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Euro Bound To Fail Say Top Bankers


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You are selling your goods abroad for foreign currency.

How do you think China does it?

Lower taxes? Lower wages? Cheaper housing for workers. China will have exactly the same issues, just that they can still do the manufacturing for less than what it costs to do it in the same way here.

Germany can manufacture lots and do well with a stronger currency, so it shows that devaluation makes not a blind bit of difference.

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Lower taxes? Lower wages? Cheaper housing for workers. China will have exactly the same issues, just that they can still do the manufacturing for less than what it costs to do it in the same way here.

Germany can manufacture lots and do well with a stronger currency, so it shows that devaluation makes not a blind bit of difference.

Germany is a value manufacturer. Naturally, they couldn't manufacture trinkets.

If the euro devalues against the pound - making German made BMW's more affordable in Sterling terms do you think

A. UK Demand for BMW's will stay the same

B. UK Demand will decrease

C. UK Demand will increase?

Edited by Police
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If the Euro devalues against the pound, it is very likely to be devalued against other currencies. I don't see the pound suddenly showing any strength. If the Euro weakens against other currencies, in particular the pound, then of course BMWs should be cheaper to import into the UK. However the effect would likely not last long as BMW would have to start paying more Euros for the materials it has to buy in, with which it makes its cars. It is not in the business of making cars at a loss, so it would need to increase the price of its car in Euros, to carry on being profitable, which would likely remove most of the effect of devaluation.

BMW is not actually that concerned about demand from the UK, as it has long waiting lists all over the world. It would have no concern about increasing its prices.

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I think you are correct. The mooted 'Super Euro' zone doesn't include Belgium, only the Netherlands. In fact, only the current AAA countries - including Austria.

Poland has absolutely no plans to join and wouldn't fit the accession rules anyway - higher interest rates, defecit, so on.

Poland is still planning to join the Eurozone, its deficit is falling rapidly (they are only borrowing 60% of the predicted amount this year). Income tax, GDP up and spending down. Its enjoying strong economic growth and normal interest rates of about 5% to cool inflation.

Interest rate has got nothing to do with Euro membership.

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Poland is still planning to join the Eurozone, its deficit is falling rapidly (they are only borrowing 60% of the predicted amount this year). Income tax, GDP up and spending down. Its enjoying strong economic growth and normal interest rates of about 5% to cool inflation.

Interest rate has got nothing to do with Euro membership.

All that with a young population that left and came to the UK...how have they managed that ?

Is it maybe all the money said young population send from here to there ?

Edited by TheCountOfNowhere
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Basic maths tells you the difference it makes. If I run a steel mill and import iron ore and gas to make steel with and then I sell the finished product for 20% more than the cost of the materials, the profit margin is wiped out if I have to pay 20% more in sterling terms for the materials. To keep making a profit I need to increase the selling price. This of course wipes out the effect of devaluation that made the product cheaper to buy with other currencies.

The cost of adding value at the steel plant becomes cheaper with a devaluation no?

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If the Euro devalues against the pound, it is very likely to be devalued against other currencies. I don't see the pound suddenly showing any strength. If the Euro weakens against other currencies, in particular the pound, then of course BMWs should be cheaper to import into the UK. However the effect would likely not last long as BMW would have to start paying more Euros for the materials it has to buy in, with which it makes its cars. It is not in the business of making cars at a loss, so it would need to increase the price of its car in Euros, to carry on being profitable, which would likely remove most of the effect of devaluation.

BMW is not actually that concerned about demand from the UK, as it has long waiting lists all over the world. It would have no concern about increasing its prices.

Consider a european manufactured item for export at two exchange rates:

With exchange rate of 1USD = 0.73EUR

Fixed Costs : 200EUR

Raw Material Cost: 1000USD @0.73 = 730EUR

Export Income : 1500USD @0.73 = 1095EUR

Margin: 1095EUR - (200EUR + 730EUR) = 165EUR

With devalued EUR exchange rate of 1USD = 0.83EUR

Fixed Costs : 200EUR

Raw Material Cost: 1000USD @0.83 = 830EUR

Export Income : 1500USD @0.83 = 1245EUR

Margin: 1245EUR - (200EUR + 830EUR) = 215EUR

Edited by Police
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Consider a european manufactured item for export at two exchange rates:

With exchange rate of 1USD = 0.73EUR

Fixed Costs : 200EUR

Raw Material Cost: 1000USD @0.73 = 730EUR

Export Income : 1500USD @0.73 = 1095EUR

Margin: 1095EUR - (200EUR + 730EUR) = 165EUR

With devalued EUR exchange rate of 1USD = 0.83EUR

Fixed Costs : 200EUR

Raw Material Cost: 1000USD @0.83 = 830EUR

Export Income : 1500USD @0.83 = 1245EUR

Margin: 1245EUR - (200EUR + 830EUR) = 215EUR

Your example highlights my point exactly. In you example, the company has increased its finished product cost from 1095 Euros to 1245 Euros. In your example the fixed costs have not yet been affected by the devaluation, but in time the fixed costs are likely to increase. The customers purchasing in Dollars are paying the same as before. Obviously the company has a bit more profit in Euro terms, but as the Euro has devalued, it is not really a much better position than before.

Edited by BalancedBear
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Your example highlights my point exactly. In you example, the company has increased its finished product cost from 1095 Euros to 1245 Euros. In your example the fixed costs have not yet been affected by the devaluation, but in time the fixed costs are likely to increase. The customers purchasing in Dollars are paying the same as before. Obviously the company has a bit more profit in Euro terms, but as the Euro has devalued, it is not really a much better position than before.

