By Blanca Franch Camino
Correspondent, Undergraduate Economics Student
European Union students at the University of St Andrews have probably been wondering about the most intelligent way to behave regarding recent changes of their finances. Little did they know that many of the most important decisions were being made for them. In fact, during second semester last year European students may have realised that their euros were buying much less once converted into pounds than they used to (around 10 percent less).
This is because the European Central Bank’s (ECB) announced another round of the Quantitative Easing (QE) programme last January, dropping the value of the euro dramatically.
By now they may have gotten used to it, but European students should still be alert in order to be prepared for the coming movements in the currency market. Obviously, reading the real exchange market is not that easy; the views circulated by credit rating agencies and other companies doing financial research are anything but consistent. We can only speculate about what is going to happen and act on those assumptions.
Since 2014, forecasts have abounded that the Bank of England will eventually raise its interest rates. Theoretically, this implies an increase in foreign investment and a corresponding appreciation of the pound. However, the decision to raise the interest rates has been postponed, and up to this date, there has been no announcement of the change happening any time soon. Most recent rumours point at an expected rise in mid-2016. So, the official announcement of this policy should be expected around the first quarter of next year.
Meanwhile, the ECB has taken more unconventional approaches to its weak financial situation. The printing of money last May has actually eased the crisis, but whether this is sustainable will only be told by time. Unemployment has fallen to a level long not seen, while wages have picked up in some countries (Germany being the ultimate example). Therefore, consumer spending has been rising and the inflation target finally seems reachable again.
This has caused rumours that the QE plan will end sooner than the expected date of September 2016. However, Mario Draghi, President of the ECB, just hinted not only that he will continue until the initial ending date, but also that the ECB is looking into boosting the effects of the QE by increasing the quantity of money printed in the next batch.
After what happened last January, European students are probably already putting two and two together and thinking of another drop for the euro. Moreover, the Europe instability, partly due to Greece, reinforces the fear of the next conversion of euros into pounds leaving European students asking: will I have to decide whether I would rather give up eating or drinking?
Will I have to decide whether I would rather give up eating or drinking?
Luckily, there are some green shoots of hope for Europe. With the Greek crisis under control for the time being, the EU is now showing signs it could recover without the anticipated round of QE. Germany, for example, is maintaining steady growth, and stability is definitely one of the characteristics of Angela Merkel’s country. Also, the so-called “PIGS” (Portugal, Ireland, Greece and Spain) are entering a new post-crisis phase.
Italy’s Matteo Renzi has also set his country on a path of stability with his reformist government. The expectations of Italy’s growth have gone up from 0.7 percent in 2015 and 1.4 percent in 2016 to 0.9 percent and 1.6 percent, respectively. Spain leads the way to recovery with its 3.1 percent expected growth which is good news for southern Europe. In the end, despite the intense political crises (Grexit, Brexit, refugee crisis, etc.), Europe is on its way to relative financial stability.
Despite the political crises of Grexit, Brexit, and the refugees, Europe is on its way to relative financial stability.
Moreover, the United Kingdom is reluctant to increase the interest rate from 0.5 percent to 0.75 percent because the current global lack of stability increases the risk of such tactics (the BoE’s Monetary Policy Committee voted by a majority of 8-1 to keep the Bank Rate at its current value on 4 November 2015). Therefore, the long awaited change might not come before Europe has dealt with its own problems.
Furthermore, the ongoing QE programme might make it easier for the ECB to minimise the effect of British contractive monetary policy in the long run and to keep the overall difference between the euro and the pound constant. Thus, attracting investment in the Eurozone through the next few months and allowing the ECB to undertake the conventional sale of bonds (the contrary to what is currently happening) once the economy has begins to pick up.
Taking all of this into account, what is the best approach for Europeans in St. Andrews regarding their currency handling?
The euro/pound rate will actually affect your real life — European students are paying 20 pence more than they did last year for that black coffee from Taste.
If you invested in pounds in the summer of 2014, you were either very cautious, lucky, or simply a financial markets genius. Rather, chances are that you bought pounds during last semester, as a way to make yourself sure that if the situation worsened you would be covered, even if the price paid was not optimal anymore – better late than never. The fact is you still have time to make up for poor previous choices. You could place a bet on the pound going up against the euro.
What does this mean? Buying pounds is more expensive than before, but once you look at the forthcoming contractionary monetary policy by the BoE, it looks like a bargain. Bear in mind, however, that financial markets behave in the most unpredictable ways sometimes. A small shake in our assumption could lead us to losing our battle against the complicated world of exchange rates.
Having explained the factors that will likely influence the development of the euro/pound exchange rate over the next year, the choice is yours. You should keep in mind moving forward that the euro/pound rate will actually affect your real life — European student are paying 20 pence more than they did last year for that black coffee from Taste.
Featured image courtesy of Lightup4u, Creative Commons.