Tuesday, May 01, 2012

Every Time I Read the News, I Want to Plan a Trip to Europe

But then I look at the exchange rate numbers. Let me explain. An exchange rate is the price of one currency in terms of another. One U.S. can buy 0.62 British pounds or 81.4 Japanese yen. The more currency you can buy, the less valuable the currency. A weak currency is good if you're traveling. Imagine being able to turn one dollar into two or three of four. Yes, some stuff will cost two or three or four times as much, but on the whole it doesn't completely cancel out the exchange rate. So when I read about Greece protesting austerity measures, Spain re-entering recession, and France about to elect a member of the Socialist party, I naturally think this will lead to fewer people wanting to do business in Europe. This should make the Euro less valuable, which means it's cheaper to buy, which means it's cheaper to vacation there. I think about where I'd like to visit. But then I look at the exchange rate numbers.
I structured the "% change" such that if it's negative, it indicates a falling value (because you can buy more). All values are in dollar terms (one dollar buys you 0.76 euros). "Before" refers to this time last year. All data are from the April 28 Economist. Yes, the Euro's value fell by about 10%, but virtually everyone's falling in value which indicates that it's a stronger dollar, not a weaker Euro, which is driving the change. You can look at the British pound and note that it only fell by 1.64%; Switzerland fell by 3.41%. These are European countries so the Euro-crisis effect is roughly the difference between them. That seems reasonable, but still: a U.S. still can't buy a single Euro? This is really evidence of the strength of German economy. If the Euro breaks up, expect Italy to be much cheaper and Germany more expensive. If France has issues (and The Economist is quite worried about that, for what it's worth), the other major economic pillar of the Euro-zone will stumble. It may be the beginning of the end of the Zone. Intrade predicts a 57.6% chance that one country will abandon the Euro by December of 2014. Lesson: plan the Germany trip for the near future and delay other visits to the continent for about five years.