The euro is climbing from strength to strength. On its flight of force, it briefly crossed the $1.30 threshold, and is showing no sign of dropping back down to earth. But what are the implications for the economy?
The euro is riding high
No sooner had the German economy surmounted the latest dramatic climb in oil prices, than it was forced to face a new demon in the shape of a stubbornly strong euro. The fearful have responded in a chorus of woeful lament, predicting a rise in the price of German exports, and a subsequent fall in demand thereof. And because the slight upward turn in the ailing economy has been almost exclusively thanks to Germany's exporters, the fear is that such a shift could plunge Germany right back into recession.
This, however, is not just a German problem, but a European one, to which the president of the European Central Bank (ECB), Jean-Claude Trichet, paid testimony with words of unusual gravity. "It is a brutal, most unwelcome appreciation," he said. Yet Trichet's concern is not so much the present exchange rate as the phenomenon of fluctuation in the common currency. Such volatility creates an insecurity to which markets react in a highly allergic fashion.
Weak dollar takes the wrap
The strong rate is showing no signs of abating
The pundits have been quick to point the finger of blame at the weak dollar, and America's so-called twin deficit. On the one hand, there is a $413 billion (€534) hole in the US finance minister's budget, where just four years ago there was a plus of $200 billion. Moreover, the weak dollar is the product of a current account deficit. America consumes considerably more goods and services than it produces, which means it needs a huge daily influx of foreign capital. So in order to counteract the trend, the guardians of the dollar are backing the weak currency, raising interest rates in order to curb consumption. But it’s the Europeans who pay the price.
That said, Europe shouldn't complain too loudly, because a weak dollar also has its advantages, not least that of diluting the consequences of high oil prices, which are traditionally in dollars. And ultimately, the high euro exchange rate is a kind of accolade for the young currency, which is gaining popularity as a reserve currency in the vaults of national banks in countries such as Thailand, Malaysia and China. In world trade terms, the euro has already become a more major player than the dollar.
Europe should act
However, there is no escaping the negative ramifications of the strong euro for German companies. For every cent the euro increases in value, German chemical giant BASF, for example, loses €120 million in turnover.
The dollar is currently weak
Given the improbability that America will succumb to feelings of sympathy and consequently slam on the emergency brakes, it's up to the Europeans to take action. The recipe is as simple as it is complex. Lower taxes, investment support and reformed labor markets would all stimulate the necessary growth. Yet such processes are slow, so the custodians of the euro should consider intervening through the foreign exchange markets in a bid to temporarily strengthen the dollar and alarm the speculators. That aside, a little more calm could go a long way, because in reality not every new market record has to spell immediate calamity for the world economy.