Posted by: Dirk | February 28, 2008

Are exports to the eurozone not affected by a weaker dollar?

Yesterday my colleague from China asked me about the outlook for the German economy regarding growth and inflation. I told him that growth is set to be slower than 2007 because expenditures will be switched from German to US goods at home and abroad, but inflation would also be lower since last year we had a one-time increase in the value added tax in Germany from 16 to 19 percent (see Herbstgutachten, in German[pdf]). Also, the strong euro means that European firms can buy resources like oil at more or less constant prices, while they are rising in US-$ terms. After the conversation I returned to my office, checked my e-mails and noted that my idea of the economic situation in Germany is not different from the IMF’s 2007 Article IV Consultation with Germany.

However, two out of three economists disagree with this view. At least those that were interviewed by the Spiegel. They argue that German exports will not be hurt so much because Germany exports mainly to the eurozone countries and Arab countries that pay in euros:

SPIEGEL ONLINE: Steigt der Euro, steigen die Exportpreise. Wie schädlich ist das für Deutschland?

Straubhaar: Es ist für die Exporte sicher nicht förderlich, wenn die Produkte immer teurer werden. Allerdings wird Deutschland durch den wachsenden Handel im Euro-Raum vom US-Wechselkurs immer unabhängiger. Auch der Handel mit arabischen Staaten erfolgt zusehends in Euro: Statt Petro-Dollar gibt es immer öfter Petro-Euro.


SPIEGEL ONLINE: Steigt der Euro, steigen die Exportpreise. Wie schädlich ist das für Deutschland?

Dreger: Man muss die Kirche im Dorf lassen. 75 Prozent des deutschen Außenhandels werden in Euro abgewickelt. Die Euro-Dollar-Schere spielt dabei nur eine untergeordnete Rolle.

So Thomas Straubhaar and Christian Dreger say that our exports are independent of the US-$ and American competition because they are sold in the eurozone or because Arabian countries pay in petro-euros. But what is the argument here? An appreciating currency (the euro) will harm exports and increase imports, according to the standard text books. Paul Krugman develops the scenario of a devaluating US-$ in his International Economics textbook (6th Int’l edition, p410-11):

While we have couched our discussion of real exchange rates and the current account in terms of customer’s responses, producers’ responses are just as important and work in much the same way. When a country’s currency depreciates in real terms, foreign firms will find that the country can supply intermediate production inputs more cheaply. These effects have become stronger as a result of the increasing tendency for multinational firms to locate different stages of their production processes in various countries. For example, the German auto manufacturer BMW can shift production from Germany to Spartanburg, South Carolina, plant if a dollar depreciation lowers the relative cost of producing in the United States. The production shift represents an increase in world demand for U.S. labor and output.

This example of Paul Krugman is very enlightening, since yesterday BMW announced to axe over 8,000 jobs. In my view, the textbook is right and the German Economists are wrong. If anyone can come up with an argument why exports to the eurozone are better protected against US competition than exports to non-eurozone countries, please let me know (comments preferred).



  1. […] contrary to what many people say, among them business leaders and Economists (see my earlier post here). Until now, exports keep growing at constant […]

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