Euro Signals Global Transition
The recent rise in the euro and fall in the dollar signal a decline in global dependence on the U.S. economy, along with growing determination that European economies are finally reforming and moving out of their doldrums.
Both developments suggest huge shifts in the world economic scene and are likely to be positive for the U.S. economy. Reforms in Europe also will revolutionize the staid European Union, which has tolerated high 9% and 10% unemployment in Germany, France, Italy and other major countries for years.
The rise in the euro comes as European officials gather today in Washington to discuss trade policies with the Bush administration. The euro has risen against the dollar to more than 90 cents from about 85 cents in the last month. This reflects a decline in foreign investment in U.S. government and corporate securities, as investors have diversified into the euro, says Scott Weiner, managing principal of Payden & Rygel, a Los Angeles investment firm with operations in Europe.
The dollar’s decline reflects an emerging view of the U.S. economy, which has been the world’s almost only growth engine for much of the last decade. The U.S. took in imports from all countries, running trade deficits in the hundreds of billions of dollars. But the exporting countries, seeing few prospects in their own economies, turned around and invested those dollars back into U.S. government and corporate securities and in acquiring U.S. companies.
That inflow of capital, which ran to more than $700 billion a year in the late ‘90s, held down U.S. interest rates and pushed up stock and bond prices and real estate values. It also led to a U.S. trade and current-account deficit of more than $400 billion last year.
But now, with U.S. economic growth uncertain and the U.S. stock market clouded by scandal, foreign investors are saying that the world needs rebalancing. A shift from a U.S.-centric world economy is in the works, says Stephen Roach, chief economist of Morgan Stanley, who thinks the euro’s foreign exchange value will rise to 97 cents.
“We appear to be early in the process of moving to a world where Europe and Asia become the equals of the U.S. in economic terms,” says Robert Pelosky Jr., an international economist at Morgan Stanley. Rebalancing won’t be painless. A diminished flow of foreign investment into the U.S. may well lower U.S. stock prices and could push up interest rates. But the pain would be offset by increased opportunities for U.S. business as other countries and regions increase economic growth.
Weaker Dollar Could Spur U.S. Exports
A weaker dollar and stronger euro could spur U.S. exports to Europe and hike returns from the vast holdings that U.S. firms have in Europe. That in turn could help narrow the U.S. trade and current account deficits.
Meanwhile, Europe is ripe for reform amid political and economic upheaval.
The Continent has been shaken politically by an outpouring of votes for radical candidates such as Jean-Marie Le Pen in France and by a massive general strike in Italy.
Those demonstrations represent “the young who bear the burden of unemployment and lack of opportunity in countries that fight against economic change,” says Stephan Richter, the Washington-based publisher of the Globalist, an online newsletter on economic matters.
These upheavals are likely to speed economic reforms such as lowering tax rates and bringing flexibility to labor practices.
Europe is renowned for rigid labor laws that restrict work hours and effectively dictate that employees are hired for life. Such laws have frustrated many U.S. businesspeople. “They have no work ethic; I wouldn’t invest a penny in Europe,” says Henry Silverman, chairman of Cendant Corp., owner of Avis rental cars, Ramada hotels and other service companies.
The work on reforms is well underway, but a lot more remains to be done. “Reforms of tax and labor laws are not even half completed” in Germany, says German banker Frank-Peter Martin, senior partner of Frankfurt’s Metzler Bank.
Another reform is the growing willingness of European companies to invest in technology and pursue other strategies to boost productivity. For example, corporate profitability and industrial productivity are rising as German companies invest outside Germany--German construction companies are acquiring Polish construction companies, Martin reports.
Reform in Europe May Come Slowly
In Germany and other European countries, companies are investing in information technology, for supply management, financial controls and other efficiencies to offset high labor costs.
Such reforms are new to Europe but could be significant. It was similar investments in information technology that led to the U.S. economic and productivity boom of the ‘90s.
Of course, some European companies are already world leaders in information technology--Nokia of Finland in telecommunications, for example. And giant Siemens of Germany, a global rival to General Electric Co., has greatly built up its Internet-related operations in recent years.
Changes in Europe are still likely to come slowly. European workers, who incur marginal tax rates of close to 50%, still pay more in taxes than U.S. workers because they value the health-care benefits and long vacations typically granted by European law. But pressures of unemployment and the inability of slow-growing economies to continue to afford such benefits will force economic transformation in the next few years.
Meanwhile, the U.S. economy is still likely to grow faster than that of the European countries, say forecasts issued by the European Commission and U.S. investment banks.
In Europe, the people “want their governments to expand their economies,” says Michael Tennenbaum, head of Special Value Investment Management, a Los Angeles firm. Tennenbaum recently toured Europe raising money for a new investment fund. He can’t talk about it, but independent reports say European investors put almost $1 billion into the fund, which will be invested in the U.S. and globally. European investors are still very positive on the U.S. economy, Tennenbaum says.
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James Flanigan can be reached at jim.flanigan@latimes.com.
