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Euro-dollar outlook worries European industry

Latest update : 2008-04-06

The strong euro is ringing alarm bells in the boardrooms of big European industrial groups as they look to reduce vulnerability to high euro-based production costs by setting up facilities in eastern Europe and the United States.

The strong euro is ringing alarm bells in the boardrooms of big European industrial groups as they look to reduce vulnerability to high euro-based production costs by setting up facilities in eastern Europe and the United States.

The head of the European employers’ federation BusinessEurope, Ernest-Antoine Seilliere of France, has said: "We are at the point where we could speak of alarm" among eurozone companies with high production costs.

The organisation he heads is comprised of national bodies that represent business and industry.

Louis Gallois, chief executive at aerospace group EADS, which counts France, Germany and Spain among its direct or indirect shareholders, has said plainly that prospects the euro might remain strong against the dollar have become a long-term planning worry.

He warns that the strength of the euro, notably against the dollar, "is in the process of suffocating a good portion of European industry by eating away at its export markets."

"If this continues, export manufacturers will flee Europe."

EADS is planning to build an assembly plant for the Airbus A330 cargo jet in the southern US state of Alabama and will also make 179 air refuelling tankers there with Northrop Grumman if a landmark US deal survives an attack by arch rival Boeing.

The factory in Mobile represents an investment of 600 million euros (935 million dollars), to be shared by both groups.

The single currency has climbed above 1.56 dollars. The dollar has fallen heavily for two years and most recently as the US Federal Reserve has slashed key interest rates in response to a collapse in the housing market and slumping economic activity.

The rise of the euro makes goods produced in the eurozone more expensive on foreign markets and this is undermining earnings by manufacturers of big-ticket items such as aircrafts and automobiles.

A strong euro also works to the benefit of eurozone companies however, depending on their business models, by cutting the price of imported materials and parts that have been outsourced to foreign firms.

The rising cost of some energy sources, such as oil that is priced in dollars, is also checked to some extent by the current foreign exchange rate.

The European Central Bank has resisted pressure to lower its own interest rates as eurozone inflation climbed towards a record high point of 3.5 percent in March.

ECB president Jean-Claude Trichet insists the bank's statutory focus on fighting inflation is the only foundation for sustainable growth.

He argued earlier this month that ECB policy has lead to the creation of 15.7 million new jobs since the single currency was launched in 1999, compared with 4.5 million in the previous nine years. The number of new jobs was significantly more than their US equivalent, Trichet noted.

Economics professor Christian Berndt said the ECB fight against inflation meant that in Germany, "companies don't really think about it anymore, its really taken as a given more or less."

"As soon as expectations change, for instance companies expect inflation and price stability to be an issue, things might turn out to be different in terms of investment decisions," he noted.

Some other top names in European industry have spoken in similar, if somewhat less direct, terms to those used by Gallois, however.

French aerospace firm Dassault Aviation is looking at the possibility of making its Falcon business jet in country where costs are billed in dollars, if not the United States itself.

Meanwhile, BMW has announced a 500-million-euro investment in its plant in North Carolina to boost output of models popular in the United States.

Volkswagen is also searching for a North American production site, even as US auto makers look elsewhere to cut their own costs.

Although car sales are falling at present, strategic business decisions look beyond short-term considerations, suggesting that auto executives do not expect the euro to fall sharply against the dollar in the near term.

German specialist Ferdinand Dudenhoeffer of the Center for Automotive Research (CAR) says that "a bigger and bigger portion of sales in Russia and the United States will be replaced by local production."

Professor Berndt added that in the auto sector especially, companies seek roughly the same share of sourcing and production as sales in overseas markets in a bid to become "more or less immune to foreign exchange rate fluctuations."

He said BMW had chosen to build its plant in North Carolina because of low labour costs and added that the group had also "made a point of going to a part of the US where they don’t have to deal with strong unions."

But, Berndt added, "on top of it, there is always the question of exchange rates."

Date created : 2008-04-06