How Sweet It Is For Europe's Exporters

The strong dollar has sparked a boom that's firing a recovery on the Continent

Nestled in the Pyrenees mountains of southwestern France, the tiny village of Came and its 700 residents seem a world away from the U.S. But for Solange Gestas, the great big economy across the Atlantic couldn't be more important. The chief executive of a 152-year-old business that makes copies of 19th-century antique furniture, Gestas exports armchairs and tables that fetch as much as $5,000 from U.S. buyers. She started targeting the market in the mid-1980s, when the American economy was booming and a rising U.S. dollar made her products all the more appealing to American buyers. Today, exports represent nearly half of the family-owned company's $3 million in annual sales.

For more and more Continental companies, exports are the bright spot in a European economic recovery often indistinguishable from recession. As the U.S. dollar stays strong against Europe's major currencies, there's growing hope that the export boom will move into even higher gear, adding to growth. More important, some observers are beginning to see signs that exports may finally spur increased capital investment, setting the stage for a job-creating upturn that Europe desperately needs.

BEST HOPE. From fine Bordeaux wine to French perfumes, from German luxury cars and heavy machinery to Italian fashion, exporters who have positioned themselves for international competition are shaping up as the European Union's best hope of generating a lasting economic upturn. The fuel that powers them--a weakening German mark--shows no sign of running out soon. The mighty mark has fallen some 14% against the dollar in the past year and 25% since its high two years ago (chart).

Since it takes a while for currency changes to filter down, the current surge could pick up even more speed. This year, figures Union Bank of Switzerland economist Darren Williams, export growth will accelerate to 8% in Germany and 7% in France, following healthy gains last year. In Italy, exports could jump nearly 4.5%.

True, the dollar's rise is beginning to worry some of Washington's money men (box). But when finance ministers from the Group of Seven industrial countries gather in Washington on Apr. 27, they will face an uphill battle to wrestle the greenback down. The fundamentals of rising U.S.

interest rates and weak growth in Europe suggest the dollar could rise as high as 1.80 marks in coming months, from 1.69 now.

That prospect is giving Europe's exporters cause to celebrate fattened bottom lines. "We can only clap our hands at the strong dollar," says Nestle Vice-President Francois-Xavier Perroud. The reason: Earnings growth at the global foodmaker has rebounded to double digits after several years in which a strong Swiss franc depressed returns. Swiss pharmaceuticals giant Roche is applauding, too. The rising dollar helped boost first-quarter sales of $3.1 billion by 18% over the year-earlier period in Swiss franc terms.

Or take Daimler Benz, where years of restructuring seem to be paying off on the export side. In the first three months of this year, exports of Mercedes-Benz autos to the U.S. jumped by 26% compared with a year ago. Germany ran a trade surplus with the U.S. of $6.5 billion in 1996. And Japan bought 31% more of the German cars during the same period than in 1996.

Exports to emerging markets are soaring as well, since many of their currencies are dollar-linked. While sales in Germany declined modestly during the first quarter at Siemens, its business in Asia jumped about 30% over the year-earlier period, and U.S. sales rose nearly 20%. The biggest jumps came in exports of telecommunications gear, transportation equipment, and electronic auto components.

SECOND LEG? The Euro-export boom is also turning up beneficiaries in surprising places. Santens, one of the biggest companies in Belgium's hard-hit textile industry, got 70% of its $2 billion in sales last year from exports. In 1997, vice-president Luc Santens expects the rising dollar to help his prospects even in Europe, where his company will gain an edge over developing-world competitors who price their products in dollars.

The critical question at this point is whether the export wave will translate into increased capital investment that would give Europe's recovery a second leg. So far the evidence is encouraging. In Italy, for example, the country's $31 billion clothing industry registered an almost 8% jump in exports last year. Now, says Gildo Zegna, executive vice-president of Ermenegildo Zegna, Italy's leading menswear group, "Italian fashion groups are taking advantage of increased earnings to put their businesses in order and invest."

In France, Morgan Stanley & Co. economist Eric Chaney thinks export performance will translate into a 4% boost in capital investment during 1997 following last year's decline. And across the Continent, business surveys are finding capital goods makers far and away the most optimistic business groups for the coming months, as exports compensate them for sluggish domestic demand.

That's not to say exports can bail Europe out of its fundamental economic problems. Only governments can rev up the engines of deregulation and privatization that would provide the long-term cure for record unemployment. But for now, the export machine shows no signs of slowing down, and could make the difference between stagnation and buoyant growth next year.

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