Reactions to Euro's Record High

'There's No End in Sight'

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.

SPIEGEL ONLINE: Mr. Bofinger, the euro keeps climbing and climbing. How much higher can it go?

ABOUT PETER BOFINGER

MARCO- URBAN.DE

Peter Bofinger, born in 1954 in the German city of Pforzheim, teaches economics at the University of Würzberg. He specializes in currency policy, currency theory and social system reform. In 2004, he was invited to join a German panel of economic experts known as the "Five Wise Men." Bofinger's positions are often at odds with the mainstream -- he is one of the few German economists to criticize the social system and labor market reform package introduced by the government of Gerhard Schröder known as Agenda 2010.

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?

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Bofinger: Yes. The appreciation of the euro softens the rise in the price of oil. This also cushions the effect of prices rising too fast in the euro zone.

SPIEGEL ONLINE: In light of the high euro, could the European Central Bank bring itself to reduce the prime rate?

Bofinger: I don't see this coming, at least not at the moment. If the current high inflation declined a bit, it would make sense to offset the euro's appreciation with lower interest rates, to generate more economic activity in the euro zone.

SPIEGEL ONLINE: Mr. Straubhaar, how much higher will the euro go?

ABOUT THOMAS STRAUBHAAR

DPA

Thomas Straubhaar is Professor of Economics at the University of Hamburg and Director of the Hamburg Institute of International Economics. In his research, he concentrates on international economic relations, regulatory procedures and the economics of education and demography.

Straubhaar: The euro will continue to fluctuate within a range of $1.45 to $1.55 for a long time. Overall, the weakness of the dollar is a remarkable phenomenon. Historically speaking, a euro price of $1.45 is already very high, and the currency has been at this level almost consistently since the beginning of the year.

SPIEGEL ONLINE: Why do you expect the dollar to remain weak?

Straubhaar: Because the prime rate spread between the United States and Europe is likely to increase even further in the coming months. The European interest rate is already one percent higher than the US prime rate. The US Federal Reserve has not ruled out further rate cuts, whereas such measures are not to be expected from the European Central Bank.

SPIEGEL ONLINE: When the euro appreciates, export prices go up. How harmful is this for Germany?

Straubhaar: It certainly doesn't help exports for products to keep getting more expensive. But thanks to increasing trade in the euro zone, Germany is becoming less dependent on the US dollar exchange rate. Trade with Arab countries is also being conducted more frequently in euros. Instead of petro dollars, we refer more and more to petro euros.

SPIEGEL ONLINE: When will the euro replace the dollar as the world's reserve currency?

Straubhaar: Whether that will happen remains to be seen. But the trend is moving in that direction. I am fairly certain that the euro will replace the dollar as the reserve currency in the course of the next decade.

SPIEGEL ONLINE: Mr. Dreger, the euro has just broken through the psychologically important $1.50 threshold. Is this the end of its rise?

ABOUT CHRISTIAN DREGER

Christian Dreger

Christian Dreger is deputy director of the Macro Analysis and Forecasting Department at the German Institute for Economic Research. He focuses on the integration of international financial markets, stabilization policy and the analysis of economic data.

Dreger: Well, the euro isn't about to hit the $1.60 mark tomorrow. Factors like the weak US economy will continue to put pressure on the dollar, but they are already factored into the current high. It would take a major surprise to cause another jump in the euro's appreciation -- for example, if the European Central Bank decided to raise the prime rate.

SPIEGEL ONLINE: Is that likely?

Dreger: It's a legitimate option within the ECB's monetary policy. Our current inflation rate is above two percent. Raising the prime rate would be the most effective way to bring down inflation.

SPIEGEL ONLINE: The fear of a US recession is depressing the dollar. Why is the US economy in such a predicament?

Dreger: The US has a negative balance of payments, while Asia is accumulating surpluses. Europe profits more from the boom in India and China than the United States does. Besides, the US energy policy is more wasteful than the European Union's, which puts a damper on growth dynamics.

SPIEGEL ONLINE: When the euro appreciates, export prices go up. How harmful is this for Germany?

Dreger: We shouldn't exaggerate the importance of that. Seventy-five percent of German foreign trade is conducted in euros. The euro-dollar spread plays a secondary role in this context. Besides, most of what Germany exports is capital equipment, which is relatively resistant to price fluctuations. Countries like Italy and France, which primarily export standard products, are affected much more heavily by a strong euro.

Interviews conducted by Stefan Schultz