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Beware the Super Euro


The almighty euro? It's hard to believe. Almost since the moment of its birth, the European single currency has played a secondary role to the greenback, slipping from a value of $1.18 just after its launch to a low of 83 cents in the fall of 2000. European leaders wrung their hands over their offspring's surprising weakness, and despaired of ever bolstering it.

Well, Europe, you've finally gotten your ?ber-currency. Although the euro has been gradually strengthening for months, of late it has been act- ing like a sprinter on steroids: It rose 6% just in April and early May against the dollar, to $1.14 or so. After Germany announced bad unemployment numbers, the euro dipped a bit on May 7, but traders don't foresee a long-term retreat.

All this in an economy -- the euro zone -- that will barely register 1% in growth this year, and whose most important player, Germany, is looking increasingly atrophied. No matter. Foreign investors who piled into U.S. stocks, bonds, and property in the late 1990s are now wary of America's massive current account deficit and its fiscal profligacy. One analyst estimates that European investors alone have pulled $70 billion out of U.S. assets in the past year. "What is happening to the euro is really that something is happening to the dollar," says Jean-Paul Betb?ze the chief economist at Cr?dit Lyonnais. As a result, some analysts think the euro could remain strong through 2004. That hurts, as exports get pricey and European companies' dollar-denominated revenues translate into weaker results in euros.

The pain became glaringly apparent in the first week of May, when one European company after another held its annual meeting -- and blamed the euro's strength for a number of ills. French-German company European Aeronautic Defense & Space Co. said the strong euro is one reason first-quarter sales slumped to $6.2 billion, from $7.2 billion a year earlier. Some $20 billion of EADS's $30 billion in sales are in dollars. In the German city of G?tersloh, media giant Bertelsmann said the weak dollar was responsible for a slide in first-quarter sales to $4.4 billion from $4.8 billion. That produced a loss of $447 million for Bertelsmann, whose properties include New York-based Random House books. German software maker SAP (SAP) says its sales in North and South America would have edged up 1% in the first quarter if currency rates had remained stable. Instead, SAP logged 20% lower sales to the region. Economists warn that the euro's climb could take up to fifty basis points off European growth.

This is a new experience for much of Europe. With their sturdy marks, Germans knew what it felt like to have a highly valued currency. German sports-car king Porsche (PSEPF) for example, remembers the hammering it took in the early 1990s, when the mark rose by more than one-third. Now Porsche is hedged so completely that the common currency's climb against the dollar hasn't even nicked the corporate paint. But not all exporters have Porsche's foresight. "The traditional Italian export strength always had to do with a weak currency. So this could be painful," says Paolo Moroni, chairman of Milan-based Sawaya & Moroni, a designer and maker of high-end furniture.

There is a silver lining. A strong euro effectively lowers the cost of oil and other commodities priced in dollars. Lower gasoline prices will give consumers more money to spend on other goods, boosting retailers. The weak dollar also significantly reduces costs of carrying dollar debt. French industrial group Saint-Gobain, for example, has about one-third of its debt in dollars. "The impact is quite significant," says CFO Philippe Crouzet.

And despite the downside, most companies are still grateful for the euro. "The euro has eliminated currency risks within Europe," says Kurt Bock, CFO of chemicals maker BASF (BF), based in Ludwigshafen, Germany. And the euro has brought lower interest rates to countries such as Italy and Spain, along with low inflation.

That's some consolation. But many companies will still have to fire workers to stay competitive. A rise in joblessness could cancel out the strong euro's salutary effect on consumer spending. Dutch chemical company Akzo Nobel (AKZOY) plans to cut 2,000 jobs on top of 3,500 it has already shed.

Politicians will be under pressure, too. Because of the harmful impact of a strong euro, Chancellor Gerhard Schr?der can't afford to lose a current battle with left-wingers in his own party over proposals to deregulate the labor market and cut social spending. Italy and France are in a similar fix. "Europe must make reforms to stay competitive," says Francisco Gonz?lez, chairman of Spain's Banco Bilbao Vizcaya Argentaria.

But isn't it a good time to go shopping for U.S. companies? Only if you have a flush bank account. Many European companies are too deeply in debt to fund the stateside deals that helped boost the dollar in the 1990s. Besides, "European investors have had their fingers badly burnt by holding U.S. assets over the last three years," says Mark Austin, global currency strategist at HSBC in London. As the European economy trudges along, the strong euro is yet another burden to bear. By Jack Ewing, with Gail Edmondson and David Fairlamb in Frankfurt and John Rossant and Christina Passariello in Paris


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