Classic / BOP, Economics, EU, Euro, Europe, Germany, Volatility / March 19, 2015

What affects the Euro

While economic theories affect the exchange rate on a long-term basis, the effect of political events and changes in economic data is more immediate.

In the case of Germany, market events and economic data coming from Germany and the European Union can make a direct impact on the trend and the direction of the Euro. Those market events and financial data changes also have an effect on stock prices and other financial instruments.

In comparison to other markets, Germany, as a member of the European Union, managed to lower the impact of volatility by following regulations, restricting the use of domestic currency by non-residents and setting limits on banks foreign exchange positions, which   reduced NEER volatility. Specifically, this refers to the after adopting limits on the net foreign exchange positions (IMF, 2004).

Currency exchange is a massive global financial market. Currency Exchange World Trade facilitates and enables access to foreign currencies for travel. With the advent of the Internet, e-commerce has significantly increased the need for foreign currencies. A converter currency calculator helps in calculating the applicable rates and the amounts corresponding to exchange currencies. There are many factors that determine the exchange rate applied. These factors are analysed below.

Measures taken by central banks

Interest rate decisions affect exchange rates significantly. As interest rates are increased, currency becomes more expensive. In the opposite case, it becomes cheaper. Other measures of monetary policy forces affect exchange rates as the actual bond purchases by the ECB and FED. Sometimes, even reports of central bank meetings create exchange rates volatility. Thus, the monthly reports of the Federal Reserve are thoroughly analysed by professionals in order to find out what the central bank wants to signal to markets and the path that is chosen to achieve targets.

Hard economic data

Exchange rates are influenced by relevant data that provides insight into the strength or weakness of the economy. This includes data on public debt and budget deficits. If this data is bad, the impact on the exchange rate is negative. A lasting, stable economic growth, a good labour market, and a fairly balanced trade balance all lead to a strong currency. The same is true for the steady development of purchasing power and a reasonable inflation rate, usually around 2%.

Financial indicators

This group includes most monthly surveys of consumer confidence, industrial production, the development of the service sector for storage, especially in long-term assets, the assessment of the economy of the future development (for example, ZEW indicator of the economic expectations), purchasing manager indices, and others. Sometimes there are early indicators that will be closed with the help of future economic performance of an economy.

Evaluation of rating agencies

Rating agencies assess not only the creditworthiness of individual companies but also the creditworthiness of the states. If the rating is positive, more interest has to be paid for debt. Significant downgrades of the rating have a negative impact on the exchange rate.

Speculation

Exchange rates can be artificially influenced by speculation. Large speculators are even able to create real currency crises. The consequences of currency crises may be the collapse of currency devaluation, or the task of a monetary policy fixed exchange rate. An example of a “successful” currency speculation was the actions of American investor George Soros, which went against the fixed exchange rate of the British pound to war in 1992. Once central banks recognize an attack against a currency, they try to take monetary policy defences. However, these measures are often not satisfactory. So, it was in the case of Soros. Despite all efforts, the Bank of England could not maintain the fixed exchange rate against other currencies and the British pound finally had to float freely.

Economic Partnerships

With commercial partnerships such as the European Union, the adoption positively affects the exchange rate and the dominance of such a currency in the world currency market. Such partnerships provide an economic region of stability and economic strength dominance over another county to win over currencies.

 

Bilateral trade

The trade that exists between two nations affects the exchange rates between the currencies of the two countries. When a country imports more than export from the same nation, the currency of the importing country loses value. The nation will demand more importers of other countries’ currency than they get from their exports. A currency converter can help calculate the cross-application exchange rate between two currencies in the country.

Balance of Payments

An international balance of payments determines how the national currency exchanges with other world currencies. The balance of payment is the difference between a country’s imports and exports. When a country imports more than it exports, it has a negative balance of payments. This means that the country cashes in more foreign currency from other nations as requested; it is less foreign currency from its exports compared to its import requirements. On the other hand, a balance of payment is positive when the exports of a country outweigh its imports in currency. A country with a negative balance of payments has unfavourable exchange rates.

German balance of payments

The German balance of payments is a comprehensive, systematic presentation of all economic transactions between residents and non-residents in a given period. In addition, it constitutes an important part of the balances of payments of the European Monetary Union and the European Union (Deutsche Bundesbank, 2015). It is divided into the following sub-accounts:

  1. Current account: trade, services, and income account
  2. Capital account
  3. Foreign exchange balance
  4. Adjustment item for external position of the Bundesbank
  5. Errors and omissions (remaining stock).

The trade balance recorded the export and import of goods in the balance of services (services) posted to the so-called “invisible exports and imports” of services and factor services in the areas of travel, transport and insurance services, investment income, patents, and licenses. The transfer balance sheet includes all payments made and received, private and public transfers, without consideration. These include remittances from migrant workers to their home countries, support payments, contributions to international organizations, and foreign aid.

