The past few weeks have seen a sharp increase in the fears surrounding the future of the euro zone.
A general election in Greece on 6 May saw the ruling coalition win below a third of the vote, with left-wing and anti-bailout candidates gaining many seats. What’s more, despite the best efforts of the president, Greek MPs have been unable to form a government.
This situation has sparked widespread panic across the euro zone, as politicians and investors fear a ‘Grexit’ – a Greek debt default, followed by exit from the euro zone. With a second Greek general election scheduled for 17 June, financial tensions will continue to rise.
If Greece does walk away from its debts and the euro by reverting to the drachma, this could cause havoc on financial markets. Here’s how these events affect you:
1. Good news: cheaper holidays
At the start of this year, one British pound would buy you €1.20, so one euro was worth about 83p. However, weakness in the euro zone has caused the pound to strengthen to €1.25, which means one euro is now worth just 80p.
In other words, this means that your pounds will go further when shopping or holidaying in any of the 17 euro-zone nations, which are Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Portugal, Slovakia, Slovenia, Spain and the Netherlands.
In effect, your pound is worth about 4.2% more than it was at the beginning of the year (ignoring currency-conversion charges). The pound’s strength in 2012 is like getting a £1 discount for every £25 you spend in the euro zone.
However, while the strengthening pound makes for cheaper euro-zone hotels, meals and travel, it is unlikely to affect the price of airfares (unless you book these abroad and pay for them in euros).
2. Good news: bargain breaks
Yesterday, European statistics office Eurostat revealed that the euro-zone economy had failed to grow in the first quarter of this year, recording 0.0% growth. Even worse, the euro zone had also stagnated over the 12 months to March 2012, so it simply isn’t growing at present.
Then again, some euro-zone countries are doing much worse than others. In fact, some European states are back in recession, thanks to stubbornly negative growth. Worst hit are Greece (down 6.2%), Portugal (-2.2%), Italy and the Netherlands (both -1.3%) and Spain (-0.4%).
Thanks to these economic troubles, there are big bargains to be had for holidaymakers, especially those jetting off to Greece, Ireland, Portugal and Spain. To attract more foreigners, hotels, resorts and car-hire firms are slashing their prices, making summer holidays and city breaks considerably cheaper this year.
3. Good news: cheaper holiday homes
Although the UK’s property market has bounced back since the lows of spring 2009, the same can’t be said for home values in many European nations. In many states, property prices continue to slide, making holiday homes cheaper for British buyers.
For example, in Ireland, property prices fell by a sixth (16.7%) in 2011, adding to steep falls since its property bubble burst in 2007. Even so, with Ireland’s economy still shrinking, house prices are likely to keep falling throughout 2012.
Spain is also in a pickle, thanks to a housing boom and bust remarkably similar to Ireland’s.
Indeed, after four years of steep falls, holiday-home prices in some parts of Spain have fallen by more than 50%. Furthermore, thanks to massive oversupply and negligible demand, Spanish villas are almost impossible to sell in this dead market. One day, they may offer potential bargains to buyers prepared to drive a hard bargain, bag deep discounts and play the long game.
In addition, with Greece’s economy in meltdown, Greek property is sure to get a great deal cheaper. Even so, with the Hellenic nation on the brink of exiting the euro, now is not the time to pile into Greek villas.
4. Bad news: lower wealth
On 16 March, the FTSE 100 – the UK’s main stock-market index – hit a 2012 closing high of 5,966. Since then, the ‘Footsie’ has tumbled almost a tenth (9.5%), dropping to below 5,400 as I write.
Share prices have tumbled for a simple reason: risk-averse investors are selling shares, because they worry about the economic and financial consequences of a Greek exit from the euro. Hence, they are selling risky stocks and sheltering the proceeds in safe government bonds.
As a result, the yield on 10-year Gilts (UK government bonds) has fallen to 1.87% a year. This is the lowest yield in history, since Bank of England records began in 1703. The good news is this makes it much cheaper for the UK government to service our £1 trillion of public debt.
In summary, if you have any money invested in shares, including in pension funds and insurance policies, then your wealth has probably taken a knock in the past two months.
Don’t get burnt
Finally, if Greece does indeed drop the euro and return to the drachma, this is likely to crush the value of Greek assets. When Argentina defaulted on its debts in 2001, foreign investors lost around seven-tenths (70%) of their money.
A Greek default would be the biggest bankruptcy in history, which is sure to produce massive losses across the euro zone and beyond. That’s why I would urge you to minimise your personal financial exposure to euro-zone assets and, in particular, to crisis-ridden Greece!
