Shares Magazine
May 24 2007
The weak dollar means insular griping of the 1940s has rarely seemed more dated – For Europe’s economy, Americans are not overpaid and not enough of them are over here. We needed their forces then, we need their business now: plus ca change. Marilyn McDonald gauges the shifting currents across the pond.
Everybody’s talking at me. I don’t hear a word they’re saying. Only the echoes of my mind.
For those of you that don’t recognise the song, it is Everybody’s talking at me be Harry Nilsson (though I tend toward the Jimmy Buffet version). These days it seems like everybody’s talking at me about the strength of the euro and the relative weakness of the dollar. As I wade through the opinion-filled magazines and newspapers, I can’t help but wonder how Europe can cope with such a strong currency. Will this be long term? How will it affect Europe’s tourism market and its ability to export products? Will consumers in the US see increased prices? (Forgive me, but I am not going to discuss the inflation in China – and its increasing appetite for raw materials – here. I do realise that it has a large impact on what is going on but I plan on remaining myopic in this discussion.) As European firms grapple with a weak dollar it begs the question of waht impact this situation will have on the world stage.
Not only is a stong euro affecting consumers, it’s already had an impact on many European countris and thier dollar holdings. They ahve been reducing thier dollar exposure and, while I don’t think there will be a great exodus away from the dollar as a reserve currency, this trend is concerning. Just last year, Sweden cut its dollar holdings from 37% to 20% of its reserves and eliminated its 8% of holdings in yen. Formerly, its holdings were about one-third each euros, dollars, and other currencies. Sweden now has a greater exposure to the European economy and, since 1998, the Swiss National Bank has been moving its reserves from dollars, primarily to the euro and sterling.
For many European industries, a strong euro could potentially hurt growth. the increasingly feeble dollar and the mighty euro are forcing Europe’s tourism, aeronautics, automobile and fashion industries to cope in an unstable market.
The industry to take the biggest hit would likely be Europe’s tourism. With such an unbalanced exchange rate, many Americans cannot afford travel to Europe. In the UK in particular, a visit across the pond means a dollar is realy worth about 50c. Or, for Yankees considering travelling to France, Germany or one of the other 11 European Union countries that use the euro – In those countries, the dollar is currency worth about 73c. These are compelling reasons for Americans to take a closer look at destinations such as Hawaii or Puerto Rico, where the dollar still reigns, or even further abroad like Fiji, New Zealand or Australia.
The risk for manufacturing
But tourism isn’t the only European industry that stands to suffer from a high euro, manufacturing may catch a case of the blues as well. March saw the long-waited arrival of the new Airbus A380 super jumbo. The production of the A380 had been plagued by delays – it’s now two years overdue – and has contributed to bilions of dollars in losses at Airbus’s parent company, Europe’s EADS. With the euro being so strong, the company is finding it difficult to turn a profit with the new plane. This has lead to discussions of layoffs and restructuring that have sparked animosity across countries within the EU. Newly-elected French president Nicolas Sarkozy has explicitly tied the difficulties of EADS to the high valuation of the euro, saying “A weaker euro should be a tool to help European industry – 10c of appreciation on the euro is a 1 billion euro deficit for Airbus. We didn’t create the euro in order not to make a single plane in Europe.”
Even Bayerische Motoren Werke (BMW), the world’s largest maker of luxury cars, released information that first-quarter profits plummeted 38% because of a stonger euro. The Munich-based company, whose largest single market is the US, expects higher raw material costs as wel as a rising euro to continue to impact earnings this year.
European fashion designers are also determining if they should raise prices due to the decline in the dollar. Versace, Armani, Christian Dior and Dolce & Gabbana are all faces with the challenge of maintaining competitiveness in a soft US economy.
In France, especially, a weak dollar stands to have a damaging effect on an already weak economy. Nicolas Sarkozy has been urging the European Union to develop a coordianted economic strategy to protect its citizens from globalization and to retain its popular legitimacy policy, something he has blamed for eroding the competitiveness of French industry. Sarkozy is pushing for the weakening of the euro by the European Central bank in an effort to stimulate economic growth, rather than simply focusing on combating inflation.
There is some concern that life could become harder for the ECB in the second half of 2007, particularly if the incoming French government continues to criticise the ECB, the eurozone economic growth continues to show signs of slowing and the euro appreciates further against the dollar. France’s February unemployment rate decresed 0.1% from the previous month to 8.4% and a 1.1% drop from the same month in 2006. Sarkozy is looking to improve that rate as he takes office.
The strength of the euro also sserves as a source of contention between the members of the Union. While this strength has served some countries well and served to bolster the economies of others, it has impacted the quality of life for other EU members, and not always in a good way. With this in mind, all eyes will be turning to the new elected French president this June to see how he handles France’s position with regards to the EU treaty. France has purposely held itself on the sidelines for the past couple of years and it is apparent to many that the EU cannot function optimally without France fully engaging.
By contrast, in Germany, production has reached record levels, primarily in exports. Germany’s March jobless rate fell 0.3% from the previous month to 9.8%, its lowest level since December 2006. The rate fell 2.2% from the same month a year earlier.
And the UK’s fourth-quarter GDP increased 0.8% from the preious quarter and 3% from a year ago. Preliminary numbers for Q1 show a 0.7% rise compared with Q4 2006 and a 3% annual increase. Unemployment in the region for the three months ending February 2007 increased 0.1% to 5.5% from the previous three-month period, and rose 0.3% from the same period a year earlier.
Threat to stability
Some financial analysts believe that the rapidly appreciating euro would make eurozone products more expensive and less competitive on overseas markets and as such could threaten the eurozone’s economic rebound. European products could just become too expensive and could damage its export market. A strong euro does undermine the competitiveness of eurozone goods on international markets and could potentially cut foreign demand, which has been a supporting factor for eurozone growth.
What concerns all economic analysts is the risk that, if the imbalance of the dollar to the euro continues to build, there could be a sudden correction later on, which could have destabilising effects. What goes up will come down, right?
So, can Europe cope with a strong euro? Only time will tell. A euro worth more than $1.40 would not just be an issue for manufacturers or exporters, it would be an issue for everybody. It is true that Germany and other countries that are economically closely linked to it have the ability to withstand the pressure of an expensive euro, but Mediterranean countries such as France, Spain and Italy probably can’t. Those countries should be hoping to see the market stabilise and correct itself soon. All this must be taken with the proverbial grain of salt, however. Analysts and economists have been speculating about the euro since its inception. Do a quick Google search and you will see these same issues being bandied about since 1999, regardless of the euro price.
As for me, I will take the advice of Harry Nilsson and I’m going where the sun keeps shining thru’ the pouring rain, going where the weather suits my clothes. And while I am there I will watch with interest waht happens next in the ever-evolving euro story.