Europeans are freaking out, and the reason might surprise you. Their seven-year-old currency known as the euro has gotten too strong. That's quite a turnabout from the common currency's launch in 2002 when dollar bashing -- and euro boosting -- was as common in the Continent's financial institutions and coffeehouses as cigarettes and strong espresso.
Of course, times have changed since then, thanks to two wars, financial meltdowns and subprime loan losses, among other calamities. With the dollar now at a 14-month low -- the euro reached $1.4967 last week -- European governments fear the greenback's slide could threaten the region's still-nascent economic recovery.
"We have to save the soldier dollar," blares the headline in a recent economy column in France's leading daily Le Monde. Columnist Pierre-Antoine Delhommais goes on to explain that if the dollar crashes, "exports would collapse, growth would sink and the unemployment rate would explode." In fact, the euro's nearly 19 percent climb since March already seems to be wreaking havoc with the exports from the Eurozone's 16 member countries. The European statistics office just announced that exports from the region fell 5.8 percent in August compared with July. "It's been a significant issue here," John Whelan, chief executive of the Irish Exporters Association, told DailyFinance.
When the euro rises some 18.6 percent in seven months, it essentially means that prices for goods like Hermès scarves and BMW coupes increase by the same amount for American consumers -- assuming rather crudely of course that the currency effects are fully translated, which is rarely the case. European exporters say a euro-dollar exchange rate above $1.40 is the point when their currency gets too strong, according to Reuters. With the euro now 6.4 percent above that mark, many are undoubtedly feeling the pain.
Of course, Europeans aren't the only ones in a funk about the wimpy dollar (the result of many factors, including rock-bottom U.S. interest rates, which make investors want to park their money somewhere else). Several Asian countries made big purchases of dollars earlier in the month to try to shore up the wilting currency. But the dollar's troubles are felt particularly hard in Europe, as the U.S. and the European Union are each other's main trading partners. In 2007, some €260 billion ($387.87 billion) in E.U. exports crossed the pond, according to the E.U. statistics office.
The Irish Exporters Association's Whelan says many of the 3,000 or so exporters the group represents in the Emerald Isle are less affected by the dollar's wipeout than their counterparts in other Eurozone countries. That's because many are multinationals in high tech, particularly in the life sciences. "Typically, they're not as subject to the maneuvering of the euro because of treasury management," he says, referring to the practice of companies managing their currency exposures.
But Irish exporters that are feeling the pressure are those in the country's so-called indigenous sector, which includes the food, beverage and textile industries that export internationally renowned products. Guinness beer and Irish knit sweaters anyone? "The indigenous sector is where our exporters are having difficulties," says Whelan.
It's not just the euro's strength against that dollar that's crimping demand but also the euro's strength against the pound in the U.K., Ireland's biggest trading partner. The euro has gained 21 percent over the pound in the past year, Whelan says.
The stronger euro also has European tourism officials wondering whether penny-conscious consumers will change their travel plans, particularly if the dollar continues to sag. In Paris, the world's most visited city, tourism officials say they're now finally starting to see a rebound in American travelers after registering 2.6 percent fewer Yanks in the first half of 2009 compared to last year. "What impact is the dollar going to have on this?" asks Paul Roll, director of the Paris Tourism Office. "It would be hard to say."
Roll says nearly 50 percent of the cost of an American's trip to Paris is accounted for in dollars, when you include airline tickets and hotel reservations made through agents. But he admits the economic crisis has already put many Americans on tighter budgets. "The American tourist is spending less and less," he told DailyFinance. One key sign? Americans are downgrading to three-star hotels from four-star hotels. "The good thing is, Paris has a whole range of services and products to offer them."
Of course, that's the same argument European exporters are using. The question is: If the greenback retreats much further and that range of products and services becomes too expensive, will Americans just end up staying home and buying there?
Take the first steps to building your portfolio.View Course »