''Galloping'' Euro Frazzles EU Exporters
New strength against the dollar is considered a real threat.?
FRANKFURT - Three years ago, Europeans were wringing their hands over the seemingly bottomless slide in the value of the Euro. These days, the currency is pole-vaulting ahead of the dollar, nearing levels it has not achieved since its introduction in January, 1999.
So are Europeans cheering? Hardly.
The rise of the Euro has set off a new bout of hand-wringing by business executives, economists, and politicians here, who fear that a strong currency could stir up as many problems as a weak one did.
The problems are different, of course. But at a time of weak economic growth in Europe, they may be no less troublesome.
"It's a real threat," said Thomas Mayer, the chief European economist at Deutsche Bank. "For Europe's exporters, it's like being a jogger, constantly running uphill and against headwinds."
The European Central Bank resisted intense pressure to cut interest rates to offset the surging Euro. The bank's president, Wim Duisenberg, said at a briefing, "there's not yet anything excessive" about the currency's rise. The Euro promptly jumped again, and was at $1.1491 [Thursday, May 8] in late trading in New York, a new four-year high.
Duisenberg said the bank wanted to see whether the rally had legs before easing its policy. "We have to know more," he said, such as whether it "will continue, or will peter out, or will reverse."
With the Euro up 4 % against the dollar in the past two weeks and nearly 30% since January, 2001, companies like Volkswagen, Swatch, Allied Domecq and Henkel contend that it has already dented their sales - both through the simple conversion of dollar-based sales into Euros, and by making their goods more expensive for US businesses and consumers.
"I cannot recall the currency ever having had such a material effect on results," said Nikolaus Schweickart, the chairman of Altana, a German drug company that generates 26% of its sales in the US. "The weak dollar has had the effect of cutting our upward spurt in half."
Altana reported a 10% jump in sales in the first quarter. Factoring out the fluctuating exchange rate, it would have had a 20% increase. Schweickart's emphasis on the weak dollar underlines a main reason the galloping Euro is not seen as a cause for celebration here.
Whatever the political benefits of a strong currency, especially one that got off on a wrong foot, people here know that the euro is less a reflection of European strength than of American weakness.
With ballooning current-account and budget deficits, the US these days is a less attractive place for investors to put money. Other countries, like Japan, look scarcely better. Europe, by virtue of its stability and sturdier public finances, has soaked up a lot of this capital.
"Europe's weak economies should not attract that much investment," said Michael Heise, the chief economist at Allianz. "But investors expect a long-term period of deficits in the US. That is worrying."
For Heise, the rapid appreciation of the Euro meant rewriting a presentation he gave this week to his bosses at Allianz, Germany's leading insurance company, about how they should allocate assets.
Allianz is also revising its projections for the Euro. It originally forecast that the currency would be at parity with the dollar at the end of this year, before rising 10% to 15% in the course of 2004.
What surprised Heise and other economists is that the dollar received no lift from the end of the Iraq war.
Commerzbank, which has also revised its numbers, expects the Euro to settle at a rate of $1.12 by August.
Some analysts contend that the Euro was growing in stature even before the recent slide to a deficit in Washington.
Niall Ferguson, a professor of financial history at New York University, said there had been a marked shift in the global bond market toward Euro-denominated bonds. From 1995 to 1999, he said, 53% of all corporate and sovereign bonds were denominated in dollars. Only 20% were denominated in the currencies of the 12 European countries that now use the Euro.
In the four years since the common currency began trading, Ferguson said, 48% of bond issues have been denominated in dollars, while 44% have been denominated in Euros.
"I'm not wholly convinced the Euro is the heir to the dollar," he said. "But there is evidence that investors are switching from dollars to euros. I'm absolutely sure some of it is a reaction to the deficit."
The trouble is, a long-term weakness in the dollar - which many economists now expect - is likely to inflict more pain on countries that export to the US than on Americans.
True, a summer trip to Tuscany will be more expensive for Americans, just as a Las Vegas vacation will be correspondingly cheaper for Europeans. But that windfall is more than offset by the pressure on exports, which have been a rare source of economic momentum in countries like Germany.
Goldman Sachs estimates that a 10% rise in the Euro against the dollar cuts an average of 4% off the profits of European companies. A 10% increase over two years trims 1.1 percent off a country's annual economic growth in the first year and 0.2% in the second.
For Germany, already resigned to eking out growth of just 1% growth in 2003, that could be a serious problem.
Volkswagen said this week that the exchange rate cut 400 million Euros from its first-quarter pretax profit, while sales in the US dropped 3.9%.
Mayer noted that companies like Volkswagen weathered a previous period of dollar weakness, from the late 1980s to 1995. They emerged lean and fit, which allowed them to reap huge benefits when the Euro swooned. Now, some of these companies are wheezing again - and looking for excuses.
"There's a blame game going on," Mayer said.
Economists note that a strong euro gives Europeans greater purchasing power, which could rekindle long-dormant consumer spending. That would be vital to reviving the German and French economies.
Perhaps the least predictable effect of a robust Euro is the impact it will have on European Monetary Union (EMU) as a political experiment.
Euro-skeptics in Britain have seized on its strength as another reason to delay that country's entry into the EU, on the grounds that it would threaten the competitiveness of British industry.
In Sweden, which will hold a referendum on adopting the Euro in September, a recent poll found that 50% of people opposed the move, while only 34% supported it. Swedish Prime Minister Goran Persson is recruiting business leaders to sway public opinion.
Longtime observers point out that the debate over the Euro is, at heart, political rather than economic.
"The Swedes used to say, 'Extremely weak currency. We don't like extremely weak currencies,'" said Daniel Gros, the director of the Center for European Policy Studies, a research group in Brussels. "Now they say, 'Extremely strong currency. We don't like extremely strong currencies."
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