Weaker euro signals difficult times for European companies

It used to be easy to sum up the way European business executives viewed exchange rates: a strong dollar was good; a strong euro was bad.

Most still think that way, but as the euro glides down from the peak of more than $1.50 it reached in November, trading on Tuesday at $1.37, some problems are emerging that complicate the picture.

Yes, the weaker euro is good for European exporters.

It makes it easier for their cars, machinery and beer to compete on price abroad and makes every sale to the US – and to countries like China whose currencies are closely tied to the dollar – more valuable in euros.

The weakening euro is also good news for Greece, Spain and Portugal, which are suffering from excessive trade deficits and struggling to become more competitive in world markets.

“I haven’t heard of anybody who is sad about it,” said Ralph Wiechers of the German Engineering Federation.

But there is also a range of negative effects.

The cost of oil and other raw materials priced in dollars is rising.

Consumer prices could come under pressure because goods imported from outside Europe become more expensive in euro terms.

The euro’s decline reflects the harsh verdict of investors on the Greek debt crisis and the monetary union’s inability to insure that its members adhere to basic principles of fiscal prudence.

“It’s more of a euro weakness than a dollar strength,” said Ulf Schneider, chief executive of Germany based Fresenius. “The whole world is watching, and there is some doubt about the euro.”

Over the next year or so, analysts say, the euro is likely to continue declining as US growth accelerates more quickly than Europe’s.

And the dollar may get an extra push from the Federal Reserve, which is expected to raise official interest rates faster than the European Central Bank will.

Along with brisker US growth, higher interest rates will make it more attractive for investors to own dollar assets.

“The ECB isn’t expected to raise rates until next year and then move slowly,” said Antje Praefcke, a senior foreign exchange strategist at Commerzbank in Frankfurt, who predicts the euro will fall to $1.20 by the end of the year.

These days, though, what may matter most to businesses is not the absolute value of the euro but its stability.

Above all, European business leaders hope the euro will avoid any sudden moves.

The last two years have been a roller-coaster ride.

After climbing fairly steadily for more than two years, the euro peaked near $1.60 in July 2008.

But amid the financial crisis, the euro – and most other major currencies – suffered a series of violent swings.

“More important than the absolute level is the amount of volatility you see and how fast these swings are happening,” Schneider of Fresenius said.

Big moves by the dollar, euro and yen also sent shock waves through less widely circulated currencies in eastern Europe or Asia.

The volatility was expensive for exporters like Volkswagen, which suffered $1.65 billion in costs associated with exchange-rate fluctuations.

Companies have made strenuous efforts in the last decade to insulate themselves from currency shocks.

It is routine even for smaller companies to hedge on financial markets, insuring themselves against future exchange rate movements.

But for many companies, currency swings are fairly far down on the list of things that keep their managers up at night.

“We don’t see the currency situation as anything very dramatic,” said Stefan Ingildsen of William Demant Holding Group in Denmark.

The country is not a member of the euro zone, but the Danish krone closely tracks the euro.

Ingildsen’s relaxed attitude might seem surprising considering that the company gets 35 per cent of its sales from the US and makes most of its products in Europe.

But the company buffers itself against dollar fluctuations by purchasing most of its components in China from suppliers that take payment in dollars, a form of so-called natural hedging.

Stronger dollar

As a result, the stronger dollar – which has also risen against the Danish krone – will add only 1 to 2 per cent to operating profit in 2010, Ingildsen said.

Even rising energy prices are not unambiguously bad for European companies.

Costly oil plays to Europe’s strengths in energy-saving technology.