May 9, 2003
A Strong Euro With Few Admirers
RANKFURT, May 8 — Three years ago, Europeans were wringing their hands over a seemingly endless slide in the value of the euro. These days, the currency is pole-vaulting ahead of the United States dollar, nearing levels it has not achieved since its introduction in January 1999.
So are the Europeans cheering? Hardly.
The euro's rise has set off a new bout of hand-wringing by business executives, economists and politicians, who fear that a strong currency could stir up as many problems as the weak one did. And while the problems are different, at a time of weak economic growth in Europe, they may be no less troublesome.
"It's a real threat," said Thomas Mayer, chief European economist at Deutsche Bank. "For Europe's exporters, it's like being a jogger, constantly running uphill and against headwinds."
Today, 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 news briefing that "there's not yet anything excessive" about the currency's rise. It promptly jumped again in European trading, to $1.15, a new four-year high. Later in New York, the euro settled at $1.1493, compared with $1.1369 late Wednesday.
Mr. Duisenberg said the central bank wanted to see if the euro's rise had staying power before easing its policy. "We have to know more," he said, like whether it "will continue, or will peter out, or will reverse."
With the euro up 4 percent against the dollar in the last two weeks, and roughly 30 percent since January 2001, companies like Volkswagen, Swatch and Henkel are contending that the situation has already dented sales, both through the conversion of dollar-based sales into euros and by making their goods more expensive for American 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 gets 26 percent of its sales in the United States. "The weak dollar has had the effect of cutting our upward spurt in half."
Altana reported a 10 percent jump in sales in the first quarter. If the exchange rate had remained steady, the jump would have been closer to 20 percent. Mr. Schweickart's emphasis on the weak dollar underlines a main reason that the galloping euro is not seen as a cause for celebration here.
Whatever the political benefits of a strong currency — especially one that originally got off on the wrong foot — people here know that the euro's surge now is less a reflection of European strength than of American weakness.
With ballooning current-account and budget deficits, the United States these days is a less attractive place for investors to put their money, and other countries, like Japan, scarcely look better. So Europe, by virtue of its stability and relatively sturdier public finances, has soaked up a lot of global capital.
"Europe's weak economies should not attract that much investment," said Michael Heise, chief economist at Allianz, the huge German insurer. "But investors expect a long-term period of deficits in the U.S. That is worrying."
For Mr. Heise, the rapid appreciation of the euro meant rewriting a presentation he gave this week to his bosses at Allianz about how they should allocate assets.
Allianz is also revising its projections for the euro's value. Originally, it forecast parity with the dollar at the end of this year and a rise of 10 to 15 percent in 2004. But to the surprise of Mr. Heise and other economists, the dollar got no lift from the end of the Iraq war, and an expected gradual appreciation in the euro's exchange value instead became a spike.
Commerzbank, which has also revised its forecast, now expects the euro to settle at $1.12 to the dollar by August.
Some experts contend that the euro was growing in stature even before the recent tide of red ink in Washington.
Niall C. 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 percent of all corporate and sovereign bonds were issued in dollars, and only 20 percent in the currencies of the 12 European countries that now use the euro.
But in the four years since the common currency began trading, Professor Ferguson said, 44 percent of new global bonds have been issued in euros, nearly equaling the 48 percent issued in dollars.
"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 that long-term weakness in the dollar — which many European economists expect — is likely to inflict more pain on countries that export to the United States than on Americans themselves.
True, a summer trip to Tuscany will be more expensive for American tourists, while a Las Vegas vacation will be cheaper for Europeans. But such windfalls will be more than offset by the price pressure on exports, which have been a rare source of economic momentum in countries like Germany.
Goldman, Sachs estimates that a 10 percent rise in the euro's value against the dollar cuts an average of 4 percent off the profits of European companies. A shift on that scale in the exchange rate over two years would trim 1.1 percentage points off a country's economic growth in the first year and 0.2 percentage point in the second.
For Germany, already resigned to eking out just 1 percent growth in 2003, that could be a body blow.
Volkswagen said its net income tumbled 68 percent in the first quarter because of its aging products and its exposure to currency fluctuations. The exchange rate alone cut 400 million euros — then $456 million — from its pretax profits, while sales in the United States dropped 3.9 percent.
Mr. Mayer noted that companies like Volkswagen weathered a previous period of dollar weakness, from 1985 to 1995. They emerged lean and fit, which allowed them to reap big benefits a few years later, when the euro dropped sharply in value. Now, some of these companies are wheezing again, and looking for excuses.
"There's a blame game going on," Mr. Mayer said.
Indeed, some European executives play down the effect of the euro. Hugo Boss, the German apparel maker, reported a 5 percent decline in its sales in the first quarter; if not for the euro's rise, it said, sales would have been flat. But the chairman of Hugo Boss, Bruno E. Sälzer, said he did not think he had lost American customers because of the euro. In part, that is because Hugo Boss makes much of its men's apparel for the United States market in Cleveland and those costs have not really increased.
"We wouldn't change our prices because of changes in the exchange rate," Mr. Sälzer said. With a nervous laugh, he added, "if one day the euro is worth $3, I'll have to rethink my strategy."
Economists note that a stronger euro gives Europeans greater purchasing power, something that could help rekindle long-dormant consumer spending. That would be vital to reviving the German and French economies.
One byproduct of the rising euro has been an abrupt end to complaints by people here that the introduction of euro notes and coins in January 2002 had inflated prices at cafes, restaurants and hairdressers.
Perhaps the least predictable effect of a robust euro is on the European Monetary Union as a political experiment. Euro-skeptics in Britain have seized on its strength as another reason to delay the country's adoption of the currency, saying it would threaten the competitiveness of British industry. The British pound has not appreciated at all against the dollar this year.
In Sweden, where a referendum on adopting the euro will be conducted in September, a recent poll found that 50 percent of people opposed the move, while only 34 percent supported it. The Swedish prime minister, Goran Persson, is recruiting business leaders in hopes of swaying public opinion.
Experienced analysts say 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,' " noted Daniel Gros, 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.' "