Falling dollar and soaring euro poses threat of jobs exodus

The euro has surged to an all-time high of $1.51 against the dollar, prompting bitter complaints from European industry and setting of a sharp sell-off in sovereign bonds from southern states deemed least able to withstand a super-strong currency.

Germany's car-maker BMW said it was slashing 5,600 jobs and warned of more drastic action if there was a "sustained rise" in the euro above $1.50.

Charles Edelstenne, head of France's Dassault Aviation, told Le Monde that the euro's rise was reaching asphyxiation level. "We can't cope with a such an exchange gap by producing and sourcing in the eurozone. The natural step is to shift to the dollar zone or low-cost areas as they have done in the car industry. This could include parts of our factory plant and some research tasks," he said.

Airbus has also drawn a line in the sand at $1.50, warning that it will have to turn its industrial structure inside out if it is to meet aircraft delivery contracts priced in dollars. The plane-maker's currency hedges will start to run out rapidly next year.

The euro's explosive move came after US Federal Reserve chief Ben Bernanke yesterday signalled further cuts in interest rates, acknowledging that tumbling house prices risked setting off a second phase of the credit crisis. "Financial markets continue to be under considerable stress," he said.

The Fed has already slashed rates from 5.25pc to 3pc since September, moving "ahead of the curve" to prevent the economic downturn spiralling out of control. The effect is to widen the yield gap with the euro-zone. This has drawn a flood of hot-money flows into Europe's money markets.

The European Central Bank has refused to budge so far, holding rates steady at 4pc despite the credit crunch. Euro-zone inflation has reached 3.2pc, the highest since the launch of the currency. Even so, the refusal of the ECB to start following the Federal Reserve with pre-emptive cuts as Europe's economy slows has set off a growing chorus of protest from EU politicians.

A top aide to French President Nicolas Sarkozy fired a shot across the bows of the ECB yesterday, demanding that "monetary policy must remain within reasonable bounds". The comments are a clear hint that Paris may try to force a change of tack by invoking Maastricht Article 104, which give EU politicians the power to dictate exchange policy. France has lacked allies for use of this so-called "nuclear option", but this may change now that a number of eurozone countries are now in trouble.

Spreads between 10-year German government bonds and the equivalent debt across the eurozone's Latin bloc have jumped to the highest level since the launch of EMU, reaching 45 basis points for Greece, 43 for Italy, 36 for Greece. The spreads on Spanish bonds have ballooned to 28 from 4 last May, reflecting an abrupt change in perceptions as the property boom deflates and investors take a closer look at Spain's current account deficit, now a 10pc of GDP.

"The widening spreads are telling us that these countries are going to be hit harder than core Europe in a downturn," said Simon Derrick, head of currency research at Bank of New York Mellon.

Hans Redeker, currrency chief at BNP Paribas, said foreigner investors had largely stopped buying euro-zone bonds, suggesting that the euro rally is now on its last legs. The inflow is mostly "hot money" speculation.

Mr Redeker said there may soon come a point when the ECB's ultra-hawkish turns negative for the euro, causing traders to look beyond instant yield and focus on the risk that monetary overkill could tip the bloc into a deep downturn. He warned that spreads on Italian and Spanish bonds may jump to 60 basis points.

"The European economy will weaken from the periphery to the centre. Countries where there is also a lot of exposure to the housing market, such as Spain and Ireland, may find themselves in a recessionary environment," he said.

Germany is in a much better condition to weather any storm. It has gained 30pc in unit labour cost competitiveness against Italy and Spain since 1998 by screwing down wages, and 20pc against France.

Simon Tilford, chief economist at the Centre for European Reform, said Germany had in effect pursued a "beggar-thy-neighbour" policy, winning market share at the expense of eurozone partners. "There is potential for tensions here," he said.

The dangers were masked as long as the Latin bloc was enjoying a consumer boom fuelled by very low real interest rates. Now the political resilience of the monetary system will be put to the test. The euro has surged to an all-time high of $1.51 against the dollar, prompting bitter complaints from European industry and setting off a sharp sell-off in sovereign bonds from southern states deemed least able to withstand a super-strong currency.

Germany's car maker BMW said it was slashing 5,600 jobs and warned of more drastic action if there was a "sustained rise" in the euro above $1.50.

Charles Edelstenne, head of France's Dassault Aviatin, told Le Monde that the euro's rise was reaching asphyxiation level. "We can't cope with a such an exchange gap by producing and sourcing in the eurozone. The natural step is to shift to the dollar zone or low-cost areas as they have done in the car industry. This could include parts of our factory plant and some research tasks," he said. advertisement

Airbus has also drawn a line in the sand at $1.50, warning that it will have to turn its industrial structure inside out if it is to meet aircraft delivery contracts priced in dollars. The plane maker's currency hedges will start to run out rapidly next year.

