'Turbo effect' revs up Europe

But EU markets may take a hit if Fed Chairman Alan Greenspan hikes interest rates, as expected.

With the European Union's common currency, the euro, languishing nearly 25 percent below its 1999 launch value, Europe's economy and its businesses also must be in the doldrums, right?


Chief financial officers of companies large and small across the Continent are rubbing their hands with glee at the euro's slump against the US dollar - from $1.16 to $0.92. It helps exports, discourages American competition, and boosts profits from dollar investments, they say.

For the upside of an apparent disaster, consider these three cases:

*DaimlerChrysler has seen a leap in exports - and a reported 12 percent increase in sales revenues in 1999 - as the German-based automaker says its car prices fell by as much as 25 percent in the United States in recent months.

*Pechiney, the giant French aluminum producer, which has seen the value of its product, priced in dollars, jump compared to its costs, which are priced in euros.

*Pinguely-Haulotte, a small French mechanical engineering company, is beating tough US competition in Europe because American machines are suddenly 25 percent more expensive here than they used to be - and thus a lot harder to sell.

Schrder shrugs off concern

"We shouldn't worry" about the euro's weakness, German Chancellor Gerhard Schrder told his parliament last week. One day, it will pull back, he insisted. "Until then, let us take a little pleasure from the fact that our exports are doing so well."

"The trend of a lower currency generally favors exports," DaimlerChrysler pointed out in a recent report on the euro, "and the same applies to DaimlerChrysler because the exports of our Mercedes-Benz vehicles and aerospace units are higher than our imports from the US dollar zone."

German exporters across the board have enjoyed the same "turbo effect" of the euro's fall, as the German Association of Wholesalers and Exporters called it last week, pointing to an upswing in German exports over the past three months.

As for Pechiney, each 10 percent drop in the euro's value boosts profits by 65 million euros, or about 18 percent, according to the company's acting chief financial officer Alain Pasquier.

Not only does the aluminum producer benefit from the way metals are priced in dollars, it is also reaping an accounting windfall from its overseas subsidiaries when their dollar profits are added up in euros.

"As far as we are concerned, we are not suffering from the fall in the euro," says Mr. Pasquier. "On the contrary, the effects are positive."

Even companies with no dealings overseas are reaping the benefit. At Pinguely-Haulotte, which makes equipment to lift workers and their tools high into the air, "we are delighted," exults company president Pierre Saubot.

Mr. Saubot's main competitors in Europe are American, and with the dollar's rise, their machines have gone up in price.

"It is undeniable that over the last 18 months we have gained in competitivity because of the euro," he says. "We've gone from 12 percent of market share in Europe to 20 percent ... and the monetary factor is far from being a negligible factor in that."

Tougher sell for US exporters

American exporters are taking the hit. The euro's fall "has certainly put the pressure on," says Geoff Campbell, vice president for international sales at JLG Industries Inc., the McConnellsburg, Penn.-based company that gives Saubot most of his competition. "You only have to do the math to understand what a huge impact a [currency] move like this has on a business."

JLG's European sales last year were up 50 percent "because our market was growing so strongly," says Mr. Campbell. But he had expected 75 percent growth. Although Campbell says, "We were doing OK until recently," he adds that the latest 10 percent drop in the euro value, in April, "could be a real concern."

DuPont, the Wilmington, Del.-based chemicals and plastics behemoth, said in its first-quarter report that it lost 10 percent of the profits it would otherwise have made on sales in Europe because of the weak euro.

Europe's 11 euro-zone members, whose exports account for about 17 percent of their gross domestic product, are more export-dependent than either the US or Japan.

Higher exports are thus especially important in boosting the Continent's growth rate, which this year is expected to reach nearly 4 percent in the euro-zone.

The weak euro is "negative for imported energy," which now costs more, "but it is positive for growth, and that is the more important factor," says J. Paul Horne, an economist in London with Solomon Smith Barney investment bank.

The fact that US growth, currently running at 5.4 percent annually, is so far ahead of Europe, partly accounts for the weakness of the euro: European investors in search of better returns on their assets have pumped about $150 billion into the US over the past 12 months, many times the amount of investment that has flowed the other way across the Atlantic.

The major risk normally associated with a currency devaluation - inflation resulting from higher prices for imported goods - does not appear to threaten at the moment, according to Mr. Horne.

This is mainly because the European Central Bank, which sets monetary policy in the euro zone, has made the fight against inflation its only real goal, and because countries using the euro are pledged to keep their budget deficits below 2 percent of GDP.

Looking to the Fed

The euro's weakness, says Horne, is largely due to the strength of US economic growth.

US Federal Reserve Chairman Alan Greenspan was expected to announce an increase in the key federal funds rate of between one-quarter and one-half of a percentage point, in a decision due after press time.

The US central bank has made five quarter-point interest rate hikes since last June, but the economy shows little sign of slowing.

If the markets feel that the Federal Reserve is serious about cooling things off with interest rate hikes, "they will start nibbling at the euro," he predicts.

"Given Europe's growth rate, its high savings rate, its current account surplus, and low inflation, euro assets are very attractively priced at the moment," says Horne.

"But we'll really have to see the US economy slow down before things start to change."

(c) Copyright 2000. The Christian Science Publishing Society

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