The Lousy Exchange Rate of Pound to Euro

In 2015, I bought Euros for a trip. The exchange rate was almost €1.40 to the £1. Unfortunately, I had to cancel my trip in October 2015 due to problems with the health of herself – she had to go into hospital. But I still had the euros which I bought at that time when it came to my trip in April of 2016, so I  had no reason to check the exchange rate in April of this year. Only since Brexit have I needed to check the exchange rate. But what I found was that the exchange rate was falling for months before Brexit. I wonder why?

Here is a pic:

Chart of exchange rate values over time

You can see that in 2012, the rate of exchange was about €1.20 to the £1, and that that continued until the beginning of 2014 when the rate started to rise, culminating in a rate of around €1.40 to the £1 throughout 2015. That was when I bought the Euros that I mentioned. Now, the rate is back down to below €1.20 to the £1.

The above graph does not really show the effect of Brexit, other than that the rate of exchange started to fall well before the referendum. I have seen other graphs which are more detailed and show that the exchange rate started to fall towards the end of 2015, months before the referendum.

So what started the downward trend? Our economy was on the up whilst the overall economy of the EU was stagnant. Why does the pound now purchase a lower number of Euros? Why, now, is the pound at a low ebb compared with the Euro?

First, you can discount Brexit. The fall in the value of the pound started well before Brexit.

But wait….. What do we mean by ‘value’?

Think of it this way. Anyone in the Euro zone has to pay less Euros to buy British goods. Thus, for example, if a pound of sugar cost £1 in the UK in 2015 it would have cost €1.40 for a Frenchman to buy that pound of sugar. Now, that Frenchman can buy that pound of sugar for €1.20.

But, as usual, there is a price to pay. Imports cost more. Hard though it might seem to understand, going on holiday to, say, France or Spain, is the same thing as an ‘import’. When we book a room in an hotel in France, we ‘import’ that ‘value’. We ‘export’ the pounds Stirling.

If you book an hotel directly in Mallorca, the prices are quoted in Euros. If the exchange rate is low, then it costs you more pounds to book that room. Thus, in terms of pounds Stirling, that room becomes more ‘valuable’. But that also means that rooms in British hotels become ‘less valuable’, and thus tourism into the UK is encouraged. Tourism from the UK to the Eurozone is discouraged.

 

It is hard to get your thinking right. At a basic level, money is just a means to exchange value here and now. It has no future value. But there is no easy way to  convert money into ‘real value’. You can by shares in companies, but that ‘value’ has risks.

So when I go on my trip, I shall be looking for ‘value for money’. I expect that competition will reduce prices. And I expect to pay less for my pint and coffee.

That might not happen, but I do not care. I have paid for my half board and will take the best advantage of it that I can. And I shall buy tobacco products at the best price that I can. I shall demand a discount for quantity.

The more that the Zealots persecute us, the more that I shall resist – in my own way.

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