For Americans traveling to Europe, the recent decline in the value of the euro is terrific news. In November 2009, American tourists in Europe were forced to multiply euro price tags by 1.5 to get the true value in dollars: those beautiful €200 Italian leather boots actually cost $300 and that €30 box of Belgian chocolates was really close to $50 of sweets. Today, however, the euro is worth only 1.19 dollars, a number that represents a four-year low in its value. Now those boots cost $62 less and that chocolate is only $35. While this is good news for vacationers and adventurers, the rapidly weakening euro has different implications for American exporters.
The reason for this can be explained by a simple lesson in macroeconomics. As the euro weakens, or declines in value, against the dollar, European goods seem relatively less expensive while American goods seem relatively more expensive. Thus the nearly 20% drop in the value of the euro in the past 7 months has made American exports less competitive in both the European and world markets (CEIP). This article will examine professional reactions to the European threat to US exports, which range from alarmist to unconcerned.
Some experts predict that the euro will continue to decline in value in coming months and will eventually reach parity with or dip below the dollar. These are the same analysts who voice greater concern over the adverse effects that a weakening euro will have on US trade opportunities. They cite certain statistics - that the EU represents 20% of US exports, holds more than 50% of US overseas assets, and invests close to 40% of its foreign assets in the US - to present alarming case for US exporters (CEIP). In this view, a weakening euro (and thus appreciating dollar) means that one of America's largest trade partners no longer has a strong incentive to import US goods. Furthermore, when the rest of the world chooses between competing American and European goods, the increasingly cheaper European goods will be more attractive.
Finally, European austerity measures are likely to dampen consumerism in Europe and further decrease the market for US exports (Council on Foreign Relations). The combination of these worrying signs suggests that US exports are slowing and will continue to slow considerably in response to the sovereign debt crisis in the eurozone. Such an analysis is bad news not only for US exporters, but also for the Obama administration's National Export Initiative, which aims to double US exports in 5 years in order to boost the economy and create new jobs (CNBC).
Other analysts are more confident in US exports. They suggest that neither the eurozone crisis, nor the strengthening of the dollar, nor slower growth and fiscal cutbacks in Europe will significantly undermine demand for US goods. Growth rates in areas such as durable goods orders, which jumped by 2.9% in April 2010, suggest that US exporters have been among the fastest to recover from the recent recession. Furthermore, large manufacturers usually hedge against currency fluctuations and will be somewhat protected from the weakening euro. According to one analyst, as of June 7, 2010 there is little evidence that orders from and shipments to Europe have declined (Businessweek).
Finally, economists at many big banks believe that Europe is not as essential to US exports as alarmists claim. Analysts at Credit Suisse point to the fact that while the EU is an enormous market for US exports, recent growth in US exports has come from other parts of the world - such as Asia, Canada, and Mexico - and thus a slowdown in European growth will not leave a substantial void in US export expansion. Goldman Sachs adds that while slower growth and fiscal retrenchment in the eurozone may slow exports to Europe, it is unlikely to have a significant effect on US growth unless it is associated with financial spillovers or side effects in other major US export markets (Financial Times).
While the combination of slower European growth and a stronger US dollar will almost certainly slow US exports to Europe and may hit the US trade sector, most experts believe that the US economy as a whole will not be severely impacted (Marketwatch). Some even believe that the trade sector as a whole will continue to grow thanks to increased exports to Asian countries. Even so, prospects for the success of the National Export Initiative's goal of doubling exports in 5 years seem bleak as Germany, whose commitment to beefing up domestic consumption and thus demand for US exports was integral to the plan, is beginning to introduce austerity measures that will most likely be marked by a fall in consumption.
Even more importantly for the aspirations of the US president, a strong US dollar will make it difficult for America to work towards reducing its own sovereign debt, which is expected to reach 90% of GDP by 2020 (CFR). While the European debt crisis may temporarily move the spotlight away from the enormity of American debt, eventually the US will need to begin reigning in its own spending, perhaps through austerity measures of its own, regardless of how European measures impact exports in the short term.
Teresa Galli is a Global Market Research Analyst at Global Marketing Associates (GMA). GMA is an international business and marketing consulting firm that helps businesses to expand globally from preparation to implementation through global online management.
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