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Decline of the Dollar: European manufacturers are beginning to hurt

Posted November 25, 2007

“Another 10% appreciation of the euro against the dollar would cost the European economies half a percentage point in economic growth. While manufacturers and exporters still are sitting on solid order backlogs, it remains to be seen if orders keep coming in when exchange rates alone are adding a 10% premium to European products…” — J. Christoph Amberger

by J. Christoph Amberger, TFN

Baltimore — (TFN): Open your email in-box any given day now and you’ll find reams of e-letter rants predicting the impending disappearance of the U.S. dollar and, by default, the United States as an economic and financial superpower.

Sure, the dollar is now near or even past the exchange rate lows it posted in the 1990s against the Deutsche mark, probably the most comparable currency for long-term exchange rate comparison.

But what happens if the increase of the euro’s valuation, not just against the dollar (and thus, yuan) but also against the yen, collides with a cooling of global demand and a slowdown of the global economy?

The negative effects of the rising euro, and hence, of rising labor cost for European manufacturers, are already taking a healthy bite out of the margins of BMW and Airbus. European economies may be seeing strong investment activities and solid export numbers… but falling private consumption (in a year of economic expansion!) indicates that exports remain the keystone to their economic well-being.

German star macroeconomist Peter Bofinger is more qualified to comment on the effects of the falling dollar than an Airbus full of American newsletter editors and other assorted armchair economists. In a recent interview with the German magazine Der Spiegel, he sees the potential for an exchange rate of up to $1.60 per euro, another 10% devaluation from current levels. But he doesn’t like to make predictions, considering the influence of short-term speculation on the exchange rates.

Another 10% appreciation of the euro against the dollar would cost the European economies half a percentage point in economic growth. While manufacturers and exporters still are sitting on solid order backlogs, it remains to be seen if orders keep coming in when exchange rates alone are adding a 10% premium to European products… not to mention the increase in labor cost that typically follows high-publicity strikes like the ones experienced in France and Germany right now.

Give it a little while, Bofinger points out, and you will get an instant replay of the wave of cost cutting we saw in 2003 and 2004, when the euro passed the $1.30 mark. Which will further reduce domestic demand…

In late November, the chief of the European central Bank, Jean-Claude Trichet and a delegation of European central banking bigwigs will be traveling to China, presumably trying to sweet-talk Beijing into letting the yuan float further.

I liked Bofinger’s comment: “I could imagine that the Chinese will think that is very humorous. Because they say: ‘Why are you coming to us to complain? We have let the yuan appreciate — now it’s Japan’s turn, which lets its currency devalue unchecked.’ If I were Chinese I’d say: ‘Why don’t you Europeans intervene? You’re free to do so anytime.’”

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Posted by J. Christoph Amberger · Filed Under News that Matters 

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