Sat, Mar 22, 2008 - Page 9 News List

Europe is learning to live with the mighty euro

European firms are no longer so reliant upon the US market, their raw materials are cheaper and the falling dollar has cushioned them from oil price hikes



When the euro tiptoed above US$1.30 four years ago, finance ministers from Germany, France and Austria wrung their hands about how it would hurt Europe's exporters, some muttering that the US should put its economic house in order.

Now, the euro is skirting US$1.60, and most Europeans are stoic.

While the currency continues to absorb the brunt of the dollar's decline -- the US Federal Reserve's rate cut on Tuesday will only add to the pressure -- Europe has learned to live with the almighty euro.

Because of new markets abroad, leaner companies at home and the positive side effects of a weak dollar, European exporters have withstood the loss of competitiveness that comes with a buoyant currency.

Last week, as the euro rocketed into uncharted territory against the dollar, Europe reported a healthy gain in industrial output, with Germany, France, Italy, and Spain all chipping in good numbers. Exports in Germany rose 9 percent in January over the same month last year.

While a surging euro is indisputably a burden for Europe's exporters, making their goods more expensive in the US and dollar-linked markets, it has not yet had a sharp effect on Europe's economy, which continues to grow, although at a more subdued pace.

Anton Boerner, who leads an association of German exporters, said he viewed inflation as a bigger threat than exchange rates. At a recent meeting with two European Central Bank governors, he urged them not to lower rates, even though it would have taken pressure off the euro.

"Some of my members asked, `Was it necessary for you to say it that strongly?'" he recalled in an interview. "I said `Yes. We're not focused on quarterly results. We're looking for long-term results.'"

Boerner predicts that Germany will ship 1.02 trillion euros worth of goods this year, 5 percent more than last year. At the latest exchange rate, that works out to some US$1.6 trillion, enough to keep Germany neck and neck with China for the title of world's merchandise export champion.

"It's quite an impressive figure, given the situation with the dollar," said Boerner, president of the BGA or Federation of German Wholesale and Foreign Trade.

There are several reasons for Europe's resilience, not least the painful cost-cutting by its companies, which has made them globally competitive for the first time in a decade. Many exporters have relocated production outside Europe, where costs are lower and not denominated in euros.

A strong euro has its benefits, beyond giving European tourists an occasion to go on shopping sprees in New York. It makes imported raw materials cheaper for European manufacturers, and it cushions Europeans somewhat from the rising price of oil, which is traded in dollars.

The euro has risen 18 percent against the dollar in the last year. But economists point out that the trade-weighted exchange rate -- which measures the euro against a basket of currencies from its trading partners -- matters more. By that yardstick, the euro has risen a more manageable 8.6 percent.

With the development of the global economy, Europe no longer relies as heavily as it once did on the US for trade. While the weak dollar and the faltering US economy are hampering trans-Atlantic exports, shipments to Russia and the Middle East are booming. Germany, Italy and other European countries specialize in the kinds of goods -- sophisticated machinery and equipment -- for which these fast-growing countries have a seemingly bottomless appetite.

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