It's the hour of triumph for Germany's hard-money central bankers. In the global currency crisis of early March, inflation-wary investors dumped liras, francs, pesetas, and dollars, all in favor of the mark. By fleeing to the German currency in record numbers, traders caused a tectonic shift in global money flows by breaking the greenback's monopoly as the safe haven of choice.
Now, Europeans are sizing up the implications of the mark's new status--and they don't like what they see. If the mark's clout grows unchecked, everything Europe's policymakers hold dear--smooth trade flows inside the European Union, a prolonged recovery, low interest rates, a single currency--could be threatened.
In short, the mark could ruin Europe's drive for further economic integration and prolong the misery of Europe's unemployed millions. With the mark dominating all other European currencies, "economic policies designed to reduce uncertainty for business have completely failed," worries Peter Praet, chief economist at Brussels' Generale de Banque.
ANOTHER BEATING. The mark's surge is already forcing economists to question the durability of Europe's export-led recovery. While Salomon Brothers Inc. economist Kermit L. Schoenholtz sees European Union economic growth reaching 3% next year, he warns that European business confidence in an ongoing upturn "appears to have plateaued." Already the sharp currency realignments triggered by the mark's surge are slowing growth prospects as interest rates from Spain to Scandinavia rise in order to shelter the weaker currencies from another severe beating.
The mark is also certain to hammer German exports, which have been essential to Europe's recovery. Instead, other European countries will find pricey German goods less and less affordable. And Germans are finding themselves competing against Europeans who can use weak currencies to their advantage. The result is that currency gyrations are throwing up big obstacles to trade in a region that's supposed to be the biggest free-trade zone in the world. And while the export sectors of countries like Italy and Sweden may thrive in this environment, their domestic economies will be battered by higher interest rates and weaker consumption.
Nowhere are the effects of these de facto trade wars being felt more than at German businesses of every size. Horst Stefan, finance director for German windowmaker Weru, is finding the mark rising just as he's thinking of expanding outside Germany. Says Stefan: "Germany is no longer competitive as a production site." New wage accords, which boost union pay higher than expected, make it even tougher for a German manufacturer to compete. So Stefan is looking for cheaper production sites in Spain and Britain.
Mercedes-Benz is nervous, too. Take its business in Italy, its top European export market at $1.2 billion in annual sales. "We certainly have a lot to lose," says Jochen Prange, managing director of Mercedes-Benz Italia. So far, Mercedes has not raised its prices in Italy, but Prange says "we can't go on for much longer without hiking up prices." According to Prange, every time the lira falls 1% against the mark, Mercedes' Italian revenues drop $12 million. The lira has sunk 38% against the mark since September, 1992.
The Germans' worries are echoed in the few countries, such as Belgium, that have kept their currencies closely pegged to the mark. Jaspar Rasschaere, chief financial officer at Godiva Belgium chocolates, is finding a bitter taste in the 10% devaluation of the British pound against the Belgian franc. He has been able to save some money by importing cheaper packing material. But with 25% of its estimated $300 million in annual European sales coming from Britain, "profits are being squeezed," he says, and he is raising prices by 6% to compensate.
Even the supposed beneficiaries of devaluation are finding limits in Europe's currency turmoil. In Italy, producers have seen prices on some German raw materials such as stainless steel rise 300%. And multinationals are finding it difficult to cope with such savage currency swings. Benetton Group, for example, will have a big edge on prices in Germany next year thanks to the devalued lira. But don't think the company would welcome more devaluations. "Benetton is not equipped to take advantage of an exchange rate that has gone crazy," says Luciano Benetton, chairman of the apparel maker. "To plan our long-term commercial strategies, we need a stable monetary scenario."
Truth is, a stable monetary scenario in Europe may be impossible to achieve for years, and businesses will have to keep struggling with the debilitating effects of the mark. By forcing devaluations and boosting the mark, currency and bond investors are expressing their doubts that Europe can reform its expensive welfare state and achieve the stated goal of fusing its disparate economies under a single currency. As a result, even as politicians insist a single currency can be achieved as early as 1997, "there is a sentiment of unpredictability and uncertainty," complains Siemens economist Martin Gross.
SPANISH TRIGGER. That uncertainty is certain to intensify as tensions between rhetoric and reality get played out in the trading pits. In the next few months, the Spanish peseta and French franc could be pummeled, resulting in more gains for the mark.
Spain could be the trigger. Prime Minister Felipe Gonzlez' scandal-plagued government shows no sign that it can rein in its large budget deficits. So the peseta, already devalued in March, may be forced completely out of the system of managed exchange rates, Europe's much-diminished method of containing currency swings. With the pound and the lira already out of the money grid, Spain's departure would leave France virtually alone as a candidate for monetary union with Germany and its monetary satellites Austria, Belgium, and the Netherlands.
Traders could also be gearing up for a battle royal with the franc in the runup to French presidential elections on May 7. With French joblessness above 12%, the new President will be sorely tested to cut government spending enough to keep the franc as strong as the mark. France must also rethink its planned monetary union with Germany. The original idea was for France to counter German influence by leading countries like Italy and Spain into a single currency. But with its allies dropping by the wayside, the French may find monetary union means simply succumbing to the mark and the German central bankers who tend it.
The mark's disruptive gravitational pull will probably continue for some time. For one thing, the Mexican crisis, the source of much of the dollar's weakness, isn't improving. For another, the German Bundesbank, while paying lip service to the need for a weaker mark, has expressed no alarm at the threat the mark poses to European integration. And a strong mark now can help keep the lid on possible inflation from Germany's recent wage settlements.
Germans do suggest one solution for the crisis: that their European neighbors control inflation and government spending as well as the Germans have. That's tough to do, of course. But so's living with the mark.
BUSINESS DISRUPTION Misaligned currencies are undermining the single market, acting as a de facto trade barrier.
EMBATTLED FRANC Traders are severely testing France's ability to peg the franc to the mark. A devaluation is possible.
HIGHER RATES Germany's neighbors may have to defend currencies with interest rate hikes.
SPANISH CRISIS More attacks by bond traders may force the peseta out of Europe's system of managed exchange rates.
DATA: BUSINESS WEEK, DRI/McGRAW-HILL