December 10, 2003

Euro-Bullying Watch The (doubtless fleeting

Euro-Bullying Watch

The (doubtless fleeting and highly disingenuous) German-French love-in continues at feverish pitch. Lately, the Franco-German condominium is issuing diktats, of sorts, and in somewhat haughty fashion. Go to the link for detail.

Note these snippets too:

"The Franco-German alliance has become so strong that the French foreign minister, Dominique de Villepin, mused in a private forum last month that the two countries, which have the largest economies and populations in the European Union, could merge into one union. He was said to have called it "the only historic gamble that we cannot lose."

Heh. Would such an entity last longer than this one did?

Oh, and the Franco-German "union" is even being accused of unilateralism!

"The Polish foreign minister, Wlodzimierz Cimoszewicz, warned that the European Union could turn into a "unipolar" organization dominated by France and Germany, two of its six founding members."

Meanwhile, in economic news, German exports are taking their biggest hit in a decade.

Of course, the weak dollar vis-a-vis the Euro has had everyone and their mother predicting this for months. But there might be some interesting mitigating factors at play worth monitoring too (you know, just a cautionary note in case you were thinking of shorting heavily export-oriented European companies' stocks):

"First, in an increasingly integrated global economy, companies' pricing power has been eroded around the world. In addition, low inflation has made price increases more obvious. So it is harder for firms to pass on cost increases of any sort, whether rising input prices or higher wages for unionised employees. In the same way, it is more difficult for a European car company, say, to raise its prices in America in response to a stronger euro. According to a study cited by Mr Magnus, the ability to pass on the effects of a stronger currency has been waning in recent years. (see chart)

"Other factors also weaken the power of currency movements. Rather than try and raise prices when their “home” currency strengthens, foreign firms may hold prices and accept lower margins, especially if they think the currency will weaken again or if they are determined to maintain market share. Manufacturing operations that are spread across countries make it easier for firms to match their dollar sales with dollar costs, reducing the effects of currency movements. And there is often a long delay, perhaps of more than a year, before consumers and producers adjust to changes in prices. " [emphasis added]

Relatedly, we should be careful not to assume a weak dollar will necessarily help eliminate America's trade and current-account imbalances. So sayeth the sage folks over at the Economist.

Posted by Gregory at December 10, 2003 09:50 AM
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