The high Euro's affect on Europe

[southsider2k5]

I know some of us had a discussion a while back on the affects of currency prices on an economy. Now Europe is starting to feel some of the things I said they would... Very interesting read.

 

The Ford Motor Co. plant in Cologne is the very picture of a modern production facility.

 

Konrad Adenauer was the city's mayor when he laid the plant's cornerstone before World War II. But inside, a recent $500 million facelift has left a shine on the place. Parts arrive from suppliers in a new industrial park nearby, and robots help workers slide dashboards and doors into gleaming new Fiestas-in-progress as they slide down the production line.

 

 

 

 

If only the European economy could be so modern.

 

The U.S. economy is rebounding, and even Japan's economy is sputtering back to life. But Europe is caught in a grand funk.

 

The continent is burdened by a high-priced currency, the euro, that has jumped more than 40 percent against the dollar in the past two years, from around 86 cents in 2002 to $1.24 today. The strong euro slows the economy by making European exports expensive.

 

Rigid laws frustrate growth

 

Meanwhile, rigid laws affecting everything from hiring and firing workers to environmental restrictions to health care and pension laws frustrate efforts to revive growth. Minor changes in laws affecting layoffs and pension plans have only highlighted the need for broader, more structural improvements.

 

"It's not that nothing is being done," said Wolfgang Schneider, vice president of environmental and governmental affairs for Ford of Europe. "It's the depth and the pace that we're worried about. The depth is not enough, and the pace is not enough."

 

The dollar's plunge against the euro and the weak European economy will be central topics beginning Friday when finance ministers from the world's seven strongest economic powers, the Group of Seven, meet in Boca Raton, Fla.

 

The ministers are likely to call for stable exchange rates and encourage structural economic reform within countries, say trade experts and government officials. But little is expected in the form of policy shifts, particularly from the United States--a country widely blamed for exporting its economic problems by maintaining low interest rates and a low dollar, despite large budget deficits.

 

"From the perspective of everyone else, the U.S. has this incredible ability to shift its problems out to the rest of the world," said Dani Rodrik, an expert on global economics at Harvard University's Kennedy School of Government.

 

In fact, President Bush has little political incentive to make any economic moves that would alleviate Europe's euro-related discomfort.

 

"In an election year you want to fire on all cylinders," a high-ranking finance official from a G-7 country observed. "You want loose fiscal policy, loose monetary policy, a low exchange rate. [Presidential political adviser] Karl Rove is setting economic policy, not [Treasury Secretary] John Snow."

 

Europe seems to be bearing the brunt of the impact. Mainly it is felt in the form of economic sluggishness tied to the sky-high euro. And Europe is getting little help from other major trading partners. The central banks of Japan and China are believed to have accumulated $400 billion in foreign currency reserves last year, mostly by selling their currencies and buying euros.

 

When the euro launched on Jan. 1, 2002, there was concern that the new currency would eclipse the strong dollar and cause economic discomfort in Europe. The opposite happened initially. The euro promptly weakened, and talk about economic dislocation went quiet.

 

The currency's deep slide concealed the real impact of what had just happened.

 

In launching the euro, the European Union countries created a powerful new entity, the European Central Bank, that would have as much impact on Europe's economy as the Federal Reserve does in the U.S. They agreed to limit their national debt to no more than 3 percent of each country's gross domestic product and to coordinate economic growth policies.

 

No wonder a euro obsession has taken hold, not only among economists and government officials but also on the streets of Europe's grand cities. The mainstream German magazine Stern ran a cover story heralding the euro's two-year anniversary. "We've paid with the euro for two years now," the story began. "And the effect is undeniable: Damn it, everything's getting more expensive!"

 

In fact, prices have climbed at only a 4.5 percent annual rate since the euro's launch. But the Stern survey of hundreds of prices included items such as a Melita coffee filter that is twice as costly; Clearasil cream, up 63 percent; Nutella chocolate spread, up 88 percent; and Coca-Cola Light, up 35 percent.

 

The perception of high prices, coupled with a newfound acquaintance with mass layoffs, reduced unemployment benefits and smaller health-care subsidies, has put European consumers in a tightfisted mind-set.

 

Klaus-Peter Mueller, chief executive of Commerzbank AG of Germany, said an obsessive cautiousness by European consumers and companies is inhibiting growth. "Europeans are saving themselves to death," he said.

 

"The Europeans have a tendency, we shave in advance. We are crying today for the pain we might feel tomorrow," Mueller told a small group of economists and government officials last month at the World Economic Forum in Davos, Switzerland.

 

Mueller notes that Germans save 11 percent of their income, more than triple the low 3.5 percent savings rate in the U.S. While many Americans decry the country's low savings rate, a high savings rate can slow economic growth--as Japan learned during its "Lost Decade" of the 1990s.

 

`Disbelief in the future'

 

"Why are European people not spending?" Mueller asked. "It's a disbelief in the future of the countries, a disbelief in what politicians are doing. The Americans still believe in their power and strength. Europeans don't."

 

European governments have been hesitant to make wholesale structural changes. The French government has tackled pension reform but won't touch the 35-hour workweek that analysts say inhibits economic growth. British productivity lags, despite new investment in training, partly because the government has yet to fully implement a new policy that encourages research and development. The Italian economy is slow, despite strong job creation, in part because of a confusing array of government debt.

 

The slow-growth economies have prompted two of Europe's strongest countries, Germany and France, to abandon the continentwide commitment to keep their government deficits no higher than 3 percent of gross domestic product. Government debt in both Germany and France top 4 percent of GDP, while Italy and Britain are among countries that seem likely to breach the EU's 3 percent debt ceiling.

 

The ballooning budget deficits could jolt the European Union's political cohesion. But France, Germany and other countries may have little choice. After all, they have turned over their other major economic management tool--control of the money supply--to the European Central Bank.

 

The halting reform efforts have left many Europeans frustrated. Structural economic change once was a political taboo, but German Chancellor Gerhard Schroeder's recent embrace of new labor rules has shown that such changes may have political support.

 

"What has happened so far is not a real reform. It's been more pushing the burdens to the working class and not really reforming," said Michael Heise, chief economist of insurance giant Allianz Group.

 

In the meantime, companies operating in Europe are left to do their best with the reforms that have been made while managing their way through the sluggish European economy.

 

Rupert Stadler, chief economist of the German auto maker Audi AG, said the company is breaking away from a strict per-hour pay structure. Audi now pays workers according to how many cars they produce.

 

The company has shifted to lower-cost suppliers, buying steel from Russia, for example. And it is trying to push up prices in the U.S., its largest export market, though that is difficult when competitors such as BMW and Mercedes-Benz have little currency exposure because they make cars in the U.S.

 

The high euro is prompting Audi to take a serious look at opening a plant in the U.S., Stadler said.

 

In the meantime, Stadler tries to reduce Audi's exposure further by trading currency in the financial markets. But such hedging works for only so long, he said.

 

The chief executive of a major, Europe-based global professional services firm said that anxiety about the economy has spread throughout European industry.

 

"Most of our clients are deeply concerned about the future of Europe," the executive said. "They're deeply concerned about the structural change that needs to be made to get anything done. That structural change will be colossally difficult."

[SuperSteve]

May you, um, summarize it? Please?

[southsider2k5]

May you, um, summarize it? Please?

To summarize..

 

High Euro=bad for European Economy.