BUSINESS STRATEGY – It used to be easy to sum up the way European business executives viewed exchange rates: a strong dollar was good; a strong euro was bad.
Most still think that, but as the euro glides down from the peak of more than $1.50 it reached in November, trading on Tuesday at $1.37, some problems are emerging that complicate the picture.
Yes, the weaker euro is good for European exporters. It makes it easier for their cars, machinery and beer to compete on price abroad and makes every sale to the United States — and to countries like China whose currencies are closely tied to the dollar — more valuable in euros.
The weakening euro also is good news for Greece, Spain and Portugal, which are suffering from excessive trade deficits and struggling to become more competitive in world markets.
“I haven’t heard of anybody who is sad about it,” said Ralph Wiechers, the chief economist of the German Engineering Federation, an industry group in Frankfurt that represents makers of machine tools and other capital goods.
But there is also a range of negative effects. The cost of oil and other raw materials priced in dollars is rising. Consumer prices could come under pressure because goods imported from outside Europe become more expensive in euro terms.
More important, there is a queasy feeling that the decline of the euro makes an uncomfortable statement about Europe’s chronic tendency to underperform the United States in economic growth.
The euro’s decline reflects the harsh verdict of investors on the Greek debt crisis and the monetary union’s inability to insure that its members adhere to basic principles of fiscal prudence.
“It’s more of a euro weakness than a dollar strength,” said Ulf Schneider, chief executive of Fresenius, a German health care company. “The whole world is watching, and there is some doubt about the euro.”
The euro has bounced back from its recent low of about $1.35 in February, reflecting more optimism that Greece is taking decisive steps to reduce its 12.7 percent budget deficit. A short spike back to $1.40 or so is possible over the next few weeks as investors who bet against the euro unwind their positions, currency analysts at Commerzbank in Frankfurt said.
On Monday, the euro slipped against the dollar to $1.3672 in late trading in New York amid uncertainty about whether European economic ministers meeting in Brussels would figure out a way to help Greece while maintaining pressure on Greek leaders to reduce their deficit. Those concerns subsided somewhat on Tuesday after Standard & Poor’s announced that it was taking Greece off its negative credit watch, lowering the threat of a downgrade. The euro rebounded to $1.3756. Read more »
