Strong €uro, Bad €uro? - Eurocentric - Silvia Wadhwa

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Dec.20

5:04 AM ET

Thursday, 20 Dec 2007

Strong €uro, Bad €uro?

Posted By:Silvia Wadhwa

Sectors:Automobiles and Parts | Aerospace & Defense

Companies:Boeing Co | Airbus | Volkswagen AG

I thought it's high time I offered up my two (€uro) cents worth on a very €urocentric topic: Yep, you guessed it: our euro currency.

Well, the first culture shock came (for me at least) when I found out that the US computer keyboard still hasn't got a dedicated button for "€!"

I mean, talk about NOT waking up -- let alone smelling any coffee, eh?

OK, maybe eight years ago, when we marched, devil-may-care whistling into the biggest European adventure since Hannibal crossed the Alps (minus the elephants), there were many who thought the euro might not be more than just an adventure -- and a soon-to-be-failed one at that.

But this new currency kid on the block pretty quickly made sure everybody understood it was here to stay.

But no sooner had the first exchange rate been fixed, did we get the familiar wailing and gnashing of teeth. It was too weak, it was too strong, it was too, well, there. That we Germans, with the post-war economic miracle currency, the rock-solid old deutschmark, were apprehensive about this currency for Europe was only too understandable. But soon we had the French complaining and - heaven help us! -even the Italians were pining for their Lira. The LIRA! Remember, that charming currency, where you always had to count and double-count the zeroes? The currency where they tended to run out of coins and gave you assorted bits of candy for change!

Quello è un buon scherzo, no?

When it was too weak, there were the familiar doomsday prophets, many of them euro skeptics from merry old England. They prophesized that this synthetic currency, with no track record, would not survive. Well, let's just say, they've become rather quiet these days, hmmm?

But now, that the new kid on the currency block has gone from strength to strength. Although in all fairness, it's more like the old greenback has gone from weakness to weakness.

We hear the all-too-familiar tales of woe and lamentation from an odd assortment of international companies, based in euroland, all singing from the same sad hymn sheet. The strong euro is ruining them, burdening their balance sheets, burying their hitherto stellar export success. We will get to that in a minute.

Pointless Political Puffing

Even more, pass-the-buck (or maybe the euro?) -happy politicians such as Nicolas Sarkozy of France call for the ECB "to act fast" and "do something about the euro."

As if they could, for starters. But even if they could, what part of the Maastricht Treaty does Monsieur Sarkozy NOT understand? Dare I mention Article 108 of afore-mentioned treaty, where it reads: "Neither the ECB nor the national central banks (NCBs), nor any member of their decision-making bodies, are allowed to seek or take instructions from European Community institutions or bodies, from any government of an EU Member State or from any other body ... Community institutions and bodies and the governments of the Member States must respect this principle and not seek to influence the members of the decision-making bodies of the ECB."

So much for all that political puffing and moaning in the direction of the ECB!

Who's Worse, Airbus or VW?

But back to the corporate complaining, here two of my favorites:

EADS/Airbus. Not that Airbus (usually with the accompanying noisy drum roll by prominent French politicians) hasn't TOUJOURS complained about the strength of the euro and how it forever ruins its competitiveness, especially vis-à-vis its dollar-based rival Boeing [BA Loading... () ] . But a few weeks ago, Airbus CEO Thomas Enders topped it all by telling the gathered Airbus staff that euro was going to cost the company another 1.5 billion euros in profit and that jobs were on the line because of that. And here comes the real punch line. Airbus hedged the dollar at $1.35. Come again? Hedged? A year ago, the dollar was already at $1.32 to the euro, so where was the hedge here?

But maybe more to the point, if the euro is such a competitive problem for Airbus, how come the company is clocking another year with record new orders. By the end of November 1,204 planes ordered and still counting, beating its own record from 2005 and dollar-rival Boeing's from this year.

A close runner up is Volkswagen. The weak dollar or strong euro (whichever you prefer) is ruining the company's sales in North America. Hmm. Let's forget for a minute that Volkswagen imports many of its more price-sensitive, down-market models from Mexico, which hasn't, unless something escaped me, joined the euro zone as yet. How come we were just presented with this glowing headline: Volkswagen's unit sales will be helped by stronger sales in China, the US, Brazil, Russia and India? Again, none of these markets known for currencies that are notably strong against the euro now, are they? And even in euro terms, Volkswagen sales and profits were up this year so far, strong home currency or not!

The Joy of Conservative Hedging

Speaking of autos, there is this other German car maker, Porsche (soon to be well-and-truly owner of Volkswagen, but that's quite another story). Granted, when you cough up 100,000 euros or more for a car, the currency and its exchange rate is almost irrelevant. But for those of us who are old enough to remember, Porsche was on the brink of insolvency in the 80s, when the dollar dropped against the old deutschmark, following the Plaza accord, in a matter of weeks from 3.47 deutschmarks to the dollar to 1.64.

With about 70 percent of sales in the dollar area, Porsche was truly, well, let's just say in trouble. But that was before Wendilin Wiedeking took over and introduced something that is called "conservative hedging."

Now Porsche has virtually no problems with the exchange rate. Almost two years ago, when the dollar stood at around 1.20 to the euro, old Wendelin told me (and not only me, I dare say) that Porsche had hedged the dollar at around 1.40. Now that's what I call hedging, with a capital H!

So what do we learn from all that?

Don't believe half the tales of woe about the nasty strong euro that's blowing the profit of somebody or other to smithereens. Usually they're just that: tales, tales to cover up flawed risk management or simply other shortcomings in corporate strategy (or lack thereof).

And I leave you with this thought:

Where do you think the Volkswagens and Airbuses would be without the euro? Trying to ride out deutschmark strength, not only against the dollar, but against all other currencies alone? Or struggling with a deutschmark-plus-French-franc balance sheet and diverse currency pulls?

Now that WOULD be a tale of woe!

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