Exporters exaggerate dangers of euro ascent

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Exporters exaggerate dangers of euro ascent
Pros of strong currency outweigh cons

By Elise Kissling


The euro's rapid ascent to dollar parity, which partly motivated the European Central Bank's decision to postpone raising rates at its fortnightly meeting in Luxembourg on Thursday, has caused exporters to warn that Germany's fragile economic recovery is in danger. But economists say that fears about the economic impact of the euro's breakneck appreciation are exaggerated.
“More important are the positive effects,“ says Joachim Scheide from Kiel's World Economic Institute. “A strong euro is in our interest,“ he adds, since falling import prices are good for both consumers and businesses and consumers immediately notice lower gasoline and home heating oil prices. “This boosts their purchasing power and with it the economy,“ Scheide says, while companies profit from cheaper capital goods.
“The euro's appreciation isn't exactly a show of strength,“ he says. “It has recovered only half of what it lost since its 1999 launch.
“A strong euro will help stabilize the economy,“ says Michael Heise, chief economist at Commerzbank. The current imbalance between the current account and the capital account needs to be brought into equilibrium. “Capital flows are heading to Europe again. I see a medium-term trend in that direction.“
Heise also says lower import prices put downward pressure on inflation, giving the ECB leeway to keep interest rates low or even decrease them further. This will in turn support the fledgling economic upswing.
The ECB had been preparing the markets for an imminent rate hike since early May amid rising inflationary dangers. Forecasts in early June that consumer inflation would reach 2.3 percent this year and 1.9 percent next year fueled speculation that the ECB would raise rates. This scenario became less likely with every cent that the euro gained against the dollar.
On the export front, Scheide says: “The euro's ascent isn't going to hit German exports head on because of the breakdown of the country's exports.“ Just over 55 percent of Germany's exports go to other EU countries, where exchange rates have hardly changed, he says.
“Of course, every cent makes things a bit more difficult for exporters. But as long as the euro stays below say $1.10, the impact on exporters will be small,“ says Heise. Although this pain threshold varies, most economists put it in a range between $1.05 and $1.15. The euro peaked at $0.9916 early this week, but fell to $0.9787 Thursday.
“We don't see a magic limit above which the recovery is in danger,“ says Commerzbank economist Rolf Solveen, but he warns that companies could have problems if the rate changes dramatically in too short a time.
“I don't see the euro rising to $1.20. The current situation has to do with the accounting problems of America's listed companies. Bush's economic policy also plays a role,“ says Scheide.
Deutsche Bank's chief economist, Norbert Walter, warns that short-term exchange rate forecasts are impossible to make, but that since the United States no longer wants a strong dollar, the euro is likely to continue rising over the long term. “Experience shows that the change usually goes beyond equilibrium. A word of warning: in the mid-1990s, the converted euro-to-dollar exchange rate was 1.40.“
German businesses already fear that the rising euro will curtail the export-led recovery hinted at in first-quarter gross domestic product. Munich's widely-used Ifo business mood indicator revealed markedly lowered export expectations in June. The mood was worst among manufacturers of capital goods.
Walter says the euro's appreciation will affect exporters with a delay of around six months, meaning the impact will become visible in the fourth quarter. “Domestic investments in the international sector have already been pared back because of these expectations,“ Walter says.
Jul. 5


Frankfurter Allgemeine Zeitung

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