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Today the euro has lost much of its glamour, gangsta or otherwise. It has fallen by 15% against the dollar since December. Most analysts think that the decline still has some way to go. Some even talk of parity between the two currencies. This is a severe blow to Europe’s self-image. But is it such a bad thing for business in the euro zone?
Exporters had seen the overvalued euro as a heavy cross to bear. For example, Anne Lauvergeon, the boss of Areva, a French nuclear firm, complained loudly that her company lost its bid to supply four reactors to Abu Dhabi thanks to the currency’s strength. The euro’s decline, in contrast, should bolster exports for big manufacturers (particularly in northern Europe) and luxury-goods companies (particularly in Italy and France) while boosting tourism across the continent.
Daimler-Benz expects a billion-euro gain in its operating profits this year. Sales of its Mercedes brand have already surged by 26% in America in the first four months of this year—and those sales are worth more in euros than they would have been at the beginning of the year. EADS, the parent company of Airbus, has seen its share price rise, despite disappointing earnings, in anticipation of a similar “euro effect”. Rémy Cointreau, which pays for the production of most of its goods in euros but sells most of them outside the euro zone, could be in for a bonanza.
European exporters, particularly Germany’s mighty car companies, have worked hard to boost productivity during the era of the strong euro. They are now well placed to reap the fruits of their good management. They can also wallow in a little Schadenfreude as American and Asian companies take up the cross of a higher dollar. The likes of Procter &Gamble and Colgate-Palmolive, which are already suffering from weak consumer spending and expensive raw materials, will now have to cope with a mightier dollar as well.
Yet they are hardly singing the “Ode to Joy” in Europe’s boardrooms. That is partly because most businesses loathe uncertainty, and European ones are now having to rejig contracts with foreign suppliers and recalibrate investment plans. But it is also partly because many big companies have worked hard to protect themselves from the opposite problem to the one they are now confronting. Some have locked themselves into hedging arrangements that will prevent them from taking advantage of the lower euro until next year or even the year after. PPR, a French holding company which owns Gucci and several retail chains, has already declared that it will be adversely affected by its hedging policy, for example.
Some of Europe’s most successful exporters operate in markets where price is far from being the primary consideration. Europe’s export powerhouse, Germany, is more focused on industrial goods than consumer ones. It is also dominated by highly specialised companies—many of them small—that produce bespoke goods for individual customers. Georg Tacke, of Simon-Kucher & Partners, a consultancy, points out that even those companies that are enjoying windfall profits are reluctant to treat the euro’s decline as an opportunity to gain market share, through cut-throat pricing, since they are well aware that what goes down can also go up.
Some of Europe’s great success stories in recent years have been driven by the overvalued euro. A swathe of European companies—think of Spain’s Santander or Italy’s Banca Intesa—have used the currency’s strength to buy companies in Britain, the United States and Latin America relatively cheaply. Arturo Bris, of IMD, a Swiss business school, points out that the lower euro is likely to put an end to this acquisitions frenzy—or, at the very least, shift it to those countries in eastern Europe whose currencies are pegged to the euro.
Heads I win, tails you lose
European companies are also grappling with the iron law of currency movements: that what you gain on the swings you lose on the roundabouts. European companies will find it more expensive to raise capital internationally. They will also have to pay more for commodities such as oil which are priced in dollars. This means that the huge number of European companies that export mainly within the euro zone are seeing the costs of their raw materials rise without any accompanying benefits. Even Germany does more trade with France than any other country.
The biggest worry for European business, however, is not so much the decline of the euro itself but rather what it says about the European economy. European governments will have to reduce public spending dramatically to allay the market’s fears. Spain has already announced that it is cutting public-sector wages by 7% and Greece by 16%. This will inevitably remove spending power from the European economy and so dent its short-term prospects.
The euro’s slide also hints at deeper worries about Europe’s ability to promote growth and create jobs. The introduction of the single market and the single currency were supposed to spark a glorious period of innovation and productivity growth. This has not happened. The European economy remains dependent on long-established corporate champions such as Daimler and on public-sector jobs. The old continent has dismally failed to create local equivalents of America’s Microsoft and Google. The problem for European business, in short, is that silver linings come with dark clouds attached
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