The Fed has already slashed rates from 5.25pc to 3pc since September, moving "ahead of the curve" to prevent the economic downturn spiralling out of control. The effect is to widen the yield gap with the eurozone. This has drawn a flood of hot-money flows into Europe's money markets.

The European Central Bank has refused to budge so far, holding rates steady at 4pc despite the credit crunch. Eurozone inflation has reached 3.2pc, the highest since the launch of the currency. Even so, the refusal of the ECB to start following the Fed with pre-emptive cuts as Europe's economy slows has set off a growing chorus of protest from EU politicians.

A top aide to French President Nicolas Sarkozy fired a shot across the bows of the ECB yesterday, demanding that "monetary policy must remain within reasonable bounds". The comments are a clear hint that Paris may try to force a change of tack by invoking Maastricht Article 104, which gives EU politicians the power to dictate exchange policy. France has lacked allies for use of this so-called "nuclear option", but this may change that a number of eurozone countries are now in trouble.

Spreads between 10-year German government bonds and the equivalent debt across the eurozone's Latin bloc have jumped to the highest level since the launch of EMU, reaching 45 basis points for Greece, 43 for Italy and 36 for Greece. The spreads on Spanish bonds have ballooned to 28 from 4 last May, reflecting an abrupt change in perceptions as the property boom deflates and investors take a closer look at Spain's current account deficit, now 10pc of GDP. "The widening spreads are telling us that these countries are going to be hit harder than core Europe in a downturn," said Simon Derrick, head of currency research at Bank of New York Mellon.

Hans Redeker, currency chief at BNP Paribas, said foreigner investors had largely stopped buying eurozone bonds, suggesting that the euro rally is now on its last legs. The inflow is mostly "hot money" speculation.

Mr Redeker said there may soon come a point when traders look beyond instant yield and focus on the risk that monetary overkill could tip the bloc into a downturn. He warned spreads on Italian and Spanish bonds may jump to 60 basis points.

Germany is in a much better condition to weather any storm. It has gained 30pc in unit labour cost competitiveness against Italy and Spain since 1998 by screwing down wages, and 20pc against France.

The dangers were masked as long as the Latin bloc was enjoying a consumer boom fuelled by very low real interest rates. Now the political resilience of the monetary system will be put to the test.

Long term the adjustment of the dollar to a lower exchange rate will be a push to relocate manufacturing from those countries with the high valued currency to the US especially for those products and services intended for this market.

Reality has already soaked in, and that’s why BMW as well as Mercedes built plants in the US and are even exporting US made cars to Germany, if one can believe that!

If the dollar drops too low, that isn’t good for us either. Inflationary pressure is the primary concern. In the past where the dollar was over valued, that might make people “feel” good, since bigger is always better to some, but it was hurting us economically. It helped create the huge trade deficit. It helped push jobs offshore in manufacturing specifically. It ate into the profit margins of those who did stay in the US, making US based manufacturing less lucrative for investment. The dollar probably is already as compared to the Euro under valued; but most comparisons have some underlying assumption that looks at currency in a way that is static, some assume more is better, others have an agenda because they realize this is squeezing the manufacturing base in the Euro zone, yet others have a personal advantage in a high valued dollar because they happen to live in the Euro zone but are paid in dollars……..

As a nation, while we don’t want the dollar to drop too much, we sure as hell don’t want a return to the past; where US based manufactured goods can’t compete even in the US marketplace anymore. We had a scenario where one of the worlds most efficient economies; a nation where the labor pool is highly skilled, a country with a time sensitive culture and good work ethic, where corporate tax code is favorable, legal and security environment stable as well as favorable (for example it’s easy and cheap to incorporate in the US), infrastructure is excellent, productivity is among the highest, labor and environmental laws are favorable, but we were getting crushed by our own dollar during parts of the 80s. We could not compete in a world where it was DM 3.60 to 1 USD, and it was no different with other currencies. That is exactly where some in Euro zone see themselves today.

The Ding Fu factory is one of 1,000 shoe factories that went under last year in southern China's Guangdong province. A bankruptcy seal marks the front gate. Workers from a recycling company strip the factory in order to sell parts to other plants in China's interior and in Vietnam.

All Things Considered, February 27, 2008 · South China is the world's factory floor. For years, it has churned out cheap products like toys, shoes and clothing. But now rising costs — and shifts in Chinese government policy — are knocking hundreds of smaller factories out of business.

As profit margins disappear, some companies are even moving to lower-cost countries such as Vietnam. In fact, according to China's state-run press, 1,000 shoe factories closed in Guangdong province in 2007.

'Banner Year' for Recyclers

On a recent visit to the now-shuttered Ding Fu Shoe Factory, workers for a recycling company were stripping the facility of equipment to sell to other plants in China's interior or Vietnam.

The factory gates were wide open and there were signs the plant had been abandoned suddenly. Straw mats still littered the floors of dorm rooms where workers once slept. Torn shoe soles and broken swivel chairs lay in puddles around the courtyard.

