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Record Euro: You’d think they love the weak dollar in Europe. But…

Posted February 28, 2008

Blogger's Note: The euro is at record levels! American pundits like to consider the weakening of the US dollar against the euro and a basket of major world currencies the beginning of the end. That's understandable, considering many of them derive their personal experience in dealing with currencies on the micro level: When traveling to London or Paris, their dollars buy less wine and designer purses and manbags.

But Europeans are not at all that thrilled about the euro's record highs. In fact, they see the margins of export-dependent companies wither up and die as the euro appreciates. Especially in countries whose modest economic revival is based on the fame of being "Exportweltmeister" — export world champion: In Germany, luxury car maker BMW just served pink slips to over 8,000 workers. Further cost-cutting may become necessary as the U.S. economy slows down.

I found this excellent interview with three top German economists… including Peter Bofinger, who I believe is probably the best and most rational macroeconomic mind in the world. 

"There's No End in Sight," writes the German news magazine Der Spiegel. "The euro has reached a record high of $1.50. How much higher can it go and does the high-flying euro threaten jobs? SPIEGEL ONLINE talks to economists Thomas Straubhaar, Christian Dreger and Peter Bofinger about the enormous risks — and few benefits — of the high euro."

Baltimore — (TFN): SPIEGEL ONLINE: Mr. Bofinger, the euro keeps climbing and climbing. How much higher can it go?

Bofinger: There's no end in sight at the moment. Experience has shown that the dollar is under pressure when euro interest rates are higher than dollar interest rates. That's why I was in fact surprised that it took the euro so long to crack the $1.50 threshold.

SPIEGEL ONLINE: What are the risks for Germany?

Bofinger: German exports have stagnated in real terms since August. The rising euro exchange rate, together with a significantly weaker world economy, carries substantial risks for an export-oriented economy like Germany's.

SPIEGEL ONLINE: When prices rise, returns on exports decline. BMW is currently using this argument to justify laying off 8,100 workers.

Bofinger: That isn't far-fetched at all. When the euro's value increases from $1.30 to $1.50, there isn't much left over in the way of profits. It comes as no surprise that German industry is about to face a new wave of cost cuts.

SPIEGEL ONLINE: Are there also positive effects?

 
Are there? Make sure you read the rest of the interview right here.

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