Ausgabe 31/2007

Soaring Euro, Soaring Egos Germany Shrugs Off Exchange Rate Worries


Part 2: Onwards and Upwards

The container terminal Burchardkai at Hamburg harbor. What effect will the strong euro have on German exports?

The container terminal Burchardkai at Hamburg harbor. What effect will the strong euro have on German exports?

As well as the luxury automobiles which Germany is famous for, German companies supply products that emerging economies urgently need for their development, such as high-quality machinery and complete production facilities. "In these types of markets, rising production costs can easily be passed on to customers," reads the Glos report.

The experts also believe a stronger euro is not necessarily detrimental in a recovery. "The cushioning effects of currency appreciation will be limited if the appreciation itself is the result of increased economic activity in the euro zone," the report's authors write. In other words, the euro is strong because of the strong euro zone economy.

This strength is attributable to the euro zone outpacing growth in the US economy, which will grow by only two percent this year. "The strength of the European economy has surprised investors, which is reflected in exchange rates," Adam Posen, an economist with the Peterson Institute for International Economics, told SPIEGEL.

Developments in interest rates have given the euro an additional boost. Although the prime rate in the United States remains higher than in Europe, "the key thing is interest rate expectations," say the authors of an internal assessment at the German finance ministry. "These are aimed upward for the euro."

The Currency of Choice

Europe's uniform currency also benefits from its growing international role, as more and more investors see it as an alternative to the dollar. The euro's share of worldwide foreign currency reserves has increased from 16.3 percent in 2000 to 25.8 percent today.

Wealthy oil-producing countries, as well as Russia, are seeking opportunities to invest the profits from their exports of oil and other natural resources. "There are only two suitable financial markets (for such investments) in the world, namely the euro market and the dollar market," write German Finance Minister Steinbrück's experts -- and the euro zone is apparently the investment market of choice at the moment.

A growing number of governments are also tying their currencies to the euro. Credit rating agency Moody's estimates that more than 30 countries, including almost all of Eastern Europe, have already tied their currencies to the euro.

But the biggest impact comes from Asian countries with substantial budget surpluses. In 2005, China abandoned its long-standing policy of pegging its currency to the dollar at a fixed rate, instead tying the yuan to a basket of currencies in which the euro plays a prominent role.

Kuwait followed suit in May 2007. Since then the value of the Kuwaiti dinar is no longer tied solely to the greenback, but also to the euro. The Russian central bank raised the euro's share of its currency basket from 35 to 45 percent.

All of these measures are mutually reinforcing. As the euro gains in value, it also acquires a stronger role in currency reserves and currency baskets, thereby raising its value even further.

And this trend is unlikely to come to an end any time soon. "If the Asian currencies remain stable relative to the dollar and the euro bears the burden of is appreciation almost entirely on its own, rates could climb above $1.40 in the foreseeable future," says Washington-based economist Posen. Even higher rates are possible if the real estate crisis in the US wreaks even more havoc among hedge funds and investors pull out in panic.

Feeling the Effects

Some sectors, especially the auto industry, are already feeling the effects of the strong euro. Because of the weak dollar, German automakers BMW and Volkswagen each reported declines in their North American profits by several hundred million dollars in 2006.

Some are already expressing mild concern. "The euro appreciation has already led to a decline in exports to the dollar zone," says Alexandra Böhne, an expert on the economy with the Association of German Chambers of Industry and Commerce (DIHK). Nevertheless, says Böhne, this does not mean that growth forecasts should be corrected downward. According to Böhne, the recovery will continue because investments and consumer spending are increasingly driving growth.

The experts at the German economics ministry note that an economy benefits as a whole from the appreciation of its own currency, even if individual sectors suffer. "A high exchange rate also translates into lower prices for imports that are priced in dollars," they write. In particular, this reduces the cost of natural resources and raw materials, such as oil, natural gas and steel.

The price benefit, say the experts at the economics ministry, is the equivalent of real income growth. The same amount of money buys more natural resources, and the same volume of imports costs less. According to the experts, the savings free up money to spend on other things: "Both consumers and businesses benefit as a result."

Translated from the German by Christopher Sultan


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