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Foreign Exchange for Expats in Germany

Submitted: October 2013

The official currency in Germany is the Euro (EUR). The European Central Bank (ECB) is responsible for monetary policy, and it is an autonomous institution.

The Euro-zone has never imposed exchange controls since the introduction of the euro. There are no restrictions as to the holding of foreign currency in Germany, and non-euro investments are available for German residents.

Exchange rate regime

The Euro follows a purely freely floating exchange rate regime. There is no official exchange rate target. The ECB may sometimes intervene in foreign exchange markets, but such interventions are very hard, if not impossible, to predict.

The Euro challenges the US dollar as a world currency. Many other currencies are pegged or somewhat connected to the Euro. These include notably Denmark, Morocco, most Eastern European countries, and most French-speaking Sub-Saharan countries.

Monetary policy

As per article 127(1) of the Treaty on the Functioning of the European Union (TFEU), the ECB’s primary mandate is to maintain price stability. Without prejudice to this objective, the ECB must also support the EU’s general economic policies.

Inflation-targeting lies at the heart of the ECB’s commitment to price stability. The ECB targets an inflation rate below but close to 2%, where the relevant inflation rate is the Euro-zone Harmonised Index of Consumer Prices (HICP).

On-going developments

Over the recent years, the ECB has failed to keep inflation in check while adopting an ultra-dovish monetary policy aimed at supporting growth. Average inflation since 1999 has been at 2.1%, which is slightly above target. In 2013, the ECB has held fire and allowed inflation to dip to 1%. In June 2013, the ECB has said that its inflation expectations are 1.3% for 2013 and 1.4% for 2014.

Dovish monetary policy is in line with the current international trend. As a result, the Euro exchange rate is not necessarily affected, especially if you come from another country with a dovish monetary policy. You might wish to check how the ECB’s policy interacts with that of your home country, as well as how the markets price this.

Generally, dovish monetary policy comes along with ultra-low interest rates. These may even fall below inflation, thereby creating a negative real interest rate. Although such a situation is not within Germany’s tradition, negative real interest rates have become hard to avoid for German savers. See Investment for Expats in Germany.

On the other hand, if the ECB ever decides to tighten monetary policy (e.g. because of high inflation), interest rates would rise, liquidity would dry up, and securities prices should go down.

Euro-zone crisis and FX considerations for German residents

There is rampant concern about a possible breakup of the Euro-zone. As far as expats in Germany are concerned, a Euro-zone breakup would involve a return to the German mark or another currency, which could easily appreciate by more than 10%.

 

 



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