A Backlash Is Already Beginning

Jean-Rene Fourtou, chairman of France's Rhone-Poulenc, hoped to insulate the chemical giant from Europe's economic ups and downs by spending billions of dollars on acquisitions in the U. S. As a result, 20% of the group's $15.5 billion in annual sales now comes from America. But Fourtou's strategy has backfired as the dollar has plunged 15% against the French franc in the past year.

Already burdened by acquisition costs, Rhone-Poulenc is being squeezed even further by the U. S. recession. Especially hard-hit are its specialty chemicals, whose sales and profits appear even worse when translated from weak dollars into strong francs. To make things worse, the cheap greenback has permitted U. S. chemical exporters to muscle into Rhone-Poulenc's European home turf. Now, the chemical maker's earnings are in a tailspin. On Feb. 20, Fourtou announced that his group's 1990 net income fell 52%, to $382 million, and that 1,000 workers in France would be laid off. Says Fourtou: "Dollar competition is going to continue for months, even for years."

TAKING A BEATING. From one end of Europe to the other, scores of CEOs are singing the same mournful tune. With much of Europe already in or at the brink of a recession brought on by high interest rates in Germany and other countries, the low dollar is only putting further pressure on already lackluster corporate profits. Carmakers Volkswagen, Volvo, and Rover, and French luxury goods maker LVMH-Moet Hennessy Louis Vuitton are being priced out of the vast U. S. market. Some, including German chemical manufacturer Bayer, are seeing the weak dollar depress U. S. profits. And others, including electronics, aircraft, and chemical manufacturers, are taking a beating, as American competitors draw a bead on 340 million Euroconsumers.

The new dollar shock threatens to heighten tensions between the U. S. and Europe just as negotiators from around the world are trying to save the General Agreement on Tariffs & Trade from collapsing. The European Community is leaning toward easing antimonopoly rules for steel, airlines, and other industries to help them through tough times. Harsher measures against foreign competitors could follow. Paul R. Krugman, a Massachusetts Institute of Technology trade expert, for one, believes "the Europeans will be shameless about trying to block imports."

A backlash is beginning in Europe's corporate boardrooms as well. European companies profited mightily from exports in the early 1980s, when the dollar was high. But now that the dollar is back down, many CEOs are charging that the U. S. has set out to destroy European industry--and its $101.4 billion in annual exports--by subsidizing American companies with a cheap currency. "The U. S. cannot tolerate competition from Europe," charges Henri Matre, chairman of Aerospatiale, France's partner in the European Airbus consortium. "They want us to go bust."

Such feelings are prompting calls for government support of hard-hit industries, especially in France. Air France, for example, has already received a $394 million infusion of capital from the government. Computer maker Groupe Bull has requested aid for restructuring and to fund research and development. And Aerospatiale is also waiting for a response to itsplea for government help. While its expenses are in francs, the Airbus consortium pays for all its work contracts in dollars, the currency of international aviation. So, Aerospatiale claims, every 10-centime rise in the franc against the dollar costs it $20 million in lost earnings. Over the past year, that has added up to about $1 billion.

BICKERING. The calls for state intervention are threatening to destroy whatever slim chances remain to bring the GATT negotiations to a successful conclusion. The Europeans are smarting from the Feb. 14 decision by U. S. Trade Representative Carla A. Hills to launch a complaint against the German government over state subsidies to Daimler Benz. Since the auto maker took over Deutsche Airbus in 1989, Bonn has reimbursed Daimler $237 million for currency losses. Daimler says it will eventually have to repay the subsidies. But it has already received $2.5 million for each of the 95 planes delivered last year.

The EC, which is already bickering over some earlier promises to cut agricultural subsidies, is threatening an all-out war if Hills doesn't withdraw the complaint. While the EC talks of retaliation, companies that aren't in line for government subsidies are bleeding. Italian apparel makers and French luxury goods manufacturers have been hit hard. So have carmakers. Saab Automobile Co., 50%-owned by General Motors Corp., estimates it lost $848 million last year as U. S. sales evaporated. And Ford Motor Co.'s Jaguar Cars Ltd. unit, which relies on U. S. exports for some 40% of its sales, lost an estimated $100 million in 1990. With the pound at $1.95, "the current exchange rate is crippling," says David Boole, a Jaguar director. "It's almost an impossible mountain for us to climb."

Despite the chorus of complaints, Europe can do little to get the dollar back up as long as Washington wants to see America's trade balance improve. The cheap dollar is here, and "we will have to live with it," says Christer Zetterberg, president of Sweden's Volvo. For those who cannot adapt, life promises to be harsh.

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