When does the EUR become a problem?

When does the EUR become a problem?

Since the financial turmoil kicked off in July, EUR has climbed around 8% against USD. We anticipate fur-ther gains and reckon that the EUR/USD could break through 1.50 in the next six months. So is the strong EUR becoming a serious problem for European exports and the European economy?

In our view, it is too early to write-off European exports. Although the EUR/USD has been hitting record highs, the trade-weighted EUR has been strengthening much more slowly and it is not yet at especially high levels (see chart). Ultimately, it is currently more appropriate to talk of a weak USD than a strong EUR.
When viewed over the last three to four years as a whole, Euroland’s competitiveness has not actually de-teriorated substantially. One important reason is that wage growth has been relatively subdued, and produc-tivity growth quite strong, not least in Germany.

Finally, the US is becoming less and less important for European trade. Over the last five years, the emerging markets of central and Eastern Europe have been more important for growth in Euroland exports than the US market. And Euroland has become more com-petitive relative to these countries in recent years.
With growing inflationary pressures from oil and commodity prices, we are therefore a long way from the ECB seeing the strong EUR as problematic.