The Exchange Rate in Europe

Long Term Advantages of a high exchange rate:

There are certainly several advantages to keep the Euro (EUR) at a high level compared to the US Dollar (USD):

Import Strength:

The fall of the USD versus the EUR will cause a shift in the import/export balance between Europe and the US. Given the relative higher purchasing power of the EUR, it enables the EUR users to import goods cheaper from the US and therefore imports from the US will increase. According to the BEA [1] US exports to the EU were up by 14% in 2004.

Purchasing Power abroad:

As a consumer or tourist, my relative purchasing power in the US has increased and thus I can shop for products sold in the US cheaper. Tourism therefore to the US will increase. “What we are seeing is a double-digit increase in international shoppers over last year," [2] The report continues that “for example, in 2003, the average house in Florida cost $160,000, or about 98,000 British pounds. This year, the same house has increased its value to $170,000, but because of the falling dollar, British buyers can buy it for just 89,000 pounds, according to the Scotsman, a Scottish newspaper. Now that's a bargain in any investor's book.”

Raw materials:

Most of the raw materials, including crude oil, are traded in USD. Thus these raw materials become relatively cheaper by buying them from the US than from within the EUR territories.

Benefits for the US:

The increase of exports to EUR countries helps the US to decrease their deficit in the trade balance by exporting more material while imports become unattractive due to the high import prices. As an example: Boeing will be able to sell products easier into Europe. With this disadvantage for the Airbus industry, government will attempt to subsidize Airbus products to ensure sales growth for Airbus. [3]

Potentially higher capacity utilizations in various industries due to increased sales abroad will help to keep the overall prices at bay and thus potentially reduces prices domestically.

More visitors will increase total spending in the US and thus support economic growth in the US.

US companies having branches in the EU will be able to collect higher profits in USD, thus contributing to a better overall result and thus increasing its value in the stock market.

Disadvantages of a high EUR:

There is a high potential in job losses in Europe, since the ‘domestic’ industry will not be able to keep up with the imported prices. Thus the threat is that jobs are being lost and either shifted to lower wage and cost countries (see below) or eliminated altogether due to bankruptcy of the production firm in the EU. Unemployment rises. European Central Bank President Jean-Claude Trichet called the increase in the EUR’s rate versus the USD "brutal" [4]

The trade balance in the EU will tend towards a negative number, given that imports increase and exports decrease.

EU companies which have branches in USD based economies or in the US will report a lower revenue and profit due to the losses on the exchange rate, resulting in potentially lower ‘rewards’ by the stock markets.

U.S. firms are increasingly buying raw materials for their products from abroad to keep costs lower. But when the dollar falls, it makes those imports more costly. “Ryan Goan, president of Standish, Maine-based Verdia, which makes natural skin care products and supplements, says his costs have gone up 10%-15% in the past year. He buys fish oils and essential oils from Germany, Norway and other European countries: "Every time I place an order for raw materials, the prices have increased."” [5]

Relocation in the face of a Rising Euro

Labor costs in Europe become relatively more expensive when in Europe, rendering the already costly products to become even more expensive. By exporting labor outside of the EUR influence, e.g. into the US or into low wage countries will bring benefits to the EUR influenced companies. However, I would argue that the majority of the labor will go to low wage countries such as India, China in order to further maximize profits. (India in 2001, for example attracted 7.7 billion USD of outsourced services, while China still had a modest representation on the chart of approx. USD 1.1 billion [6] Placing labor in the US will only address the problem partially,