Strong Euro Weakens Business Profits

The strong euro, in the past weeks sporadically worth up to USD 1.30, has a negative effect on the profit situation of German export-oriented companies.

In March, the Centre for European Economic Research (ZEW) surveyed 278 financial analysts about the consequences of a strong euro. They assume that the automotive industry will be particularly affected since its upstream products largely originate from the euro area and a major share of its products are sold in the dollar zone. But other sectors exporting to the dollar zone such as mechanical engineering, the chemical, steel and electrical industry also need to expect considerable losses in the medium-term due to the constant strength of the euro. The impact on sectors selling most of their products and services within the euro area - suppliers, the construction industry, and insurance companies - is negligible.

Even though the euro exchange rate is no longer close to its record peaks, export-oriented companies cannot yet breath a sigh of relief, as the experts surveyed by ZEW forecast an average exchange rate of USD 1.2350 against the euro on a six-month horizon. This ratio is still high enough to impair the profits of German exporters. The reason for this lies in the fact that long-term hedging against exchange rate risks is difficult as one usually struggles to find contracting partners. It is thus not very likely that many companies are able to protect themselves from currently strong euro exchange rates on advantageous terms.

Should this rate ever reach a significantly higher level than what is recorded today, the European Central Bank would have the possibility to sell euros in any quantity desired against US dollars on the exchange market to prevent any further risk to the competitiveness of German exporters. The financial analysts surveyed by ZEW, however, firmly reject such reasoning. Only 37 per cent of them support an ECB intervention for this purpose, providing, on average, an exchange rate of at least USD 1.32 against the euro.

Contact

Volker Kleff, E-mail: kleff@zew.de