Just how much is the euro overvalued?

For the most part, the relative valuation of currencies isn’t something that affects day to day life for most people.

After all, outside holidays, how often do you directly buy something from overseas? Even with Internet sales sites as numerous as they are, in reality most people buy from their closest outlet for the simple reason that to do otherwise would add to the shipping costs. Even when that’s not so much the case it needs a major price disparity to make it worthwhile shipping internationally for most products.

However, that all changes when it’s a major transaction such as a house. Which is why we find ourselves wonder just what’s going to happen to the sterling/euro rate over the next six months or so.

Frankly, most ways of predicting the future direction of exchange rates are little more than gambling. However, looking at it historically the rate has been between 1.50€ to about 1.05€ over the last five years and around 1.10€ to 1.25€ over the last year. Perhaps more importantly though is that the Euro is clearly overvalued a lot. For example, the Big Mac Index puts the over-valuation at 30% (ie the 1.50€ from getting on for five year ago is the right one); the problem is that it can take a long time before a currency reaches its correct exchange rate, however one might define that.

So what’s a person to do?

In practice most people do nothing which leaves them wide-open to what can be massive exchange rate differences. For example, that 15% change over the last year might not sound like much but translate that into a house price of, say, 200,000€ and you could be looking at a change of around 30,000€ which isn’t small change obviously.

Second choice is to translate the prices into your own currency at the current rate and build that into the sale contract. A reasonable option for you, if you can convince the other party into running with it. Chances are that in reality this is going to be a non-runner.

Finally, there’s the option of using one of the currency exchange places and fixing the exchange rate in advance. There are a whole lot of options with this route but the principle differences are between committing yourself to buy/sell at the rate quoted and getting an option to buy/sell at that rate. It’s much, much better to run with the option as, of course, the exchange rate could move in your favour. With an option, you can change your mind and exchange at the better rate.

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2 Responses to “Just how much is the euro overvalued?”

  • Gordan Finch says:

    The Euro is massively overvalued by fraud and much worse by the Insurance industry Bailouts.

    Zurich Financial Services Announces Settlement Of U.S. Class Action Litigation
    Thursday, 7 Oct 2010
    Zurich Financial Services announced that it and its wholly-owned subsidiary, Farmers Group, Inc. (FGI), have agreed in principle to a proposed comprehensive settlement in the matter of Fogel versus Farmers Group, Inc. The proposed settlement will resolve all claims, dating back to 1999, in a complaint originally filed in August 2003. In the lawsuit, the plaintiff challenged the management services fees paid by the Farmers Exchanges to FGI and certain of its affiliates, which under policyholder subscription agreements act as the attorney-in-fact for policyholder subscribers of the Exchanges. Zurich and FGI do not accept that there is any basis for the plaintiff’s claims regarding the management services fees that FGI charged to the Exchanges. Under the terms of the settlement, a sum of USD455 million will be made available to up to 13 million policyholders

    Zurich also will pay attorneys’ fees to class action counsel of up to USD 90 million. As part of the settlement, the plaintiff has agreed to dismiss the case and drop all claims against FGI and its parent Zurich.
    Zurich Financial Services.

    Zurich Financial Services Places EUR425 Million In Subordinated Debt In Europe-DJ
    Tuesday, 21 Jul 2009
    Dow Jones reported that Zurich Financial Services said it placed EUR425 million in 30-year subordinated debt with investors in the European institutional market.

    American International Group, Inc. announced that it has closed the sale of 21st Century Insurance Group, the wholly owned subsidiaries of American International Group, Inc.’s U.S. personal auto insurance business, to Farmers Group, Inc. (FGI), a subsidiary of Zurich Financial Services, for $1.9 billion, consisting of $1.7 billion in cash and $200 million in face amount of subordinated, Euro-denominated capital notes backed by Zurich Insurance Company, Zurich Financial Services’s principal operating unit. FGI also assumed 21st Century`s outstanding debt of $100 million. The transaction excludes American International Group, Inc.`s Private Client Group, which provides property and casualty insurance to high-net-worth individuals.

