No matter how battered the economy is, over 40% expats in Spain sure euro will never fall

A vast majority of expats in Spain believe the euro will not collapse

Over the last few weeks and months we have seen Greece grab the headlines with regards to economic uncertainty and the future of the euro but in the eyes of many it is actually Spain which holds the key to the future of the euro. Spain is the fourth largest economy in the Eurozone and despite a number of austerity measures announced over the last couple of years it is in grave danger of collapse. While politicians are very concerned about giving a negative spin on the Spanish economic situation there is a growing belief that if Spain was to fall this could drag down the likes of France and we could kiss goodbye to the Eurozone.

This may sound like something of a doomsday scenario but the reality is that Spain is in trouble and the situation is likely to get much worse before it gets better. Decided to solve up the enigma, Expat Forum has conducted a survey on behalf of Barclays Wealth and Investment Management to clarify how worried are expats in Spain about the euro collapsing.

No, it would never happen (41.18%)

Despite the doom and gloom surrounding the Spanish economy, the belief by many experts that Spain holds the key to the Eurozone it seems that the vast majority of expats in Spain are of the opinion that the euro will not collapse. Even though when amalgamating all of the individual country votes together there is still a distinct opinion that the euro will not collapse there is worry that many people are adopting a blind faith strategy as opposed to waking up and smelling the coffee.

Again, we’re not sure of the breakdown between non-European and European expats currently living in Spain who entered our online poll. However, we can safely assume that there will be a significant number of European expats living in Spain due to its ongoing popularity amongst a whole range of different nationalities. So the question now is whether the experts are reading the economic situation in Spain incorrectly or indeed the growing confidence on the ground regarding the future of the Eurozone’s fourth largest economy is a reflection of the correct situation?

We can only take these votes at face value of and despite ongoing economic concerns and funding issues it seems that the vast majority of expats would like the euro to survive and fight another day. This in itself is a useful element to consider from our online poll vote because general opinion prior to this ongoing issue seemed to suggest that many people were not overly concerned about the survival of the euro. Is this renewed confidence a consequence of recently introduced austerity measures which are hitting people hard yet giving the impression they are doing their bit for the Spanish economy?

Yes, it would affect my savings back home (17.65%)

It appears as though expats living in Spain are least concerned about the short-term future of the euro than their non-European counterparts. The 17.65% share of the vote in relation to a potential impact upon savings back home is less than the overall votes cast for this particular answer. So initially we have fewer people showing any concern about the future of the euro and now we have fewer people concerned about their savings back home. Is the rest of the world reading the European situation wrong?

The impact on savings currently denominated in euros would be the same whether you are living in Spain or any other Eurozone country. However, the overall impact of a collapse in the euro could well lead to lower interest rates to try and inject confidence into the markets which would effectively freeze savings accounts at their current levels. When you take into account even the most minimal inflation figure across Europe, even if many are currently in excess of 3%, the real time impact upon savings accounts within the Eurozone is detrimental. If interest rates are set at zero as a means of injecting confidence into the markets, and the cost of living continues to rise, then savings are effectively falling in real terms. Many people forget the fact that while their savings may well stagnate with zero or very little interest earned they are effectively going backwards as the cost of living moves up and up.

For those holding savings in non-euro accounts they may well feel protected in the short term from any problems within the Eurozone but as we have mentioned on numerous occasions, if the euro was to collapse then the whole world would be affected. The dream of a federal Europe is now laying in tatters and Eurozone members are now entering a vital phase of the recovery programme. The problem that the euro may have in the future is the fact that a concerted effort by investors to drive the currency lower, despite relatively upbeat statements from Eurozone members, certainly won the day. As a consequence, what is to stop investors targeting the euro in the future?

No, I use a FX tool of any kind to make the most of currency volatility (11.76%)

It seems as though some expats living in Spain have been looking at the currency markets in great detail and indeed a number have used foreign exchange tools to try and benefit from ongoing market volatility. This is an interesting development because it shows that while in general expats living in Spain do not believe the euro will collapse they are more than happy to benefit from currency volatility. But is this sensible behaviour?

The foreign exchange markets are in many cases the tail that wags the dog with the dog being the European wide economy. It is common knowledge that the vast majority of short, medium and long-term economic indicators are reflected in the currency markets prior to their transfer to relevant stock markets. Currencies are more susceptible to news flow, both good and bad, and very often “convenient leaks” can set the markets up for particular news. The idea of using foreign exchange tools to benefit from currency volatility would tend to indicate an interest from speculators looking for short-term gain. But is this the right attitude?

If you have moved to Spain to begin a new life then we can possibly understand if you wanted to use foreign exchange tools to insure and protect your existing assets and existing funds. But why on earth would you look to speculate with your financial future in a market which even the most ardent investors are finding very difficult to read. Moving to a new country is a stressful occasion at the best of times but adding market speculation to the mix will not help you settle down in the short term. Have voters ever considered using foreign exchange tools to insure their assets?

Hedging or protection strategies are very simple ways of putting a floor under your assets in relation to the exchange rate of the euro. If the euro was to collapse then you would simply activate your hedge/protection strategy and your downside would be limited. If the euro was to recover and go from strength to strength then you may feel as though you have wasted your “insurance premium” in the shape of the hedging/protection strategy but you have given yourself peace of mind during the most volatile and dangerous period that the euro has known.

Yes, it would affect my purchasing power (17.65%)

Despite the fact that more expats in Spain believe that the euro will not collapse the joint second top answers to our online poll suggests concern about their savings back home as well as their purchasing power. However, if we compare the 17.65% figure associated with expats in Spain against the average for the overall online poll of 25.11% then again we are starting to see signs of support for the currency.

