The Pound has had a rough time against the Euro, in recent months. But, whilst the UK economic climate is far from strong, the Eurozone economy looks to be experiencing increasing problems.

Led by the German economy, the Eurozone experienced a sharp contraction in the first quarter of this year. Eurozone GDP fell by 2.5% and the most optimistic forecasts show a decline of 4% of GDP.

It will come as no comfort to the Germany economy that they avoided a housing boom and bust and avoiding a similar credit bubble. It has shown the global recession has affected all countries – whether or not they were involved in the credit boom and bust.

So far the ECB have been the most cautious out of the Central Banks, ECB interest rates have fallen slower than in the UK and US. There is the possibility of ECB cutting rates even lower close to 0% interest rates. This would definitely weaken the value of the Euro.

Also, some analysts feel that the Pound’s weakness has been overdone and on purchasing power parity, the pound looks undervalued by 10 or 15%.

The UK still has many significant economic problems which could keep the pound undervalued

• Very high government borrowing (12% of GDP in 2009)
• Policy of Quantitative Easing to increase money supply increasing threat of future inflation.
• Deep recession.

Yet, these weaknesses of high borrowing and deep recession are now faced by Eurozone members as well. Also, although the UK may experience some inflation, it will mean UK interest rates have the prospect of rising and this would lead to a higher value of sterling.

The weaker value of Sterling and hopes the UK market may be bottoming out have caused foreign interest in buying UK houses. Neil Turner a Germany-based executive in charge of a 300 million-euro ($403 million) property fund says:

“Weaker sterling makes U.K. property more attractive,”

Barclays Plc predicts it will rise as much as 18 percent against the dollar and 11 percent versus the euro in the coming year.
Goldman Sachs Group Inc. sees a 23 percent gain versus the dollar and 15 percent advance against the euro.

Impact of not Being in the Euro on UK economy
Forecasts for Euro to fall
(bloomberg)

Tags: bank, banks, economic, inflation, market, million, money, percent, recession

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