Reporters faced with recurring news sometimes resort to clichés. Oppressive heat wave? Show a kid frying an egg on the pavement. If the value of the dollar falls relative to the euro, describe what admission to the Eiffel Tower or a croissant and espresso now costs U.S. tourists. Balance that with Europeans enjoying bargains at the Mall of America or Walt Disney World.
The travel-focused stories are accurate. When it takes more dollars to buy a euro, Europe is more expensive for U.S. tourists. America becomes cheaper for tourists coming here.
But such stories ignore the fact that a higher-priced euro – or a lower-priced dollar, another way of saying the same thing – affects all U.S. households, not just the few that travel to Europe or that cater to foreign tourists.
The less visible, but far more substantial effects of exchange rate changes stem from the same source as those faced by tourists. All European products – not just food, lodging and recreation bought abroad – suddenly cost more to any American buyer.
These may be consumer products bought directly by U.S. households – Greek olive oil, French wines and cheeses, German automobiles or Italian clothing. These increase in price relative to competing U.S.-produced items. Savvy shoppers may connect this to a more expensive euro. Others will just note that a favorite product costs more and not relate it to a cheaper dollar.
Such imported goods bought directly by consumers are only part of all imports from the euro zone. German machine tools and specialized machinery made by German and Italian companies will cost more for U.S. manufacturers. Dutch insurers and Danish shippers will have to charge clients more unless they are willing to slash profit margins to remain competitive.
Toys and electronics at U.S. malls will not be the only bargains for foreigners. U.S. wheat, corn and soybeans, iPhones, movies and pacemakers will all be cheaper to Europeans than before the dollar lost value against the euro. U.S. sales and production will increase. Producers will hire more workers.
These are the classic effects of a depreciating currency. Consumers suffer. Producers and workers benefit.
An expensive euro also affects prices. U.S. vintners, cheese plants, auto firms and high-end apparel producers have space to raise prices now that European competing products cost more. So do grain companies, electronics manufacturers and movie studios.
The impact of the price change depends partly on the time frame chosen for comparison. A bottle of French wine only costs 16 percent more this week than one with the same price in euros when that currency debuted on January 4, 1999. But a Volkswagen or BMW would cost 60 percent more than an auto with the same price did in January 2002, after the euro’s long slide. A $6 bushel of U.S. soybeans cost Europeans 7.25 euros in October 2000. It would only cost 4.35 euros today. You don’t have to be a tourist to feel the results.
© 2007 Edward Lotterman
Chanarambie Consulting, Inc.