The euro is here, but how will it affect you? Belinda Beresford reports
Like Spock and Captain Kirk caught in a malfunctioning transporter beam, the euro is not yet fully in this world. It is still elusive, existing only in cyberspace, on price tags and travellers cheques.
The real notes and coins won’t be jingling in pockets around the world for another three years. Anyone who can’t bear the anticipation can have a preview on one of the Internet sites dedicated to the euro.
It’s tempting to regard the furore about a currency coming into being a continent away as irrelevant. But the impacts are going to be pervasive even for countries at the tip of Africa.
South Africans planning, or holding, international investments should be looking at the impact the euro will have on their financial strategy.
Local financial institutions already have euro-compatible products. For example, Standard Bank’s European Growth Fund is euro- denominated for local investors, while two euro-based funds are available through the bank’s offshore operations. Nedbank is offering euro- denominated deposit accounts to personal bank clients via the bank’s London office.
But like the latest editions of certain ubiquitous software programs, the latest offering is not always the best. Swopping your sterling or dollar investments into euro-based ones just for the sake of it is probably not a good strategy. But it would be good for your broker, who would be getting commission on all the transactions involved.
The launch of the euro means there are now five big currencies: the Swiss franc, the Japanese yen, the United States dollar, British sterling and the euro. It is generally accepted that the euro will gain in strength against other major currencies. But whether that means you should buy into euros in the hope of gaining from appreciation of the currency is debatable.
Brian Romelfanger, of FNB Corporate Bank, points out that like any other investment decision, such choices primarily depend on your appetite for risk, and what your time frame is. If you’re primarily interested in preserving your capital, then an important criterion would be currency stability. If on the other hand you’re less bothered by risk, well then interest rates in Britain are relatively high at the moment, so sterling investments are giving good returns.
A diversified portfolio is always a good strategy. According to one banker: “Invest in euros but put a chunk in dollars.”
The consolidation within Europe will help investors make decisions by removing currency fluctuations and leaving decisions to be made on the merits of the companies and financial products on offer.
The European Monetary Union (EMU) will probably lead to even greater financial unity. This year sees the London and Frankfurt stock exchanges link their settlement operations, probably the first step in a merger. Carried to its logical conclusion, the not too distant future may see a pan-European stock exchange.
On a larger scale, events in Europe could bode ill for South Africa by contributing to a capital crunch in emerging markets. Since the – untried – euro could still be regarded as speculative in some quarters, investors may choose to put money into euro-denominated government debt rather than riskier emerging market debts. For South Africa this could mean higher interest rates in an attempt to make the country more attractive to foreign capital and prevent it moving into Europe.
Absa treasury’s chief financial economist Craig Zaayman says reduced currency volatility in Europe, owing to the fixed internal exchange rates, could also cause problems for South Africa. Such calmer waters will mean traders will seek profits by exploiting volatility elsewhere – and South Africa is a possible target.
n South Africans visiting Europe are likely to gain from the new regime, Ian Wylie writes from London.
Anyone planning to travel to Austria, Belgium, Finland, France, Germany, Italy, Ireland, Luxembourg, the Netherlands, Portugal or Spain will find it difficult to avoid the euro. You are likely to see dual pricing of goods in euros and the local currency. In the longer term, price transparency, thanks to the euro, could also mean cheaper fares and car rentals. The strength of the euro may have an impact on the cost of holidaying in Europe. A strong euro, for example, could make holidays to Spain or Italy more expensive compared to non-EMU destinations such as Greece.
The real advantage of the euro, however, will be to holidaymakers and business travellers who hop from one country in Euroland to another. If you plan to visit more than one EMU country, you might consider taking some euro-denominated travellers cheques, which are available from issuers such as American Express, Thomas Cook and Visa.
These will save you dealing costs as you won’t need to exchange money when moving between countries. It is estimated that someone travelling through all 11 EMU countries changing money as they went would lose 40% of the value of their money in bureaux de change costs.
Paying by card is likelier to be more straightforward and plastic will probably be most travellers’ passport to euro shopping before euro notes and coins are introduced. While credit card purchases should theoretically be possible already, it will take some time before every retailer has the in-store technology to process the transaction.
Buying a product or a service in euros won’t be any different from buying it in francs or pesetas. Your credit card company will still make a foreign exchange charge to your account.
But with a euro-denominated card it should, in theory, be cheaper for holidaymakers travelling around Europe to settle their bills because card issuers won’t be able to charge currency conversion fees for transactions that involve two separate currencies as billing will be in euros too.