Spain Anxiety on Euro Leaves Rajoy With Two-Front Battle

Photographer: Angel Navarrete/Bloomberg

A giant bull advertisement for the Bodegas Osborne SA winery stands on display as the sun sets by a roadside at the company's vineyards in Malpica de Tajo, Spain. Close

A giant bull advertisement for the Bodegas Osborne SA winery stands on display as the... Read More

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Photographer: Angel Navarrete/Bloomberg

A giant bull advertisement for the Bodegas Osborne SA winery stands on display as the sun sets by a roadside at the company's vineyards in Malpica de Tajo, Spain.

Spanish Prime Minister Mariano Rajoy is counting on Mario Draghi’s help in a battle on two fronts against the strength of the euro.

With the currency reaching a level high enough to provoke the European Central Bank president to threaten action, data today showed slowing euro-area export growth and figures tomorrow will confirm the damage caused to inflation. For Spain, the effect has already been double-edged, depressing consumer prices enough to cause annual declines in an economy beset with unemployment, while also threatening its export-based recovery.

Rajoy said on April 7 that he would like “a different exchange rate,” and Draghi said as much in Washington five days later when he told reporters that the euro’s strengthening “requires further monetary stimulus.” Such assistance can’t come soon enough for Spanish companies including Cosentino SA, a manufacturer of bathroom and kitchen quartz surfaces.

“The economic rationale of maintaining all our factories in Almeria is becoming weaker and weaker,” Chief Financial Officer Luis de la Haza said in a telephone interview from the southern region of Spain, where the company has 10 facilities and two fifths of its workforce. “We’ve been suffering for months without any respite from the euro’s exchange rate.”

The euro fell 0.1 percent today to $1.3807 as of 2:48 p.m. in Madrid. That compares with its level of $1.3967 on March 13, the strongest since October 2011.

Cost Cutting

The 18-nation currency has appreciated more than 5 percent against the dollar in the past 12 months, undermining euro-area exporters’ cost-cutting efforts to win business outside the 18-nation bloc. At the same time, slowing inflation makes competition within the region tougher.

Spanish exports outside the European Union fell 0.8 percent in February from the previous month, and for the euro area, overseas sales rose 1.2 percent compared with a 1.3 percent gain in January, the EU’s statistics agency said today in Luxembourg.

Spain’s Economy Ministry publishes data on total export growth tomorrow. While the country’s foreign sales reached a record 234 billion euros ($323 billion) of goods last year, the annual rate of increase slowed to 0.8 percent in the fourth quarter from 4.4 percent in the third.

Inflation Report

Data due tomorrow will confirm euro-region inflation was at 0.5 percent in March, according to all but one of the 38 economists surveyed by Bloomberg. That’s a quarter of the rate the ECB defines as price stability and in line with a March 31 estimate. In Spain, prices fell for the first time since October 2009, the country’s national statistics institute said last week.

“The best scenario for Spain is an inflation rate below that of the euro area to help restore competitiveness,” said Ben May, an economist at Oxford Economics in London. “If prices fall, with the risk of becoming entrenched, and there is a strong euro exacerbating weak underlying inflation, then it becomes a worst-case scenario.”

Euro-area core inflation, which excludes volatile components such as food and energy, probably slowed to 0.8 percent in March. In Spain, the region’s fourth-largest economy, it fell to zero, the least since April 2010, when the nation was in between two recessions.

Inflation would be half a point higher if it weren’t for the strength of the euro, ECB Governing Council member Christian Noyer said yesterday. That was two days after Draghi reiterated that the exchange rate is “an important dimension” for price stability. He said earlier this month that he has “unanimous” backing to use unconventional measures to defend it if needed.

ECB Action

“One should expect the ECB to act,” said Santiago Carbo-Valverde, an economist who teaches at Bangor University in the U.K. “The strong euro is particularly bad for Spain as domestic demand remains limited and it’s trying to focus its economy on exports rather than construction and housing.”

The country’s focus on exports has helped offset weakness in consumption in an economy where a quarter of the workforce remains without a job. An EU report for 2013 today identified five Spanish regions as having the highest unemployment in the whole 28-nation bloc, including Andalusia with 36.3 percent.

Last week, Rajoy called for action to preserve the Spain’s price competitiveness, his recipe for leading the economy back to growth last year.

ECB’s Remit

“A different exchange rate would enable us to export even more,” Rajoy said. “That’s not within my government’s remit, it’s within Europe’s, within the ECB’s.”

Companies can’t yet rely on Spain’s domestic market to grow, said Jose Manuel Romero, chief financial officer of Molecor, a Madrid-based piping manufacturer, which escaped Spain’s slump by focusing on exports and generated net income of 1 million euros last year. “Demand remains weak, there is a price war and it’s difficult to get paid.”

Back in Almeria, Cosentino estimates the exchange rate led to a 10 percent loss in its earnings before interest, taxes, depreciation and amortization last year, which amounted to 64 million euros.

“We hedge the risk and buy everything we can in dollars but our means to protect ourselves are limited,” said de la Haza. “A reasonable exchange rate is a necessity.”

To contact the reporter on this story: Angeline Benoit in Madrid at abenoit4@bloomberg.net

To contact the editors responsible for this story: Craig Stirling at cstirling1@bloomberg.net Jana Randow

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