Sunday, January 26, 2003

Getting High on the Euro

The Euro continues its rise. For the prestige of the ECB and the standing of the EU I suppose this is a good sign. But since this rise is more a 'dollar fall' and since what the economists love to call the 'fundamentals' don't seem to justify it at all, permit me to have my doubts. With low uptake of new tecnologies, sluggish momentum from the US and downright deflation in Japan, and ageing populations perhaps it will be more like a reamke of an old Eastwood movie: Hang-em High 2.

Clearly the rise in the Euro will have a deflationary impact on the European economy generally (remember the Chinese Yuan is pegged to the dollar), exports will decline and imports rise, and with deflation and not inflation the buzzword, all this doesn't augur too well. As the article blogged below points out, Europe as a whole is twice as dependent on exports as the US, with Germany (the EU motor?) especially vulnerable:

The strengthening euro is beginning to pinch European exporters, and it is increasing expectations that the European Central Bank will cut interest rates this year. In recent weeks, international companies ranging from beer brewers to electronics manufacturers have warned that the appreciating currency is chipping away at foreign sales and profits. All other factors equal, a rising euro makes European goods more expensive overseas, and therefore less competitive, or yields exporters smaller earnings when they convert foreign profits into euros. The cries are loudest in Germany and Ireland, the two euro-zone countries most reliant on exports. Last week, the euro briefly rose above $1.05 to a three-year high. It traded at $1.0417 late Friday in New York, making for a 16% rise over the past year against the dollar and a 6% rise against a basket of major currencies used by the ECB.

The common currency was intended partly to help shield the 12-nation euro bloc from currency shocks by creating a large, unified economy. But Europe is still more sensitive to currency fluctuations than is the U.S., because Europe's economy is nearly twice as reliant on trade. The ECB estimates that a 5% increase in the euro sustained for a year can knock as much as 0.9 percentage point off annual growth, seven times the impact a similar rise in the dollar would have on the U.S. For Germany, the euro zone's largest economy, sales to the U.S. dropped 15% in euro terms during the first 10 months of 2002, compared with a 9% increase in 2001 and double-digit rises during the previous three years. By value, 40% of Germany's manufactured output is exported. One firm feeling the pinch is Siemens AG. The electronics firm generates about 80% of its sales outside Germany. In the year ended Sept. 30, sales slipped 3% to 84 billion euros and new orders declined 7% to 86.2 billion euros -- partly because of currency moves.
Source: Yahoo News

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