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business

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mies of powerful states such as Germany cannot be sensibly compared to, say, the “Club Med” countries — Spain, Italy, Portugal, and Greece. But the “one size fits all” currency that entails a fixed interest rate set by the European Central Bank and then adopted across the entire eurozone has contributed to the economic downturn across Europe. Why? Because devaluation of a local currency — one of the traditional tools available to finance ministers when presented by an economic crisis — simply isn’t possible any longer for the eurozone countries. Witness the results so painfully demonstrated recently by the luckless Cypriots. Policy makers in Gibraltar are also powerless when it comes to managing the exchange rate because we use the pound sterling. And the pound is particularly vulnerable as the UK continues to struggle with its eye-boggling deficit. But at least our currency can “float” freely — even if in Gibraltar its value depends more on what happens in London than Main Street. In the UK, the popular press likes to use sterling’s performance as a barometer that often leads to lurid headlines. ”Pound crashes as recession bites”. “Holidaymakers win as pound soars against the dollar”. You’ve seen them no doubt. Such stories probably help to sell newspapers but the reality is generally rather more complex. Of course currency movements are far more important than simply getting our holiday cash. Let’s face it: if one spends, say, £500 on a holiday and the currency appreciates by a whopping 10% that will only add £50 to the cost (and sometimes it goes the other way). Much more important is the cost of imports and exports to companies, which can affect the economy as a whole. In fact in the bad times, policy makers often prefer a weaker currency. It may not feel as good to Joe Public but it will make the country more competitive — assuming, of course, that the country is exporting either goods or services. In the first few months of this year, for example, sterling fell quite some distance against the US dollar and, until the Cyprus crisis at

least, was also significantly down against the euro. If £100 is now 5% less in US dollar terms than six months ago, that will make exports cheaper so that’s bound to be a good thing, right? Well only up to a point actually. It depends what it is that one is exporting. In today’s global village, where so many components are imported from elsewhere, there is a risk that one will simply cancel out the other. Sadly, I am old enough to remember the famous words of then UK Prime Minister Harold Wilson when faced with a politically explosive devaluation of the pound against the US dollar. Overnight, the rate was cut by 14% from $2.80 to $2.40 against the pound. Wilson’s response was to remind the country that the devaluation “does not mean that the pound here in Britain, in your pocket or purse, or your bank, has been devalued”. Tell that to the voters who were also about to experience a decade in which annual inflation ran up above 20%; one can understand why politicians are not universally popular. The exchange rate, however, is only part of the equation. I’ve always suggested people look at it another way — “purchase power parity”. This is an economic theory that considers the cost of goods and services in one country compared to another. The best example I can give is to consider what many of us do locally. We might purchase some items in Gibraltar but others in Spain. It’s not because the euro

In the UK, the popular press likes to use sterling’s performance as a barometer that often leads to lurid headlines. “Pound crashes as recession bites”

might be a cent or two cheaper this week but because some things are permanently “better value” either side of the border. Cross over to Tangier and see how far your pound (or relevant number of Moroccan dirhams) stretches there (but don’t forget to pay any import duty when coming back home!). Of course there is always professional help available for individuals and businesses for whom currency movements are an important part of daily life. Banks and other financial institutions employ huge divisions dealing in foreign exchange. Sovereign works with one particular firm that is expert in its field and your bank should be able to assist you — most now offer multi-currency facilities so you can minimise the risk of being caught out by a sudden exchange rate movement. You could go further. Combine accounts denominated in foreign currencies with more complex arrangements such as currency swaps, collars and floors, or perhaps borrowing in other currencies, and one can readily see that the “FX” industry has a whole arsenal of weaponry — and jargon! But as recent developments in the eurozone remind us — caveat emptor. Currencies are a commodity like any other, so keep a close eye on the rates and don’t take chances you cannot afford. Now what can I do with that five dollar bill I brought home with me? I could hold on to until the next time I can afford to go travelling to the US — but should I take the risk with the exchange rate? n

Cultural Grants The Cultural Grants Committee has invited applications for financial assistance from local cultural entities or individuals. Application Forms are available from the Ministry of Culture, 310 Main Street, from 9am - 1.15pm and 2.15pm - 5.30pm from Monday to Friday. For any enquiries contact Tel: 20041687 or e-mail: yolanda.pilcher@culture.gov.gi Applications must be accompanied by the entity’s audited accounts for the last financial year and must reach the above address by not later than 17th May 2013.

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Seven new recruits from the Royal Gibraltar Regiment passed out last month at the Infantry Training Centre in Catterick. Passing out were Pte Fortuna, Pte Banasco-Zaragosa, Pte Chalmers, Pte Duyanov, Pte Chrome, Pte Webb and Pte Boyd. The soldiers will now complete Driver Training in Catterick before joining the Regiment in the UK as part of Exercise Jebel Tarik.

GIBRALTAR MAGAZINE • MAY 2013

The Gibraltar Magazine - May 2013  
The Gibraltar Magazine - May 2013  

Gibraltar's fabulous business and leisure magazine. Crammed full of great features from finance to football, from fashion to arts. Enjoy i...