The dollar's slide hurts Europe's economies. But the currency debate's bark may be worse than its bite
Posted Sunday, January 18, 2004; 13.35GMT Buy a Porsche 911 Carrera sports car and get a Porsche Cayenne sport- utility vehicle free! Some kind of tacky promotion? No, it's actually one of the most striking consequences of the sharp rise in the value of the euro against the U.S. dollar over the past few months. At the current exchange rate, German and other European luxury cars now sell for far less in the U.S. than they do in Europe, anywhere between €5,000 less for a Mercedes E320 to €85,000 less for a Rolls Royce Phantom, according to Ferdinand Dudenhöffer, a German auto-industry consultant. The €60,000 difference between the top-of-the-line Carrera GT in America and in Germany is, he calculates, enough to pay for the Cayenne.
That might be great news for the few car lovers prepared to cross the Atlantic, but it's murder for Europe's car manufacturers. Indeed, many argue that the biggest threat to Europe's economic recovery is the soaring euro, which is up by more than 25% against the dollar in the past year and more than 40% higher than it was two years ago. Exporters, who account for about 20% of Europe's GDP, are in a squeeze. If they raise their prices abroad to compensate, they risk losing business to their competitors; if they don't, their profit margins disappear. Policymakers are in a squeeze, too. Despite healthy signs of growth in the U.S. and elsewhere, the strong euro is putting the brakes on an export-led recovery, raising the prospect that the euro-zone economy could remain stuck in a ditch for a second year in a row. "You can understand the frustration of European governments: just when they hoped to benefit from the upturn, there's a Damocles Sword of exchange rates hanging over it," says Olivier Garnier, director of strategy at SG Asset Management in Paris.
Inevitably, there's a chorus of alarm — and some recriminations. German Chancellor Gerhard Schröder last week raised his concerns directly with Alan Greenspan, the chairman of the Federal Reserve, in a meeting in Berlin, saying that he was worried about the abrupt exchange-rate movements. In France, Finance Minister Francis Mer told Parliament he wants the G-7 countries — including the U.S. and Japan — to "send the right signal" about the weak dollar when they meet in Florida next month. Some even see a conspiracy: by running up huge trade and budget deficits, the theory holds, the U.S. is deliberately allowing its currency to slide to punish "old" Europe and pump up its own growth in a presidential election year. That theory was given some credence by the International Monetary Fund when it warned earlier this month that the burgeoning U.S. deficits posed a threat to the global economy.
But not everyone subscribes to it. "What irritates me is the hunt for a scapegoat," says French economist Albert Merlin. The dollar, he says, "is not the primordial preoccupation for the Americans, it's our problem." Greenspan, for one, agrees. In Berlin, he argued that the dollar's decline wasn't fueling inflation, damaging the U.S. economy or endangering a global recovery, but he did concede that it's hurting European exporters.
And the hurt is widespread. The big German business-software company SAP last week reported that its sales in euros had fallen in the most recent quarter, and it partly blamed the weak dollar. At aerospace firm EADS, chief executive Philippe Camus frets that the strong euro will more than wipe out any gains from the firm's efforts to reduce production costs. And smaller players are feeling the pinch strongly, too. "It makes business enormously difficult," says Rainer Hundsdörfer, chief executive of Weinig Group, a producer of woodwork machinery based in Tauberbischofsheim, Germany. Exports account for 90% of the firm's €320 million in annual sales. Hundsdörfer says that while it can raise some prices, it can't fully compensate for the currency losses.
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Buy a Porsche 911 Carrera sports car and get a Porsche Cayenne sport- utility vehicle free! Some kind of tacky promotion? No, it's actually one of the most striking consequences of the sharp rise in the value of the euro against the U.S. dollar over the past few months. At the current exchange rate, German and other European luxury cars now sell for far less in the U.S. than they do in Europe, anywhere between €5,000 less for a Mercedes E320 to €85,000 less for a Rolls Royce Phantom, according to Ferdinand Dudenhöffer, a German auto-industry consultant. The €60,000 difference between the top-of-the-line Carrera GT in America and in Germany is, he calculates, enough to pay for the Cayenne. 
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