Are expats worried about the euro collapsing? Apparently not, as 35% expats show great confidence on euro survival. This one of the main findings of the last poll conducted by Expat Forum on the behalf of Barclays Wealth and Investment Management.
Over the last couple of years it has been impossible to pick up a newspaper or log online without seen some reference to the European debt problem and potential collapse of the euro. This has obvious has a major impact on the thoughts and plans of expats as many of them have direct exposure to the euro or indirect exposure via their investments and other assets.
The poll which we carried out on the expat forum attracted a number of interesting comments and has given us a useful insight into the way in which expats in various countries around the world are viewing the problem.
What is happening in Europe?
In simple terms, governments within Europe have overspent on public services over the last few years, neglected to put money aside in the good times to cover the bad times and are also being hit by a worldwide economic downturn. So as a consequence governments around the world, not just within Europe, have had to introduce enormous austerity measures to reduce budget deficits and try to get government finances back on an even keel. However, the situation within Europe has been further complicated by the number of countries joining the euro and the European Union with very different financial situations.
The issue with the euro has been brought to a head by the Greek debt debacle with the country literally drowning in a sea of debt and having to force lenders to take a severe “haircut” on monies due to them. Officially this is not seen as a debt default but morally many investors believe that by forcing lenders to effectively write off up to 50% of outstanding debt the country is in “moral default”. This has brought about the need for a multi-billion euro bailout fund of which financing is proving to be very difficult with EU members and Eurozone members unable to agree on individual country exposure.
The economic downturn is testing the wheels of credit within Europe, and indeed around the world, and in many ways short-term economic performance is being put to one side as governments address growing debt problems. The Greek issue has been “resolved” on numerous occasions only for deals to unravel spectacularly which is impacting upon short to medium-term confidence in not only the euro but the EU as well. Many are putting forward Greece as the “firewall” between the survival of the euro and the collapse of the ailing currency. However, other countries in serious financial trouble include Spain, France, Portugal and if any of these three were to go then this may well spell the end for Europe as we know it as well as the euro.
To keep posted on the last developments of the so-called euro-crisis, it is highly recommended to follow the Barclays Wealth and Investment Management’s blog. In last post, they discuss what the European Central Bank (ECB) is trying to do in order to alleviate the on-going financial stress.
But, back to the question, are the expats worried about a potential fall of euro? Over the third of participants don’t share any concern on this situation, assuring that No, it would never happen (34.84%).
The most popular choice by those who took part in our online poll seems to put aside the problems of the euro, Europe and the worldwide economy to suggest that the euro will survive and there is nothing to worry about. While other comments would suggest otherwise, it is interesting that despite the doom and gloom of the media, downbeat comments from investment markets and a currency which is struggling to hold its own there is still a common belief that the euro will survive and Europe will recover.
During currency issues of years gone by there were very few people who believed the dollar would collapse and disappear after a spell of weakness, very few who saw the end of sterling after the UK hit financial headwinds and indeed the likes of the yen have also had their fair share of issues. Nobody really ever suggested that any of these currencies would disappear forever but the problem today is that the euro is a relatively young currency and the financial situation we are faced with today is very different to that which any living person has ever experienced. We are quite literally in unique economic territory.
While a blind belief that euro will recover and Europe will push on with economic growth in the future is all good and well but is this really the case. Even if the euro does survive it is dangerous to blindly believe that there are no serious issues on horizon and there is no chance of collapse. When you bear in mind the downbeat media coverage and volatile investment markets it is a little surprising to see that many people automatically assume the currency will survive when this may not be the case.
However a non-little, Yes, it would affect my savings back home (20.59%)
The subject of savings is a tricky one because those who voted in our online poll may be from Europe with euro exposure or they may originally be from outside of Europe with no euro exposure. The subject of savings is a very sensitive issue because if you take a look at the worldwide situation regarding savers there is no doubt that the vast majority have felt the strain of economic headwinds.
It is slightly bizarre that those who have put money aside for the future are the ones who are suffering at the moment with the likes of the US, UK, Eurozone and many other areas of the world dropping their base rates to near 0% as a means of trying to inject confidence and liquidity into their local economies. So as a consequence, putting aside the euro issue itself for a moment, many savers are receiving little or no interest on their funds and therefore in real terms, when you take into account inflation, the value of their savings is going backwards.