    Zurich Financial Services Completes Placement for CHF 1.26 Billion
    Friday, 17 Apr 2009
    Zurich Financial Services announced that the Company has completed the placing of 4.8 million new shares issued under Zurich’s Authorized Share Capital and of approximately 1.9 million existing treasury shares, bought back in 2008 on a secondary trading line, with institutional investors via an Accelerated Bookbuild. The book was oversubscribed, and shares have been placed at CHF 188 per share resulting in gross proceeds of CHF 1.26 billion. The shares being placed represent 4.7% of Zurich’s registered share capital prior to the placing.
    American International Group, Inc. To Sell 21st Century Insurance Group To Zurich Financial Services Group Unit
    Thursday, 16 Apr 2009
    American International Group, Inc. and Zurich Financial Services Group (Zurich) announced an agreement to sell 21st Century Insurance Group, the wholly owned subsidiaries comprising AIG`s U.S. personal auto insurance business, to Farmers Group, Inc. (FGI), a subsidiary of Zurich. Under the terms of the transaction, FGI will pay AIG $1.9 billion, consisting of $1.5 billion in cash and $400 million in face amount of subordinated, euro-denominated capital notes backed by Zurich Insurance Company, Zurich`s principal operating unit. FGI will also assume 21st Century`s outstanding debt of $100 million. The transaction is subject to satisfaction of certain conditions, including approvals by appropriate regulatory authorities.

  • Gordan Finch says:

    One of the most audacious frauds being perpetrated on the population of Europe was the bailout of Greece, and the expected default. Which will happen by other more significant countries like Italy and Spain. Germanys reluctant taxpayers support of these weaker countries is collapsing. The massive overvaluation of the Euro is a crisis fraud. It is an unconscionable theft of taxpayer’s money to avoid the inevitable default of a major country like Italy or Spain and a run on its banks.

    This time the situation is serious there is no bailout option unless the Euro is revalued or at least devalued in relation to PIIGS local fiscal conditions. This at least will give it a competitive advantage and limit contagion. But it’s unlikely; the last golden goose of manufactured austerity will die. Before the real cost of fuel tax and duty is realised as the culprit. This tax is destroying everything with inflation. But before the IMF fraudsters release their control all first world manufacturing will have ceased.

    We saw similar plays in the US a war of politicians and public who were asked to vote in tax increases on top of job losses just before the debt ceiling was reached? Now Europe’s future is in the hands of America and Germany.

    Germany’s Federal Court decides next week the questionable support of defaulting countries. See extracts from Money morning below.

    What’s at issue for the Constitutional Court is whether Berlin broke the EU’s Maastricht Treaty, which unequivocally stipulates that member states cannot assume each other’s debts. And, more germane to German citizens and the center-right coalition government, will be the Court’s ruling on whether German Chancellor Angela Merkel’s decision to fund the bailout facility circumvented constitutional requirements to put such fiscal matters before the German parliament.

    And while the court isn’t ruling directly on the EU’s currency – or Merkel’s support of it – the decisions rendered will have consequences for the euro’s future and by extension, the EU as a whole.
    Money Mornings report By Shah Gilani, Capital Waves Strategist, Money Morning.

    The clock may be ticking on the future of the European Union (EU).

    After being shaken to its core by the sovereign debt crisis, the entire Eurozone now runs the risk of blowing up within a week.

    Germany’s highest court, the German Federal Constitutional Court, on Sept. 7 rules on the legality of German participation in the euro rescue fund that was established to bail out Greece.

    If the court rules that Berlin’s commitment to the European Financial Stability Facility (EFSF) goes against EU law, or worse, against the German constitution, the entire Eurozone could collapse.

    Whilst my opinion is somewhat different in timescale than Money Mornings report, I agree the situation is serious.

    Look at the state of affairs with Ministers and Newscorp these meetings in the UK appear one sided with senior Government officials and questionable Newscorp board members. What we have is crooks in suits, payments to police, its fraud, but normal business. The banks are bust, the Government is corrupt, the Police take bribes, the Ministers are backhanded, the MPs are fraudsters, the Insurers are the vilest fraudsters and most dangerous financial predators on the planet, and certain media moguls are insane spies.

    We had gold, the only safe currency, but a creep from Scotland sold it for peanuts.
    Did anyone ask why it was sold, who bought it and. How much was sold and more importantly just how much remains in Britain now. Certainly a lot is now in Switzerland. You know, that bunch of criminals that are so secret they wont know who owns what, when asked. The BIS bank of international settlement springs to mind here and the IMF, its leaders, set free by money and friends in high places.

    Then we have the UN and the World Bank both manipulative gangsters and that guy in Europe rumstroff or something that nobody knew, heard of or had an opportunity to vote in.

    But today is another day, its fraud of cause but then who cares, its just the taxpayer who pays and nobody cares, well at least those in Government don’t, so its up to just you and me, to change things with the ballet box.

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