Weak euro has implications for foreign trade

OUTLOOK

European economy still trails U.S.

February 06, 2000|By Amanda J. Crawford

THE EURO has slumped in recent weeks after stronger than expected economic growth. In the United States on Monday, the currency hit a record low of 96.65 U.S. cents, a decline of about 17 percent since it was adopted by 11 of the 15 European Union countries in January 1999. While some have expressed concern about the euro's slide, Dutch Finance Minister Gerrit Zalm called it "a good investment opportunity."

What caused the euro's decline against the U.S. dollar? What does it mean for Europe? For the United States? Will it affect trade?

Alex Beuzelin

Senior market analyst, Reusch International Inc., Washington, D.C.

The key reason for the euro's slide against the U.S. dollar is even though European economies are showing signs of improved economic growth, they continue to vastly underperform the robust U.S. economy. The strong economic growth in the U.S. combined with low inflation make U.S. assets attractive to global investors. Consequently, there is strong demand for U.S. dollars. A lot of that demand is at the expense of the euro.

The euro's new record low against the U.S. dollar will have different consequences for Europe -- some positive, some negative. On the positive side, a weaker euro means that European exports are priced more competitively in the international market. Therefore, a weaker euro will help the European economies accelerate in terms of economic growth.

On the negative side, the weakness of the single currency represents a psychological blow to European central bankers and European political leaders. In addition, further euro weakness could increase the risk of imported inflation in Europe and this could force the European Central Bank to raise interest rates sooner than it would originally have liked to. A pre-emptive interest rate hike could serve to slow down European economies.

The euro's weakness is going to tend to further hurt the competitiveness of U.S. exports, thereby further deteriorating the U.S. economy's trade deficit and current-account deficit.

Stuart Esler

Business director, Millennium Performance Chemicals in Paris, part of Millennium Inorganic Chemicals Inc. of Hunt Valley

The important thing to remember about the euro is at the moment it is still only a financial entity. There is no currency and no coins. (The coin and currency will be issued in 2002.) Because of that, the euro is not widely used yet at the retail level. It is increasingly being used at the commercial level for commercial transfers. The end customer is still seeing the price in local currency, French francs or German marks. For the man in the street in Europe, the slump in the value of the euro has not touched them yet in a personal way because they are still trading in their local currency.

The primary purpose of the euro was to improve internal efficiency within Europe and it certainly succeeded in that aspect. The external value of the euro, really, is a reflection of the much higher growth rate that we are seeing in the Anglo-Saxon economies, particularly the U.S.

This lower value of the euro makes European exports cheaper. So the immediate effect for Europe is positive. We're already seeing improved growth in Germany and in France. In the short term, the lower value of the euro is negative for U.S. exports because a stronger dollar makes these exports less competitive in Europe. But in the midterm, as European growth begins to increase, the demand for U.S. products will also increase. And the long-term effect should be positive for both economies.

Mickey D. Levy

Chief economist,

Bank of America, New York

The slump in the euro reflects international portfolio managers' concerns about anti-growth economic policies that suppress potential growth and expected rates of returns on euro-dominated assets. The euro weakness, while providing a boost to European exporters, also suppresses purchasing power of European households and thus is a net negative for the European economies.

Since Europe is a destination for approximately one-quarter of all U.S. merchandise exports, the weaker euro relative to the dollar may suppress U.S. exports from what they would be otherwise. Most importantly, however, the weak euro symbolizes the misguided tax and regulatory policies in key European countries that inhibit faster economic growth and thereby deter international capital inflows.

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