The head of the recycling firm, a man named Huang Jin, says the factory boss had fled several months ago, leaving hundreds of workers unpaid. Huang says his company had a banner year in 2007, stripping 30 or 40 bankrupt shoe factories.

Difficult Business Conditions

Factories have gone bankrupt for several reasons. Huang says one is a labor shortage, as workers can find more jobs elsewhere than ever before.

"If a boss opens up a factory, it's very hard to find workers," he says. "And even if you find workers, they're not skilled. They don't know how to make shoes."

Guangdong province is home to tens of thousands of factories and the engine of China's industrial economy. Some Chinese dream of running a factory here. But Huang says the conditions are so bad now, it's safer to keep stripping them.

Last year, he was thinking of starting a motorcycle fuel business. But a friend who already owns a fuel plant talked Huang out of it.

"He told me, 'Huang Jin, don't do it,' " Huang recalls. " 'Don't think that I'm flourishing. It's empty inside. You probably have more money than I do.' "

Shoe, Furniture, Other Manufacturers Feel Pain

Shoe factories aren't the only ones struggling. Last year, Lacquer Craft Furniture laid off one-third of its 6,000 workers in South China's Dongguan City.

The company's head, Samuel Kuo, says he couldn't afford to pay rising labor costs. Other factories have been pinched by increasing costs for materials such as glass, paint and steel pipe.

" 'Made in China' isn't cheap anymore," Kuo says. "The low value-added products will have a hard time surviving in China … because the costs here are too high."

Beijing Makes High-Tech Industries Top Priority

Instead of making it easier on these factories, China's government is making it harder. After encouraging cheap manufacturing for more than a decade, the regime wants to push investment toward high-tech. Last summer, it reduced a tax rebate to squeeze low-end exporters.

Fred Chen, who runs the Taiwan Furniture Manufacturing Association in China, says the days when the government welcomed cheap factories are over.

"Before, when China was poor, any kind of factory could come in," he says. "They [gave] you a lot of preferential treatment — no taxes, cheap rent."

But today, China is the world's fourth-largest economy and a rising global power. It wants more sophisticated factories with higher-wage jobs. Sounding like a jilted boyfriend, Chen explains the change with a Chinese idiom.

"We say the government breaks the bridge after crossing the river," he says. "We helped you develop. Now you're dumping us, you're kicking us out."

If Chen sounds bitter, he says he isn't. He may not like the new policy, but he says it's a natural progression. China is just trying to follow countries like Japan and Taiwan, which climbed the manufacturing ladder from low-end to high-tech.

Small Factories Struggle Amid Policy Changes

But that leaves many small firms struggling, such as Creation Furniture, which had to close two of its three factories in the past year.

In addition to losing much of the tax rebate, the company is losing money because of the rising value of China's currency, the renminbi. The Chinese government is allowing the renminbi to appreciate against the dollar. But as the renminbi goes up, the money the company gets for each piece of furniture goes down.

Becky Song, the company's sales manager, points to a coffee table in her office and explains. Two or three years ago, she could get 800 renminbi for the table. Today, she only gets 730.

Song says profit margins at some companies like hers have evaporated, and at least 30 companies have moved to Vietnam in the past year to save money. Others in the industry put the figure higher.

"If you keep doing this, you keep losing (money)," Songs says, "and no one can survive."

There is little optimism about low-end factories in South China. One Hong Kong businessman in Guangdong says the era of such small manufacturers is ending, and he expects 1,000 more to close in the coming months.

'Made in China' Is Cheap No More

BMW and mercedes build cars within the USA for quite a long time. Beside that BMW and in my opinion also Porshce (although the numbers do not reflect that) will really suffer from a lower dollar because the US is still a significant market fro these two carmakers. BMW will increase the production within the US as far as i know.

Overall we had a record trade surplus and also a record car export to the US in 2007. German carmakers could gain market shares (japanese even more) mainly because of the really bad shape of the US car industry in general.

The german trade situation is changing or has changed a lot in the last 20 years mainly because of the Euro but also in terms of markets. trade valued in euro has reached 75% this year even with oil still valued in dollar ( not really a disadvantage at the moment). The percentage of export to northamerica (US and canada) is below 9% this year while eastern europe asia and the middle east show huge growth numbers.

In the end some companies as for example BMW will really suffer if the dollar continues to sink but we do not live in the 80s where the US market was really very important.

I also doubt that a policy of a low dollar will help the us economy in the middle or long run because of so many reasons. We all know the countries that tried to solve their trade problems by devaluation of their currency (italy or france in europe) and we all know the longterm problems caused by that. The french had even to give up their currency Independence long before the euro came because of their wrong currency policy.

I personally think that it is a very dangerous road the FED goes down at the moment. Perhaps sometimes a recession might be painful in the short run but the US could be stronger and better after the problems have been solved instead of creating new perhaps even bigger problems.

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