Strong Euro Worries German Exporters

There was a time when the euro was so sharply plummeting in value against the U.S. dollar that European politicians and central bankers would rush to say how undervalued it was in hopes of propping up the fledgling currency.

Politically, the weak euro may have been a liability. But to companies across Europe, the falling euro made their exports cheaper in key markets around the world.

But that was after the euro slumped from $1.18 at its introduction in January 1999 to its all-time low of $0.82 in October 2000. In recent months, as the United States has slashed interest rates to spur growth and amid global uncertainty due to the war in Iraq, the euro has surged to hit its highest level against the dollar since February 1999.

Exporters worried

In this year alone, the currency has jumped over seven percent against the greenback and is now worth more than $1.12. Germany’s top exporters are starting to worry an even stronger euro could hurt business. Europe’s largest carmaker Volkswagen AG said last month that earnings in 2003 would decline for the second year in a row as the euro’s strength hurt sales overseas.

"If you're from a high cost country and your currency is strengthening and your competitors are effectively lowering prices, then you're squeezing profits, " Paul Taylor, chief economist at the U.S. National Automobile Dealers Association, told the Dow Jones news agency. "Exchange rates have to be part of this tapestry."

German industrial giant Siemens also recently warned that it may have to cut more jobs since the falling dollar is increasing price competition.

“Price hikes just can’t be forced through at the moment. The weak dollar is already weighing on us,” Siemens Chairman Heinrich von Pierer told Wirtschaftswoche magazine in an interview.

Euro hits manufacturing

In a further sign of trouble, European manufacturing contracted for the seventh time in eight months in April, as the euro curbed export orders. An index based on Reuters’ survey of purchasing managers at about 2,500 euro zone companies fell to 47.8 from 48.4 in March, even as most economists had predicted the index to rise.

The rising euro is particularly dangerous for Germany, since its economy is one of the world’s most export-driven. On April 28, the German government cut its official growth forecast for 2003. Instead of its previous forecast of 1 percent, the Economic Ministry now expects Europe’s largest economy to expand only 0.75 percent this year.

But Bundesbank Vice President Jürgen Stark said on Thursday the euro’s rise was not entirely a bad thing for the region. He pointed out that as the euro climbs, dollar-denominated goods such as oil become less expensive, which decreases the risk of importing inflation from abroad.

That in turn could enable the European Central Bank to cut interest rates to help spark growth in the coming weeks.