The issue of those living in a new homeland outside of Europe is even more alarming because the vast majority of them will have some direct or indirect exposure to the euro via assets, income or perhaps benefits which are still paid out in euros. When the vast majority of them moved overseas for their new life they would have taken their financial position at the time and used this to plan ahead for the future. If exchange rates had remained constant then this would not have been a problem but with the euro losing value across all of the main currencies some expats may be feeling very exposed to the beck and call of the currency exchange markets.
Even a 10% swing in the currency could see a reduction when exchanging into your “new local currency” and this is a big slice to take out your budget. If the euro was to collapse then this impact would be even more severe and we could literally see many expats forced to return to their former homelands. The situation with regards to those holding currencies other than the euro may seem stronger on the surface but the reality is that if the euro was to collapse this would have a major detrimental effect on worldwide financial markets and nobody would escape. However, direct exposure to the euro is by far and away the most difficult and most challenging issue at the moment.
No, I use a FX tool of any kind to make the most of currency volatility (7.24%)
The issue of foreign exchange tools is one which 10 years ago seemed to be at the beck and call of professional financial advisers and professional investors. However, over the last 10 years or so, due in the main to the ever growing influence of the Internet, a whole range of new financial tools have been made available to private investors and many expats are now considering these. While the figure of 7.24% is relatively low compared to the other answers given in our online poll it is worth remembering that the use of foreign exchange tools is literally “foreign” to many private investors today. However, are expats now becoming more savvy?
The implication with regards to the wording of the answer seems to suggest a speculative nature is attached to foreign exchange tools when this is not always the case. True, there is an opportunity to make money (and lose money) from volatile currency markets using foreign exchange tools but they can also be used as a form of insurance for your investments and your assets. The idea that an expat would look to move to a new country and then literally gamble their current and future finances on the foreign exchange markets seems a little far-fetched and at best extremely dangerous. Why would you spend years planning your future and then look to speculate to POSSIBLY accumulate?
In relation to the expat market, where very often finances are tight and long-term planning is required, the idea of holding assets in euros at this point in time is potentially a nightmare for some people. Do you transfer into a “stronger currency”, do you wait until the euro recovers or do you take alternative hedging action? Using foreign exchange tools it is possible to place a floor under your investments to ensure that they do not fall below a specific level even in the event of a damaging collapse in the euro.
This is done via fairly straightforward foreign-exchange transactions although the strategies are the more complicated area of this particular option. Therefore, it is vital that whether you are looking to speculate in the currency markets or indeed hedged and protect your assets going forward, you do need to take professional financial advice at the earliest opportunity and follow this all the way through. Do not gamble on your future for the sake of a few Euros!
If interested in giving a try to the FX tools, iAlert from Barclays it’s is an easy to use yet quite useful one.
Yes, it would affect my purchasing power (25.11%)
There’s no doubt that a collapse in the euro would immediately impact upon those living outside of Europe with assets and savings held in euros – this is a given. In this particular situation there would be an immediate reduction in purchasing power when exchanging into your local currency which could literally change your life forever. This is the second greatest concern of expats around the world and it is not difficult to see why.
However, the direct exchange rate of the euro is not the only potential fly in the ointment which could affect the purchasing power of expats around the world. Inflation has become a major problem around the world and while it is more under control today than it has been for the last two or three years it is still eating into the purchasing power of many people due to the fact that savings rates are near zero in many countries. In simple terms, if the interest rate on your savings is 1% and inflation is 4% then your savings are reducing in real terms by 3% per annum which leads to a reduction in your purchasing power.
The wider concern with regards to a collapse in the euro is literally a collapse in the worldwide financial system because the euro is a major cog in this massive machine. There are many expats who incorrectly believe that a collapse in the euro would only impact European countries when in reality the knock-on effect to the likes of the dollar, yen, sterling, etc would be enormous. This would be a catastrophe the likes of which we have never seen before and despite the trillions of euros injected into the European economy, any benefits would literally disappear overnight.