The USD price hasn't change. The export market isn't affected. The increase in euro price is a non sequitur - foreigners are looking at the USD price.The goods are priced in USD. There's now more margin to lower prices and increase turnover.

What are the fixed costs?

Depreciation of plant & machinery. Fixed over the term of disposal.

Labour costs - fixed by contract and market conditions.

Local taxation - fixed.

If plant and machinery is purchased from abroad then this of course increases your contributions to the depreciation reserve. But you have increased income and market share to compensate. If an American competitor can buy that equipment and still have a viable business - so can I.

Edited by Police
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The USD price hasn't change. The export market isn't affected. The increase in euro price is a non sequitur - foreigners are looking at the USD price.The goods are priced in USD. There's now more margin to lower prices and increase turnover.

What are the fixed costs?

Depreciation of plant & machinery. Fixed over the term of disposal.

Labour costs - fixed by contract and market conditions.

Local taxation - fixed.

If plant and machinery is purchased from abroad then this of course increases your contributions to the depreciation reserve. But you have increased income and market share to compensate. If an American competitor can buy that equipment and still have a viable business - so can I.

Your example assumes that all exports are bought by customers paying with Dollars. This is obviously not really the case though. The customers paying in Dollars have received no benefit from the devaluation of the Euro. There is therefore no change (in Dollars) to how competitive the price of the product is. This is normally given as the benefit of devaluation. On the flip side, the price in Euros has risen, so more expensive to those buying with Euros.

Edited by BalancedBear
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Your example assumes that all exports are bought by customers paying with Dollars. This is obviously not really the case though. The customers paying in Dollars have received no benefit from the devaluation of the Euro. There is therefore no change to how competitive the price of the product is. This is normally given as the benefit of devaluation.

If my currency devalues, it devalues against USD and other currencies. If it doesn't we are not talking about devaluation.

You have an increased margin. You can lower your foreign denominated prices. You can increase your share of the market. You can maximize your industrial capacity and return on capital.

On the flip side, the price in Euros has risen, so more expensive to those buying with Euros.

We are talking about manufacturing for export, no?

Edited by Police
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If my currency devalues, it devalues against USD and other currencies. If it doesn't we are not talking about devaluation.

You have an increased margin. You can lower your foreign denominated prices. You can increase your share of the market. You can maximize your industrial capacity and return on capital.

We are talking about manufacturing for export, no?

You are just not understanding - you have an increased margin only measured in a devalued currency. You could convert your example to Zimbabwe Dollars - sure you would make millions in profits, but they would be worth bugger all. Your example of higher profits measured in Euros is the same, just not to the same extreme. How much accumulated profit would you need to replace the equipment in your factory when it wears out? Quite a bit more, but in your example you consider these costs to be fixed, with only a very brief reference to any problems on this front.

Devaluation does give a short term boost when you can still use resources that have been paid for when the currency was stronger, but it is no long term solution.

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All that with a young population that left and came to the UK...how have they managed that ?

Is it maybe all the money said young population send from here to there ?

A recent survey reported that very few Poles return from abroad with any money. 1000pln is about average - £200. Money is repatriated by electronically but its a tiny part of the economy <1%.

The population here is still 38million, having half a million unemployed people leave doesn't make any difference economically (virtually nil benefits are paid).

The dynamic is exports are booming (food especially) and foreign investment is bring jobs, investment in infrastructure (roads) making a lot of difference.

Plus the fact that people are buying food, clothes and things they need to live is an economic boom compared to before.

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You are just not understanding - you have an increased margin only measured in a devalued currency. You could convert your example to Zimbabwe Dollars - sure you would make millions in profits, but they would be worth bugger all. Your example of higher profits measured in Euros is the same, just not to the same extreme. How much accumulated profit would you need to replace the equipment in your factory when it wears out? Quite a bit more, but in your example you consider these costs to be fixed, with only a very brief reference to any problems on this front.

Devaluation does give a short term boost when you can still use resources that have been paid for when the currency was stronger, but it is no long term solution.

No, I am understanding - but its bilge. You are too focused on currency and not the correct variables: income, expenditure, margin and market share. It doesn't matter whether you measure them in USD, EUR, Renminbi or grams of gold. There is a ton of empirical evidence to show you. Why does the Australian wheat farmer find it harder to sell his USD denominated commodity when the AUD strengthens? How does this affect his decision on crop planting for next year? How do the sales forecasts - which feeds directly into the years production plan - of an Irish dairy farmer change when his sterling based competitor finds its expenditures have decreased, in value terms, over his? He finds it harder to export into their market - worse still they find it easier to export into his. Why does the Swiss central bank intervene on CHK currency strength, quoting its "exporters". Why does the Japanese central bank do the same? Why do the Chinese suppress its currency with its major export market and the world reserve currency? Why are German manufacturers finding it easier to sell to club-med, now that club-med have access to German strength currency? Why does Dyson off-shore his business to a lower cost base country? Why has the mass off-shoring of back office business functions and manufacturing occurred? Why are some business, who have previously off-shored now looking to off-shore again because of rises in total expenditures in these countries - and loss of market share? How many businesses would off-shore if it was viable?

The wealth of evidence is there - provided you chose to look at it - and not your devalued STR fund which I can only say is giving you bias goggles.

Edited by Police
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