Americans still do not understand the effects of exchange rate fluctuations on their economy. At least that is the lesson one might take from examining how recent strengthening of the U.S. dollar is reported in the media. This is another way of saying that the euro has weakened compared to the dollar.
That is how the facts are usually presented: the euro is weakening. It is treated as a purely European phenomenon that affects only residents of the 11 European Union countries that adopted a common currency in January of 1999. Some stories note correctly that the weakening euro is good for European manufacturers since their exports are cheaper in international markets.
A few say prices of Europe’s imports are up and that this hurts consumers. But most stories dismiss this by saying imports make up only a small part of the average E.U. household’s purchases.
Many stories carry at least a trace of smug condescension: “Look at those poor Europeans with the 97-pound-weakling currency.” That is the sort of attitude that Ronald Reagan displayed in the mid-1980s, when huge Federal deficits combined with tight monetary policies pushed the dollar to stratospheric levels.
The Great Communicator, who had majored in economics while in college, boasted that the dollar was once again a strong currency.
All the while, this strong dollar was putting millions of farmers through the worst financial wringer in 50 years and erasing more than 300,000 jobs each from U.S. automobile and steel manufacturing.
Perhaps no one examines the effects of a weaker euro on the U.S. economy because it seems to be doing so well right now. Employment and income are high, real estate markets strong, building active and equity markets resiliently bullish. Who cares about negative effects of a stronger currency when everything is so good? After all, isn’t the weak euro just an indicator that the world has much more confidence in the U.S. economy than in that of Europe?
That assessment is correct when one looks at the U.S. economy as a whole. But some sectors are getting pounded by a strong dollar.
Take agriculture. In recent days, President Clinton has made much of the potential benefits for U.S. farmers if legislation approving China’s entry into the World Trade Organization passes in Congress. But we still export eight to 10 times as much to the E.U. as we do to China.
China has agreed to lower its tariffs on agricultural imports if admitted to the WTO. This will benefit U.S. farmers, much more in the long run than immediately. It assuredly will not be the type of panacea for financially strapped farmers as some proponents suggest.
In the meantime, however, the prices of U.S. exports to a much bigger customer, Europe, have gone up by a higher factor than Chinese tariffs may be reduced. Why? Because even though the prices of soybeans, wheat and corn have not changed much in U.S. dollar terms, a stronger dollar (or weaker euro, if you prefer that) means higher effective prices to European customers.
A simple example may be helpful. The euro entered life on Monday, January 4, 1999, the first business day of last year. On that date, farmers in the Midwestern United States were getting about $5.46 per bushel of soybeans according to USDA statistics. On Friday, May 12, the price was $5.41. In other words, soybean prices in U.S. dollars are about the same as they were 16 months earlier.
But let’s look at prices in euros. The euro debuted at a worth of 1.187 U.S. dollars, but soon began to slide. By May 12, 2000, it was worth only 91 cents U.S. The bushel of U.S beans worth $5.46 on January 4 translated to 4.60 euros. By May 12 of this year, the nearly identical U.S. price of $5.41 was equivalent to 5.49 euros.
In other words, the price of U.S. soybeans to European customers went up by nearly 30 percent even while it was declining slightly for U.S. farmers. That is a big price hike to customers who still buy one-seventh of all U.S. farm exports.
We need to understand clearly that exchange rates are merely symptoms of more fundamental forces in economies. There is nothing practical that the U.S. government can do to halt the dollars rise against the euro.
But the media, citizens and policymakers alike should at least understand what is happening in the economy and how it affects as important a sector as agriculture.
© 2000 Edward Lotterman
Chanarambie Consulting, Inc.