As the Euro weakens, the impact on wealth management for expats on the continent is becoming a point of increasing concern. Whilst the threads that bind the single currency together begin to unravel, it is clear that investors have a lot to lose in the event of an uncontrolled break-up of the Eurozone. The pain will be felt particularly by expatriates in terms of their pension fund holdings.
To be or not to be; that is the question…….
The Euro is as coveted a prize to the European mainland as the Higgs boson has been to particle physics. The discovery of the latter may unlock the door to our understanding of the universe, whereas the creation of the former was heralded as one of the greatest economic and political advancements of the last century.
A lot of energy has been expended over the years in order to avoid a clash of interests among European Member States. Despite this effort, it now appears that certain governments have managed their deficits as if they have been living in a parallel universe, ignoring even the most basic of agreements. The absence of governance in applying rules has set Member States on a collision course which may ultimately end in a ‘big bang’ for the single currency.
Whilst the results of the Higgs experiment have so far proven inconclusive, the probability of a Euro collapse occurring is almost down to a ‘toss of a coin’ with a 50% likelihood of a break-up. Europe’s politicians have finally grasped the gravity of the situation and are now attempting to solve the Eurozone crisis through fiscal union. However, this new development does not disguise the fact that the monetary union is fundamentally flawed and is thus unlikely to convince the markets.
Devaluation and wealth management
In order to revive growth in the weaker peripheral countries, the European Central Bank (ECB) lowered interest rates on 8 December from 1.25% to 1%. It is envisaged that the ECB is prepared to reduce rates even further over the coming months if necessary to stave off recession. Such actions will also have the net effect of weakening the value of the Euro significantly and will result in the erosion of discretionary spending power related to pensions.
The Euro is currently trading just below $1.30, with some analysts predicting that it could trade within the $1.10 – 20 range by the end of the first quarter of 2012.
It is difficult to speculate on all possible future paths that the Euro crisis may take; indeed the situation can yet be retrieved if proper structures are put in place and adhered to. However, in the event of default by Greece, Spain or Portugal, a move to reinstate previous national currencies would likely trigger a run on domestic banks. This may also coincide with a much smaller core of European Member States clubbing together in order to retain a strong Euro.
In any case, wealth management advisors are taking the prospect of a Euro break-up more seriously. Investors may witness the value of their holdings rise, fall or become subject to prolonged legal uncertainty, depending on how any break-up would occur. Exchange rate adjustments would have an impact on the wealth of expatriates, with pension portfolios that hold net assets in foreign currencies gaining from devaluation, and vice versa.
There is always a certain element of ‘dice- rolling’ when conducting an experiment. Scientists at Cern in Switzerland predict that within one year we will know whether the Higgs particle exists; the fate of the Euro will become known much sooner.
Watch this space!!