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Commercial Angles' Newsletter - May 2001

The Value of the Euro

The main economic news in April concerned the apparent slow-down in the US economy and the effect this would have on European economies. German opinion about their economy was again pessimistic but the UK government thinks that the UK economy is in good shape - but it would say that ahead of a general election. Although unemployment in UK is low, the number of companies entering administration or receivership -14 in March / 26 to mid-April, and 44 in March / 21 to mid-April respectively  according to recent reports - seems set to increase. The steady reduction in world interest rates, led by US and Japan, will provide some relief to manufacturing industry and may correct the over-valuation of Sterling if, as usual, the European Central Bank, (ECB), dithers before acting.

The ECB has some difficult decisions to make. The devaluation of the Euro over the last two years, which some have blamed on capital outflows for cross-border acquisitions, has led to an increase in manufactured exports but is now increasing factory gate prices as higher imported prices push up costs. Lowering interest rates, whilst keeping the value of the Euro down and thus maintaining the competitive edge in world markets, might also increase domestic demand at the same time as maintaining the imported inflationary pressures. This could push the Euro into a vicious cycle of higher inflation and further falls in the value of the Euro.

The low value of the Euro has not restrained capital outflows in the past two years but international mergers and acquisitions may be reducing. If the Euro remains cheap more European companies may become targets for investors outside the Euro-zone and the flow of capital could reverse, perhaps pushing up the value of the Euro. But is public opinion in Europe  ready for a wave of foreign takeovers? The quickly-stifled outcry by Chancellor Schröder at the time of the takeover of Mannesmann shows both the true nature of public opinion in important parts of Europe and the extent of the problem.

On the other hand, keeping interest rates relatively high could reduce export sales and lead to higher unemployment. Unemployment in the Euro zone is not uniform: in Germany and especially in the old East Germany, it is high but in Ireland and France it is lower. Whilst France is at the heart of Europe, Ireland is most definitely on the periphery, both geographically and economically. The Irish economy is increasingly being distorted by the Euro-zone exchange and interest rates. The other major economy in the Euro-zone is Italy, which has lived for so long with a depreciating currency that its comments have been muted.

France is sensitive to higher unemployment and foreign control of French businesses. The recent announcement by Marks & Spencer to close its French stores has provoked the French government to introduce even tougher laws relating to lay-offs. Germany is sensitive to inflation and unemployment and Italy too has its sensitivities. Against the three large economies in the Euro-zone, the voice of the other countries would seem of little account. How the ECB squares the circle could, in the words of the ancient Chinese curse, cause all Europe to live in interesting times.

The depreciation of  the Euro has not been proven to be caused by capital outflows alone. The xenophobia over foreign takeovers is very real and changes in exchange rates are quickly reflected in companies' acquisition plans. But the impact of exchange rates on unemployment is a medium-term effect.

Therefore, on balance the ECB will probably err on the side of caution and postpone a decision on reducing interest rates for a few months. The value of the Euro would therefore be expected to rise or at least stabilise against the dollar in the short-term.

Exchange Rates

Currency

Mid March per £ End March per £ Mid April per £ End April per £
US Dollar

1.444

1.436

1.441

1.433

Euro

1.593

1.628

1.600

1.612

Yen

175.9

176.7

176.8

176.7

Articles from previous newsletters

Acquisitions & Mergers | Big Brother | Business Plans | Climate Change Levy | Company Car Tax | Contracts of Employment | Corporate Immigration | Corporate Responsibility | Data Protection | Energy Audits | Environmental Liability | Euro Notes & Coins | Exports to Germany | Export procedures | Fraud recovery | Out of Court Offers | Payroll Review | Prevention of Fraud I | Prevention of Fraud II | Prevention of Fraud III | Product Liability | Redundancy | Stakeholder Pensions | Temporary Contracts | Travel Expenses | Value of the Euro | Work Permits | More articles |

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