Pound To Euro Parity

25th September 09 – Pound to Euro parity

Four euros for a small cup of black coffee seems quite a lot of money converted back to UK pounds. But that is what it cost this week in a small town in Germany. Two years ago at a rate of 65p to the euro, £2.60 would still have been steep and last year at 79p, even more so. But now, at about 91p, it is positively expensive.

I mention this not to gain sympathy, that can be left to the family with a few children in tow that have to eat, but because currency experts are predicting that the pound will reach parity with the euro within the first three months of 2010. The factor chiefly to blame is said to be the loose monetary conditions in the UK relative to the eurozone. In turn, the main cause of that looseness is debt, as commented upon yesterday.

Currency experts at BNP Paribas said “Sterling is likely to be the underperformer among the majors, despite a favourable global financial market environment, as the UK domestic picture is set to deteriorate with the fiscal/monetary mix in particular working against sterling.”

The big issue is that the eurozone is a major source of imports to the UK and a weaker pound makes such goods (many often just passing through) more expensive in pound terms and thus not helping when inflation times return. But, by the same token, the eurozone is the largest export market for UK businesses. Exported goods become cheaper to the buyer if invoiced in sterling and so on balance UK Ltd ought to come out on top (much to the annoyance of our German friends).

The cynical will say that this is all very well but unfortunately Britain’s export industry is shot to ribbons. To them I would reply that the first posh shop window we looked at in Rottweil help shoes. The shop was full of high quality shoes. Shoes made by Clarke of UK fame, the biggest shoe manufacturer in the world.

The moral to this story is, sell like there is no tomorrow to Europe, but tomorrow – do not go there.

Pearl of the week

“The European Union faces a quasi-existential crisis”

Mario Monti