Will the weak euro benefit European contractors?

03/09/2015 08:37 AST

There was relief sounded earlier this year when the European Central Bank (ECB) announced that it would buy over $1tn (EUR890m) of sovereign and asset-backed bonds between March 2015 and September 2016. At the time, commentators suggested a weak European currency could give eurozone economies a much needed boost, prompting jobs growth and an uptick in the broader economy, as well as an end to deflation in the region.

Closer to home here in the UAE, some suggested that a weaker euro could also help European construction firms bidding for Middle Eastern projects, as they would gain a competitive edge after the currency dropped.

I am not convinced that there is much merit in this argument – yes, the euro is certainly cheaper, but there are two important factors that I believe override this argument. Firstly, a contract will usually cite the local currency where a project will be based, rather than the euro or US dollar. Secondly, the import of equipment and materials from Europe is limited. This adds an additional layer of complexity and cost for construction firms based in the EU, which have to source materials locally.

The demand for raw materials in the UAE has increased, which is a signal that the local economy has bounced back. The forecasted hike in the price of raw materials also has a significant impact on their value and availability.

There can be certain savings on employee or contractor salaries with a lower euro, but only to a partial extent. Expats will make their calculations based either on the local currency or in euros, whichever is higher at the time.

Salary rates are arrived at when contracts are agreed and deals are signed, so the recent currency tailwinds may not interfere with this at all.

Therefore, a drop in the value of the euro would not prove as significant for construction firms bidding for projects in the Gulf region.

The reality is that companies from other jurisdictions, such as China, are far more competitive when they bid for contracts, as they can operate with lower overheads. This is the major challenge that European firms face.

European contractors need to work incredibly hard on their proposals, because if the euro weakens further, the cost of finance is likely to increase.

Construction may rely on the export of know-how and experience, but it remains a local industry that is only influenced by currency fluctuations to a limited extent.

Nevertheless, the UAE market will remain important for European contractors, as there are plenty of available tenders and projects in the country.

Construction Week Online