Watch the exchange rate!
The last few months we have seen extreme volatility in the exchange rate of UK sterling between both the US dollar and the euro. However, despite signs of recovery in the UK economy, Mervyn King (the Governor of the Bank of England) recently encouraged a large fall in the exchange rate by declaring that the UK recession was not over and there were still issues to consider in the short to medium term.
Whether or not Mervyn King is correct in his assumption that the UK recession is far from over, his comments were interpreted by the currency markets as an admission that the UK government and the Bank of England would prefer to see sterling at lower levels to encourage overseas investment in the country. There was also an indication that the Bank of England was “unwilling” to offer any protection to sterling in the short to medium term thereby effectively announcing “open season” for short-term attacks on the UK currency.
While there are many different countries around the world which are attracting the interest of UK expats and expats from other countries, there is no doubt that Spain continues to be destination number one for many UK citizens. The mix of sand, sea and a quiet life in later years has attracted not only those looking to retire to Spain but many younger families and couples looking for a new life.
For many years Spain has been seen as the poorer country compared to the likes of the UK but since adopting the euro, something which the UK government has failed to do so far, the cost of living in Spain for those with Euro denominated assets has remained steady. But what about the situation for those with assets in the UK who are exposed to the currency exchange rate?
Expats with UK income
While many expats who have moved to Spain from the UK will have sold their assets, many will still retain assets in the UK, whether this is property which is being rented out or funds which are invested in UK denominated assets. As a consequence, many will receive regular income in sterling which they need to convert into euros so that they can fund their life in Spain. However, there are also more a more expats living in Spain who receive a state pension from the UK government which again needs to be converted from sterling to euros before they can spend it.
Aside from the fact that the UK state pension has been falling in real terms for many years now, many expats are losing significant amounts of money due to the falling exchange rate. When you consider that when the euro was first introduced to places such as Spain you were able to acquire three euros for two pounds you will soon realise the problems many face with sterling now just over parity with the euro.
The Spanish economy
As we covered in one of our recent posts, the Spanish economy is in no way shape or form out of the woods yet and there are concerns that the worst may be yet to come in the shape of a depressed property market, growing national debt and a negative outlook on the employment market. However, despite the fact that the Spanish economy is still struggling, the fact that the country adopted the euro some time ago at least ensures that the exchange rate within Europe is not only influenced by the Spanish economy, but the “Eurozone” as a whole.
The UK economy
While there is a feeling that the UK economy may well be over the worst, recent comments from Mervyn King on behalf the Bank of England, would suggest that maybe some investors are starting to look too far ahead. The budget deficit for this year alone will top £175 billion, national debt is now well over £1 trillion and tax rates are set to balloon in the short to medium term. Make no mistake about it, the UK economy and UK finances as a whole are in trouble and this will impact upon the exchange rate for many months to come.
As a consequence, even if the cost of living in areas such as Spain remains fairly steady in the short to medium term, those with UK assets may well continue to suffer from relative price increases because of the exchange rate when converting from sterling to euros.
Considering the cost of living in your new homeland
If you are moving from one area of the euro zone to another and both of the countries in question have adopted the euro then there is no currency risk whatsoever. However, if you’re even moving from the Eurozone out of the Eurozone or moving from a non-euro country into the Eurozone then there may be further issues to consider. While on the surface they may only be a number of “big issues” to cover before you decide upon your move, in reality each and every country around the world will have different considerations and different issues to take into account.
As ever, it is vital that you do your homework when moving overseas and take advice where necessary because with the best will in the world it is very difficult for one person or one couple to cover all points when looking to move overseas and start a new life.
Conclusion
When the UK economy was fairly stable and the UK currency was as high as two dollars to the pound it was easy for many people to ignore potential currency risks when moving overseas. However, the ongoing worldwide recession has seen enormous swings in a number of currencies around the world which has impacted to differing degrees in different countries.
For some people there may be the option to convert all of their assets into euros, in this particular example, but for others who receive pensions and other sterling income this may be impossible. In many ways some people have no choice and are effectively at the beck and call of the currency markets although we have to make the point that recent movements in exchange rates have been “severe” to say the least. Whether we will see the likes again in our lifetime is debatable but that is of no consolation to those who are suffering at the moment.
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