There are vast books written on this subject, many by renowned academics and economists. It has been said, with some justification, that one needs a PhD to understand many of them.
Don’t worry! This short article isn’t going to start debating history, politics and the economic theory but rather it will look at some day-to-day issues of interest here for the average expat.
When it was first launched a few short years ago, there were many who thought it was doomed to failure from the start. How could a vast range of separate countries with their own currencies such as Guilders, Francs, Pesetas, Drachmae, Lire, Marks and so on, possibly just scrap them all and come together in one single currency?Yet the international critics and sceptics were confounded. After some teething troubles, and some glitches that continue even today, the Euro zone has proven to be a success.
At the time of writing it encompasses 15 countries with previously separate currencies that now all use the one currency – the Euro. These days it is now immensely easier and cheaper for people and companies across these vast areas of Europe to do business with each other without incurring the costs, admin overheads, risks and confusion of working in different currencies.
It is true some banks and financial centre traders are less happy as their commissions for trading and converting between all the old currencies have disappeared, but it’s a fair bet that nobody is going to shed too many tears for them!
This may all very interesting and perhaps even noble, but what does this mean for the average expat living overseas?
To start with, if you have accounts, pensions or other income still being paid and held in a non-Euro currency such as Sterling or US Dollars, well, probably at a glance you may not think it means much to you. You are probably still paying currency conversion charges every time you move money to your new country, and have also probably wondered from time to time if your bank has used a fair conversion rate or whether you’re being ripped off.
Many expats in those circumstances are unlikely to be singing the praises of the Euro zone because they perceive it to be something that happened to someone else even if they’re now using Euros in the local shop rather than Pesetas or Francs etc.
However, the Euro zone offers immense opportunities to expats overseas in business or starting to think of going into business.
That’s because if your dealings are with people outside your local country but within the Euro zone, you may be able to offer them more attractive deals than you could to those customers who do not have the Euro as a currency. Why?
Firstly, if you’re running a business in say, Spain, and you have a customer in Italy and another in the UK, then your costs of dealing with the Italian customer will be lower than with the UK one. That’s because when your Italian customer pays you via bank transfer they’ll pay in Euros and you won’t have to pay your bank to convert it, though you WILL have to pay transaction charges as per normal. If your British customer pays you via the same method, either they or you will have to pay a bank to convert it from Sterling to Euros.
On larger amounts those savings can be significant, and that means higher profit for you or perhaps you can offer your Italian client lower prices by way of incentive for future business.
The advantages don’t stop there. You will find it is easier for you, and your customers, if you’re dealing in the same currency. If you’re selling outside of the Euro zone either you or your customer is going to have to get to grips with currency conversion during the quotation processes and that’s to say nothing of all the problems associated with currency movements over time. This can mean that the ‘friendly’ quotation you gave someone in US dollars some months ago based upon conversion rate assumptions is now the source of major heartache for you as rates have shifted since you issued the quote!
If you’re buying in Euros, you can also be sure that the price is the price and when you pay it is the amount you expected. If you’re buying in say Sterling and paying in Euros, if the currency has moved against you over a few days then you could suddenly find the item is costing you quite a few more Euros than you expected when you ordered it.
All these things, and many others, are good reasons why the Euro zone should be important to many expats who are in business in their new countries. It gives greater opportunity to think outside of the country you live and work in, and also outside of the UK, thereby finding more opportunities in the vast market that is the Euro zone.
There are though a few myths around business in the Euro zone worth keeping in mind.
The first is that any bank in the Euro zone will take a cheque issued in Euros by any other European bank. It doesn’t matter what some leaflets and sites tell you, many banks just won’t! Some may take a cheque from another bank in another Euro zone country, but watch out as they could hit you with very large bank charges and you may have to wait extended periods for the cheque to clear.
You can avoid doing this if you can by using electronic bank transfers such as IBAN/BICs. They are much cheaper and easier to use thank cheques.
The second common myth is that bank transfers in Euros are always free between banks. In reality sometimes they are, and sometimes they’re not. It is not unusual for them to be free of charge to another bank in the same country (though not always!) but if sending to another Euro country you may find you incur charges. Check with your bank in advance.
Finally, a variation on the cheque myth relates to the Euro zone banker’s draft or indeed any draft in Euros. It’s not unknown for people in say the USA or UK to send a banker’s draft in Euros as payment because the issuing bank has told them it can be cashed or baked by the recipient in a Euro zone country free of charge. Many will say, “That’s what the Euro zone is meant to be for”. If only it were true!
While it is true that a banker’s draft is usually easier to handle than a cross-border cheque, in practice whether in Euros or not, many receiving banks overseas often look at them with a completely blank expression having never seen one before. One can quite often get reactions of hilarity if one asks to deposit the draft or cash it without fees.
Drafts are only free if there are reciprocal agreements in place between banks. You should expect charges for banking/cashing them and/or delays whilst people phone or email their head office to see if anyone knows anything about this sort of draft!
In summary, the Euro zone is here to stay and will doubtless get larger over time. Get out there and use it to expand your expat business!