Strong Dollar Brings Few Smiles to Europe

Wandering through the vast and opulent displays of sausage, smoked fish, cream cakes and exotic fruits of Berlin’s largest food court one day recently, Carl and Angie Ehlers of San Jose were having little trouble fighting off the visual and olfactory temptations.

Carl Ehlers, a retired software specialist for General Electric, indicated that the recent powerful run-up of the dollar against the German mark was not enough to make him go for his wallet. “It’s well-known that Germany is a high-priced country,” he noted.

Added his wife, who works for Hewlett-Packard: “We’re not buying the way we usually do in Europe.”

Surprisingly, it’s like that all over Germany this summer, and in the other European countries whose currencies have suddenly fallen against the dollar. More American tourists are appearing, but observers say they’re still not buying much.

Even though the dollar buys about 1.87 marks these days--more than in any year since 1991--prices are still high because of Germany’s welfare state--the costs of generous government pensions, unemployment insurance and national health care are factored into every consumer purchase.

Exports to America have risen, but because of the way they’re structured, they have little effect on corporate bottom lines or national accounts. The German stock market is riding high, but the public mood remains bleak.

Two years ago, when the dollar was weak and the mark was overvalued, business people were complaining that their products were too expensive to compete overseas, and declaring the end was near.

Yet now, even though the positions are reversed, the gloom persists. “I guess it’s just a question of culture,” joked Thomas Weber, a spokesman for the German engineering giant Siemens. “We’re supposed to be whiny.”

Actually, Weber was quick to add, there are solid economic reasons for the continuing malaise among the business classes of Europe. Even though the strong dollar has meant windfall profits for some players--hoteliers, tour operators and certain exporters--unemployment is still at record levels in Germany and France. Domestic demand is also anemic, and an important tax reform proposal in Germany, meant to give a supply-side boost to business, has just failed disastrously in the upper house of Parliament.

No one thinks a mere currency-led export boom will have much effect on these underlying problems.

“The currency effect [on exports] is positive, but it is only a short-term effect,” said Reinhard Kudiss, senior economist with the Federation of German Industries, the country’s main business lobbying group. “We still cannot lie back and say, ‘Everything is fine; now we can profit from the strong dollar.’ We have to tackle our structural problems.”

“Our problems are domestically made,” agreed Antonio Martino, the rightist Italian politician who was foreign minister in media tycoon Silvio Berlusconi’s brief 1994 government. “Whether the dollar is at its present level, lower or higher, I don’t think it has such an effect.”

In addition, most economists are not ruling out the possibility that the strong dollar will eventually bring inflation and rising interest rates.

“One of the dangers of a rising dollar is that our energy bill could grow larger,” said Serge Legal of the Caisse des Depots & Consignations, France’s largest institutional investor, noting that oil prices are denominated in dollars.

Rising interest rates would further discourage weak European domestic demand and deter business investment at a time when the Continent desperately needs to create jobs.

In the boardrooms of some of Germany’s biggest companies, there is little rejoicing over the strong dollar. Although German exports have become more competitive and sales are rising as a result, the largest German companies have already moved so much of their production to America that their bottom lines aren’t affected much at all.

“About 85% of our manufacturing content in the United States is local, so the short-term effect [of the strong dollar] is not that great,” said Weber of Siemens, which makes everything from kitchen stoves to power plants to subway systems.

The big German auto maker Bayerische Motoren Werke, which makes BMW, opened a plant in the United States last year, so as its dollar revenues rise, so do its dollar-denominated costs, a spokesman said.

“It is our long-term strategy to become more independent from exchange rates, especially the pound and the U.S. dollar,” said BMW investor relations chief Werner Rothfuss.

The dollar’s strength probably will benefit the bottom line of the vaunted Mittelstand, or small and medium-size business sector, often described as the backbone of German industry. Firms big enough to sell internationally but small enough to manufacture domestically will get a boost, said the Federation of German Industries’ Kudiss.

“Our machinery-engineering sector was really hurt when the mark was strong,” Kudiss said. “It will really benefit now, once things calm down in the financial markets.”

Even so, he said, the overall effect on the German economy will be muted, since more than two-thirds of German exports stay in Europe and aren’t directly affected by the strong dollar. Only 8% of German exports are destined for America.

Likewise, France ships just 6% of its exports to America. Peter Hoeller, economics department administrator for the Organization for Economic Cooperation and Development in Paris, said the dollar would have to grow much stronger before the French economy would feel a significant change.

The biggest opportunity on the Continent at the moment--in England, the pound’s strength mirrors that of the dollar--may lie in tourism. The French Tourist Board is reporting a 5% increase in American visits for the first five months of the year. Its German counterpart has observed a 10% increase for the first four months. Both organizations said they are hoping for even better results in the coming months.

“The effect of the rise in the dollar won’t be really noticeable for a few months because people plan their holidays in advance,” said Gerard Dumontant, president of the French Trade Union of Hotels. The German National Tourist Office is planning to step up a Christmas promotion centered on traditional holiday fairs that are held throughout Germany in December.

But in Italy, Marco vom Bruck of the Roman travel agency Teodora Viaggi said that although he is seeing more Americans these days, he has noticed that they are being very careful with what his compatriots now call “the superdollaro.”

“They ask much more about prices,” Vom Bruck said. “They don’t go to the first travel agency or the first shop. They go around to 10 shops, and then maybe they buy something.”

The Ehlerses of San Jose are a good example. Even if the strong dollar is making them richer, they said, they aren’t about to change their buying habits. They had booked their trip to Germany before the dollar’s big rise and were sticking to a shopping list based on regional specialties, not whim: marzipan in Luebeck, beer steins in Munich, jewelry in Innsbruck.

“There are 45 people on our tour bus, and I would say they’re not buying,” Angie Ehlers said. “Just some candy and a few gifts. They’re checking their stocks every day, though.”

On previous trips to Italy and Hong Kong, the couple had loaded up on leather jackets and pearls. But during their recent shopping trip, they rode the escalator straight to the food court of KaDeWe, western Berlin’s largest shopping emporium, bypassing all five lower floors of merchandise.

And even in the food court, they were window-shopping only. Said Angie Ehlers: “I don’t think the prices are good here.”

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High Marks for the Dollar

The global strength of the dollar has sent the German mark, the French franc and other major European currencies tumbling in value, but so much European manufacturing has already moved offshore that the weak currencies haven’t translated into a boom in exports for those countries. The mark is at its weakest level against the dollar since the fall of the Berlin Wall in 1989. Marks per dollar, quarterly since 1989 and latest:

Friday: 1,846

Source: Bloomberg News