Tags: Weak | Euro | European | Economic | Recovery

Weak Euro Could Help European Economic Recovery

Wednesday, 19 May 2010 09:48 AM

As jittery markets fret about the plunging euro, experts say there's a potential upside: Europe's economies stand to profit from the drop of the common currency as exports to the United States and Asia become cheaper.

The euro has dropped in value by nearly a quarter since its height of $1.6038 in 2008, down to $1.22 Tuesday. That means a German car priced at 50,000 euros ($61,5300) two years ago — worth $80,000 in U.S. dollars at the time — would cost the equivalent of a little more than $60,000, strictly according to currency effects.

The lower euro is an advantage especially in Germany, the euro zone's largest economy and an export powerhouse.

"The euro's becoming weaker naturally helps the German export economy and that helps all of the German economy get back on track," Volker Treier, chief economist at the German Chambers of Industry and Commerce, told The Associated Press on Tuesday.

"Exports are the factor in the gross domestic product that has helped liven up the economy," Treier said.

After having slowed in 2009, German exports in March jumped 10.7 percent on the month and the think tank IW reported this week that it was now predicting a 7.25 percent increase in exports from Germany on the year. It predicted a further 6 percent for 2011.

The euro's drop against the dollar "tends to favor the German export economy," IW director Michael Huether said. "On this background, exports will become a driving force of economic recovery in Germany."

The export advantage of a weaker euro extends to all the 16 nations that use the common currency, so long as they are trading outside the bloc. They have some competition in the weaker currency department, as Britain has seen a similar dramatic drop in the pound from a high of $2.1161 in November 2007 to this week's level of around $1.45 — a decline of nearly a third.

Still, Anton Boerner, president of the Federation of German Wholesale and Foreign Trade, signaled a note of caution.

"Short term, the weak euro might bring some relief because products made in Germany have an advantage on world markets," he told the Sueddeutsche Zeitung newspaper's online edition. "But one should keep in mind that Germany is also one of the world's largest importers. And as commodities are traded in dollars, buying them will be very expensive."

For now, however, sinking oil prices have mitigated that effect, with a euro buying the same amount of crude now that it did at the beginning of the year, Treier said.

Boerner and others also voiced concerns that even with the boost to exporters, wide currency fluctuations could hurt businesses that are unable to hedge against risks, and also harm foreign investments in Germany, among other things.

"The continuing weakness of the euro exchange rate and the high volatility in stock markets confirm that the structural problems so far remain unresolved," Alexander Koch of UniCredit Research said in a statement, adding that austerity measures in euro countries might also slow growth in Germany.

"This clearly more than compensates for the support coming from the euro depreciation, which improves the price competitiveness of exporters."

Duisburg University economist Ansgar Belke added that short-term currency fluctuations do not tend to affect major exporters significantly.

Companies producing the most prominent German export goods like high-tech items, high-priced machinery and cars are hedged against currency risks, he said, and can also buffer slightly higher or lower exchange rates by taking losses or beefing up their profits without changing prices.

"Overall, reaction of German exports to moderate variations in the exchange rates is very weak," Belke said.

Belke cited a study he did late last year that showed major economic consequences are to be expected only with extreme ups or downs.

With experts seeing a "balanced" exchange rate at $1.25 for 1 euro, only prolonged rates at the level of $1.55 or $0.95 respectively would see major shifts in export business activity, Belke said.

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