Europeans travelling to the United States and paying with their credit cards like a strong euro. The downside: Products made in Europe are more expensive. But is that a danger for German exports?
The reaction is always the same: When the euro climbs above $1.30, pessimists see German exports in danger. They argue that a strong euro makes German products more expensive and thus less attractive on global markets.
Recent events in the United States prompted another round of currency fluctuations. The bizarre wrangling between Republicans and Democrats over a debt-ceiling, which caused a temporary government shutdown, led to a brutal beating of the US currency, with the euro climbing to $1.38.
Concern for mid-size companies
But does such a hike in the value of the European currency really threaten German experts? "Exchange rates play a very important role for medium-size companies," says Jens Nagel, head of the Federation of German Wholesale, Foreign Trade and Services. "There are regions in the world, especially Asia but also the Middle East, South America and Africa, where business is primarily conducted in dollars or in currencies that are coupled to the dollar. And what is crucial in these regions is, first, how high the exchange rate is and, second, how much it fluctuates."
Ralph Wiechers, chief economist with the German Engineering Federation (VDMA), favors an exchange rate of $1.25 per euro. "This rate roughly reflects purchasing power parity,” he says. “I think it's a fair exchange rate. We're currently above that so we have some headwind at this point."
But the headwind for exports doesn't affect everyone and everything. About one half of all German exports go to Europe. In mechanical engineering, it was most recently exactly 53.9 percent that was not in anyway affected by the weak dollar.
Even companies exporting in dollar-based regions don't necessarily have to worry about a strong euro, provided, of course, that they have the right products. "The headwind affects particularly mass-market products," says Wiechers. "The more special a product is, the more likely customers are willing to pay a higher price for it but only for a certain time, of course."
Coping well with cheap dollar
Each exporter also has the opportunity to hedge against price fluctuations. Especially large companies in the automobile and chemical industries have an easier way to hedge, thanks to their production facilities in dollar-based regions such as Asia and America.
“No machine builder would go to Tierra del Fuego to manufacturer simply because the exchange rate or the labor costs are more favorable,” says Wiechers. "There has to be a sufficient market." But even in large markets such as the United States and China, he adds, many mid-size mechanical engineering companies struggle. "They lack the human resources to set up production around the world, not to mention the challenges and costs attached to such expansion," he notes.
Until now, German exporters have coped well with the cheap dollar, even when the euro exchange rate has soared to $1.60. Where the pain threshold is for German exporters is a moot question. For sure, it's not $1.30, Wiechers argues, pointing to differences in sectors. "There are sectors where the pain threshold is $1.30 and others where it is $1.40 and still others as high as $1.50," he says.
Locomotive for neighbor countries
And even that rate, Wiechers believes, won't derail German exports, a fact that makes many competitors envious. The US Treasury recently criticized Germany's powerful exports, even claiming that they're a drag on European growth.
Foreign trade expert Nagel struggles with that argument. "There just happen to be economic centers in regions that are more industrial and export-driven and that serve as a locomotive for their neighbors," he says.
Oregon, for instance, benefits from California's export strength and no one is complaining about that, Nagel argues. That same is true for suppliers from Central Europe and France that benefit from Germany's strong exports. "I don't know where France and Italy would be today if Germany didn't use so many components from these countries," he told DW.