If your savings and your income are already held in euros then it is difficult for us to see where your purchasing power might be directly impacted on a collapse. However, it would be impacted if you were looking to spend money overseas and had to exchange your euros, it would be impacted if inflation ran out of control and the cost of goods and services increased and it would be impacted if you’re savings attracted little interest. It is also worthwhile noting that in the event of a Euro collapse it is likely that unemployment would increase dramatically and there would be pressure on wages. This may also reduce your purchasing power in the short to medium term.

The worrying sign for many expats is the fact that savings rates have been relatively low for some time now yet inflation continues to cause concern. The net impact of lower savings rates and higher rates of inflation is that for the last few years each and every penny of your savings is reducing in value in real terms. This will have a major impact upon your purchasing power unless you are able to increase your income or increase your savings rate.

Other reasons (11.76%)

Again, it is very useful to get additional comments and additional suggestions from those who took part in our online poll. There were two main “other reasons” suggested by expat forum members in Spain which include: –

Wish the thing would! Might get back to the old Spanish prices again!

This is a very interesting comment by one of the expat forum members because very few people seem willing or able to compare previous Spanish prices in pesetas against those in euros. The indication with this comment is that there has been a general increase in the cost of living in Spain purely and simply because of the introduction of the euro and the time taken for prices to level out. A return to old Spanish prices again is something of a forlorn hope at this moment in time but if the euro did collapse would Spain return to the peseta?

I hope it collapses

The longer the European financial situation drags on the more those living inside of Europe and outside Europe will become exacerbated with the problem. This comment “I hope it collapses” is rather blunt and to the point but it does show a level of frustration that many people are now experiencing. If you are living in Europe then you are likely to have been impacted by the bailout fund already – we are talking literally billions upon billions of euros ploughed into Greece to prop up the ailing economy.

The cost of bailing out weak economies in Europe

The above comments are very interesting and give a snapshot of public opinion in relation to the ongoing euro crisis and Eurozone debt story. Many of the recent headlines have centred round Greece and the ongoing challenges faced by the government and while figures of multibillion euro bailout funds are causing concern, this is literally just the tip of the iceberg!

There are serious concerns that if Spain was to wobble this would have an impact upon the likes of France and potentially bring down the whole Eurozone. Germany is by far and away the strongest economy at the moment but even that would be impacted by the fall of either the French or the Spanish economies. The impact this would have on the Eurozone and the euro itself is not worth thinking about because it would literally undo the introduction of the euro and inject a massive dose of concern and confusion into the financial markets. The worst thing that can happen for financial markets is being left to face an uncertain future because even if the worst-case scenario is clear then they can price assets accordingly and so they can as well with a best case scenario. Uncertainty kills financial markets and investors will run for the hills.

Spanish economic growth

A recent survey in relation to the Spanish economy suggests that the country will not experience economic growth until 2013 at the earliest. This is very much been tempered by an increase in taxes and further austerity measures which are now being introduced across Europe. Initial projections with regards to required austerity measures in Spain were nowhere near the mark and just three months down the line the initial €15 billion austerity package program will likely grow to around €45 billion.

This ongoing problem in balancing the Spanish books will have a major impact upon the economy for some time to come and if the euro was to collapse the damage would be significantly worse. Even in the best case scenario we are unlikely to see any economic growth in Spain for the next two years and even then this will be very limited in scope. Investors have already attempted to bring down the Spanish economy although so far it has rallied and remained firm. However, if we see issues with regards to the Spanish budget and increasing government debt then this will make Spain a target for the speculators yet again and we could see the “tail wagging the dog”.

Expats across Europe are beginning to experience a reduction in income, job opportunities and for many there will have been a reduction in spending power. Despite the fact that Spanish expats are relatively upbeat at this moment in time slowly but surely the impact of further austerity measures will come to the surface. Whether or not this has a major impact upon short to medium term confidence in the Spanish economy remains to be seen but if the confidence of investors was to take another significant hit in the short term this could be catastrophic.

Conclusion

Spain has been and continues to be a major attraction for tourists and expats from around the world. Despite the fact that many other countries have joined the “expat party” Spain still remains relatively popular with many people. The impact of a collapse in the euro would be felt right across the Eurozone and ripples would reach every corner of the globe. Even though there appears to be more optimism than pessimism from Spanish expats regarding the collapse of the euro we are highly likely to see further economic problems in Spain. Anyhow, as rule of thumb when you are either living abroad or planning to do so – and even more in such a troubled era- it really pays off to be aware of the local idiosyncrasy and banking panorama. Barclays International Banking offers a free, very handy and easy to follow guide to banking in Spain.

Spain is the fourth largest economy in the Eurozone and any further downward pressure will impact the likes of Germany and France. There is talk that France could be dragged into the situation if Spain was to falter and this would literally take away the strength behind the Eurozone. There is no chance that Germany could maintain control and fund all bailout opportunities by itself as its own economy is not exactly flying high.

While it is good to see optimism from Spanish expats it is sometimes difficult to see where this optimism comes from with major austerity measures set to hit Spain. This will have an impact upon short to medium term confidence and indeed could affect consumer spending for many months to come. While it would be wrong to suggest that the euro is literally on the verge of collapse there is no doubt that Spain will have its own economic challenges in the short to medium term. If the authorities can maintain the underlying strength of the Spanish economy and the austerity measures bring about enough savings to save the Spanish government’s budget then perhaps there is light at the end of the tunnel?