Europe would converge. This has not happened – quite the reverse – and when Germany is forced to bail out much of the rest of Europe it is hard to see the Euro remaining as strong.?

No one knows with any certainty what will happen between Sterling and the Euro during 2010. Last year some economists were predicting that the Pound would pick up more than it did towards the end of 2009. Now it looks like it may fall further depending largely on the UK?s general election result and the markets? reaction.

There is also a feeling that the Euro may be about to turn downwards brought to a head by the pressure of the economic crisis and the ability of a ?one currency fits all system? to work efficiently.

What can you do?

British expatriates continue to feel the burden of a low Pound against the Euro, especially where transferring regular income such as pension payments are concerned.

If you don?t already use a currency exchange specialist to transfer money you should consider doing so, since they can offer better rates than banks and without many of the accompanying charges. You can also fix a rate for regular payments such as payment income, to ensure you receive the same amount each month.

If you have private pension funds you may be able to set them up so you can change denomination to Euros and avoid further currency uncertainty. The same applies for your savings and investments ? if you intend to live in the Eurozone for the foreseeable future you should ideally have some assets in Euros

Whether you need to change currency now or if you are concerned about preserving your wealth it is in your interest to consult an international financial adviser and wealth management company like Blevins Franks for advice on how to get the most of exchanging your disposable income and protecting your assets for the future.

By Bill Blevins, Managing Director, Blevins Franks

5th January 2010

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.

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