The Sinking Dollar 'The Strong Euro Is Destroying Jobs'

The strong euro -- and weak dollar -- is making it increasingly difficult for European companies to do business overseas. SPIEGEL ONLINE spoke with German government economic advisor Peter Bofinger about the dangers of an unfettered euro and what the European Central Bank should do.

The dollar continues to fall against the euro.

The dollar continues to fall against the euro.

SPIEGEL ONLINE: Mr. Bofinger, the euro topped the $1.48 mark on Tuesday, and it looks like it might just keep on climbing. But, as opposed to when the euro dramaticly rose in 2001, relatively few politicians and managers have complained about the currency's strength this time around. Why not?

Bofinger: I'm wondering the same thing. Here in Germany, we are dealing with a number of smaller issues, things like how long we should pay unemployment benefits or tax cuts for commuters. But the euro just keeps getting stronger and stronger. And not just against the dollar, but also -- and this is absurd -- against the yen, despite the fact that Japan has the highest current accounts surplus in the world. The rising euro is really destroying jobs, but hardly any attention is being paid to it anymore. It's odd because the exchange rate is, at the moment, incredibly important for our continued economic growth.

SPIEGEL ONLINE: The euro has been climbing for years, though. Hasn’t the economy long since learned to live with a strong European currency?

Bofinger: In recent years, the appreciation of the euro has gone hand in hand with a dynamic and growing world economy. The expensive euro was easily set off by that growth. Now, though, the euro's climb is set against the backdrop of slowing global demand -- and that is a new aspect.

SPIEGEL ONLINE: German Finance Minister Peer Steinbrück is unperturbed by the strong euro. Even the Federation of German Industries (BDI) has said that German exports are equipped to deal with an expensive European currency.

Bofinger: That is a contradictory position. You can't demand that non-wage labor costs fall so that German companies can compete in the global marketplace while at the same time asserting that the economy can handle the climbing euro rate. If you calculate the climb in yen or dollars, the appreciation of the euro raises costs for European companies exactly as a wage hike or an increase in social security payments would. And since when are climbing costs irrelevant for companies? The euro rate has already created major problems for BMW, not to mention Airbus. You will soon begin seeing the effect elsewhere, too. It cuts into profits.

SPIEGEL ONLINE: There is an upside to a strong euro, though. The price for gasoline is climbing much less quickly here than it is where dollars are being spent. Plus, imports from Asia and the US are getting cheaper.

Bofinger: The oil argument isn't totally wrong, but the climb in the dollar price of oil is at least partly due to the currency's weakness. Plus, our economy is very dependent on foreign trade. This year, we have seen relatively strong investments, but private consumption has dropped -- and that's happening in a growth year! The economy here at home isn't totally healthy, and that's exactly why the expensive euro has the potential to hit the German economy at such a critical point.

SPIEGEL ONLINE: How do you think the euro rate will develop?

Bofinger: It could easily climb to $1.60. But I don't want to predict anything; currency markets are largely speculative.

SPIEGEL ONLINE: But let's assume it does hit $1.60. What then?

Bofinger: That would be an appreciation of another 10 percent, which would mean it would eat into annual economic growth to the tune of half a percentage point. I don't think the economy is going to slow down immediately; exporters are still sitting on a mountain of unfilled orders. But the loss of competitiveness will become apparent as soon as the new orders start coming in, and -- in the mid-term -- the job market will suffer.

SPIEGEL ONLINE: What can be done to control the rising euro? A cut in interest rates by the European Central Bank is likely out of the question.

Peter Bofinger would like to see a more active European Central Bank.

Peter Bofinger would like to see a more active European Central Bank.

Bofinger: In theory, cutting interest rates would be a useful tool, but you're right that such a move wouldn’t really be compatible with the current EU economy. The US would likely just sink interest rates even further, and the ECB wouldn't be able to keep up without risking inflation. A much better solution would be an intervention in the currency markets.

SPIEGEL ONLINE: Would an ECB intervention even have an effect? There is an overwhelming amount of evidence that the euro appreciation will continue no matter what anybody does. Countries like China are converting their reserves from dollars into euros in full knowledge that the problems in the US aren't going to disappear overnight.

Bofinger: I wouldn’t just brush off the potential effects of an ECB intervention like that. Here, everyone seems to treat currency rates as if they are handed to us by fate. But that's a joke. Of course you can intervene successfully. The Japanese did it in 2002 and 2004, and the Chinese are massively active in the currency markets. It is only the Western Europeans who don't pursue their national interests on the currency markets.

SPIEGEL ONLINE: You're exaggerating.

Bofinger: Not at all. In recent years, we have seen an enormous increase in the size of currency reserves around the world. That shows that many countries are buying dollars to keep their own currencies cheap. That's not just true in Asia. Countries in South America, South Africa and Eastern Europe are intervening in this way to protect the competitiveness of their domestic economies.

SPIEGEL ONLINE: Controlling the exchange rate, though, isn't part of the ECB's portfolio. Their main goal is that of keeping inflation in check.

Bofinger: It is true that the bank's statutes mention price stability as being the its primary aim. But as long as it achieves that, it can surely make sure that the euro doesn't ruin the euro zone's economic viability. The two things can be compatible.

SPIEGEL ONLINE: But let's be honest. It's not very realistic to think that the ECB is going to jump into the currency markets.

Bofinger: Unfortunately, it isn't very likely, no. In the mid-term, though, we do need a multilateral policy for dealing with exchange rates. It is something that the World Monetary Fund could coordinate. In the current, weak-dollar situation, China, South Korea, Japan, Russia and other countries that have huge dollar reserves would have to be brought on board. A treaty should be signed with their central banks so that they don't dump massive amounts of dollars onto the market. A similar treaty already governs the gold market in Europe.

Interview conducted by Matthias Streitz


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