The reduction in purchasing power for many expats is perfectly reflected in local anger in the likes of Greece and Spain where riots in the streets have followed reductions in government spending, pension pots and wages. The European debt debacle is having a massive impact across the world and austerity measures introduced by European governments are among some of the more severe in the developed and the developing world. The situation is likely to get very much worse before it gets any better and even though the UK government for example seems to have the situation fairly under control it just takes one tweak of a credit rating or a collapse in a currency to undo all the good work so far.
Other reasons (12.22%)
To allow voters the chance to give their individual opinions we also welcome other comments regarding a potential collapse of the euro and any impact this will have on the expat market. There were many tongue-in-cheek comments although there were also a number of interesting comments which we will look at below.
My GBP would go further
This is an interesting comment in relation to the Great British pound which would initially benefit from a reduction in the value of the euro. However, the impact on the UK economy and UK finances would likely be far greater than any benefit from a reduction in the exchange rate. Therefore, this is perhaps a prime example of the difficulties facing financial experts trying to get the severity of the situation across to all parties.
I have dollars, let the euro crumble
This is a similar comment to the one regarding the Great British pound and while the dollar is a more widely traded currency than sterling it is inconceivable to think that the dollar would not be impacted by a collapse in the euro. The impact upon the worldwide economy would be immense, the financial cogs of the commercial markets would come to a standstill and we would literally be on the verge of credit crunch part two, the nightmare sequel.
Yes, very near future there may be a collapse
It is interesting to see that there are some expats out there who do actually fear a real short-term collapse in the euro and are potentially readying themselves for the problems ahead. Even if the euro does not collapse it is better to be forewarned that to be forearmed and put your own finances in order.
Already heavily affected me
We tend to look forward and discuss a potential collapse of the euro when in reality the damage has already been done for many people. Austerity measures around Europe have resulted in a massive increase in unemployment and indeed we have had riots in Greece and Spain for example with people protesting about government spending cuts. The problem is real, the problem is here and it is having an impact upon people’s everyday lives.
No, this whole monetary system could collapse at any time
Over the last few years we have been focusing on the problems affecting the euro and the European economy when in reality we should have learned lessons from credit crunch part one. A fairly innocuous rise in lending at the lower quality end of the mortgage market in America seemed at first to present no problems. However, when the heat began to cool on the US property market it became apparent that many of these low quality mortgages would be the subject of default and many mortgage providers ran for the hills. This small trickle of defaults very quickly ballooned into a major worldwide problem and the oil on the cogs of the worldwide financial system dried up. This perfectly illustrates how it just takes one part of the worldwide financial chain to break for the rest to suffer. Have we not learned any lessons from credit crunch part one?
It is very interesting to see how different aspects of a potential euro collapse affect different areas of the expat community and local population. Whether or not we will see a collapse in the euro remains to be seen but there is a growing difference of opinion within the expat market. Some believe there will be no collapse and have probably made no contingency plans to protect their assets while others are concerned about the impact upon savings and their purchasing power. There are others who seem very keen to play the currency volatility to their own ends and hopefully increase their wealth.
The truth is that the current economic situation we are facing is not one which has occurred during our lifetime. It is unique, it is deep-seated and it will take many years to correct even if the euro was to survive. Only a few years ago a number of economists put forward “scare stories” which were immediately discounted as the talk of “madmen” although unfortunately a number of these predictions have come true.
One main problem we will have in the future is the issue of protecting the worldwide financial market from problems in a relatively small area of the financial chain. Governments are taking action to try and reduce the risks taken by commercial banks, which many blame for the ongoing economic problems, but in reality these risks will return in the “boom times”. Human nature sees that we chase the dollar in the good times and we batten down the hatches in the bad times therefore creating massive swings on investment markets, in economic growth and in wealth.
If there is one thing which we need to get across to all expats around the world it is the necessity to take professional financial advice on an ongoing basis to protect your assets, your income and your future. Those who sit idly by expecting the euro to recover, the worldwide economy to move into boom time overnight and all financial issues to be resolved are kidding themselves. We are in the midst of the worst economic downturn in living history and many experts believe it will take decades to get back to anywhere near full health.
So, if you have made plans to move overseas then you need to re-evaluate the situation and take the necessary action. If you have moved overseas and you have assets directly or indirectly linked to the euro then you should take your head out of the sand and put in place insurances and support where possible. A review of your finances should be an ongoing activity because those who take their eyes off the ball in the short term may get a very short sharp shock when they refocus!