The financial account recorded all receivables and liabilities to foreign countries. In accordance with the terms of financial transactions, a distinction was made between short-term and long-term capital account. The limit set by convention is one year.

The currency balance sheet shows changes in net foreign assets of the Central Bank. The net foreign assets consist of the foreign reserves of the Bundesbank minus its foreign liabilities. This reflects exchange rate fluctuations (exchange rate), in particular, the US dollar, forcing the Bundesbank to account for its foreign currency holdings to valuation adjustments. Second, changes in the allocation of special drawing rights are recognized by the International Monetary Fund.

The residual item is the balance of statistically unpaid spin-off transactions arising from differences in rating or recording errors in the summary of the main balance.

The balance of payments is a systematic presentation of all economic transactions between residents and aliens. In Germany, this data is obtained from the Federal Statistical Office of the movement of goods and the foreign trade law reporting the Deutsche Bundesbank. There is data on cross-border payments and capital and public and private households, as well as information collected from business relations with foreign countries. Along with the international investment position, statistics provide the necessary information about the global integration of goods and financial markets. Discussions on “locational competition” are also important. Multinational companies also receive information on trade and capital links between states. The balance of payments is also required by the European Central Bank to assess the monetary situation of the Euro. It will continue to be made available to the EU institutions, such as the Statistical Office (Eurostat). In addition, Germany has to fulfil reporting obligations arising from membership in international organizations (OECD, IMF). The methodological structure of the balance of payments is based on the requirements of the IMF (Balance of Payments Manual).

Notes in the balance of payments, the economic transactions of an economy are systematically aggregated with the rest of the world for a certain period of time, therefore, it is not a balance sheet in the sense of a point in time statements of assets and liabilities, but a flowing account. The balance of payments includes not only transactions that are associated with cross-border payments, but also commercial operations with no payments or immediate payments (Deutsche Bundesbank- Balance of payments, 2015). The German BOP for 2013 is showing a current account surplus of €206 billion, which is €7.4 billion higher than the previous year. This increase was caused by the economic improvements, which were barely accompanied by any rise in imports from outside of Europe. In addition, the German economy profited considerably from better terms of trade on the back of a considerable fall in prices of internationally traded commodities and semi-finished products. Export momentum was flat in 2013. This was mainly because  demand for German-made, high quality, capital and consumer goods in the emerging market economies (EMES) was more subdued during the reporting period than it was in  preceding years, when it went up (Deutsche Bundesbank, 2013).

Current Situation and Impacts on the Euro

Despite being an economic powerhouse of Europe, Germany, just like any other economy, is not immune to global financial crises. The country has government debt rate standing at 83.2 percent of its GDP and an unemployment rate of 7.1 percent. These statistics are based on 2010 findings. A significant portion of Germany’s strength is attributed to its strong manufacturing sector, meaning that the country never relies on financial services industry; neither does it depend on the property market. This explains why the country was not severely affected by the recent global economic crises. However, it is warned that the country might be exposed to future troubles because of its heavy reliance on trade with China in case there is trouble in the Asian markets.

The German economy is surely bolstering and buoying the euro. That is if the country was not there as an anchor to the stability of the euro, the world (mainly Europe) would not be witnessing recovery from the economic crunches. Nevertheless, the high economic weight by Germany does not mean that the country can do all recovery alone. The current crisis in Eurozone (occurred in 2014) has brought about skepticism among politicians and media houses across the continent, where some reports even mentioning old tensions and rivalries.

The experience of the integration within Europe designates that the selection of an exchange rate mainly depends on medium and long-term perspectives of the institutional and economic integration within a particular region. That is, the more the advancement of an area, the higher the need for stability of the exchange rate. It means that need for a stable exchange rate relies on a number of objective parameters. At the same time, the stability relies on the political willingness as well as on ability to implement the process of integration.

A number of impacts have played out from the integration and the current economic issues being witnessed. The single currency (Euro) could create confusion as it has over the past decades. Nevertheless, the feeling is that much greater outcomes are yet to be witnessed, which may include a breakup. It is hard to find a solution that will not involve the ECB, thus further weakening the euro in the future. The main problem here is the breakup of the integration, rather than the involvement of the ECB, where oil price becomes part of the problem due to the weakening of the euro. The collapse of the Euro is partly because of the weak demand for oil from China and Europe. The main reason for the collapse is the flourishing supply, and this has been compounded by panic selling of the euro currency.

Because of this, the fall in oil prices overstates the weakness of the world economy. On the other hand, no matter the reason(s) for the fall, it is expected that lower energy should assist with the re-ignition of a global growth. The other distress is the slow progress in emerging economies. The major part of the slowdown development took place from 2010 to 2012, after which the growth has been stable. The weakening of the euro is because of the economic impacts due to the current situation in Germany. The opinion here is as a resultant of bad news in regards to prices of the commodities.