A Strong Euro: Good for Who?

Most Europeans I talk to are thrilled with the high value of the Euro, some even go as far as to believe that it proves the European Union with surpass the United States in economic power.  In reality, this could not be further from the truth.

First, lets go over the best thing that the strong Euro has given Europeans.  That is a large purchasing power for items outside their economy.  This means vacations and imports all of a sudden become extremely cheap for europeans.  This, however, is only the short term effect, but is what they have been noticing so far.  The long term effect is much different in reality.

Over a longer period of time, having a currency that recently increased in value kills the economy.  Because their currency is expensive in relation to other countries, production within Europe increases in cost.  When the Euro rose against the dollar, american imports greatly dropped in price for Europeans.  This is because they still made the same amount of Euros, but those Euros were a lot more Dollars than before.  This allowed american companies to begin selling much higher volumes in Europe.  The downside for the European economy is that while american companies produce in Dollars, European ones produce in Euros.  A company cannot lower the salary of an existing contract simply because its currency rose, so European were effectively costing corporations many more Dollars than before.  

What happens next is a chain reaction.  While an american corporation can produce item X for 100 Dollars, a European one must spend a higher amount.  Let's say 120 Dollars to keep it simple.  The result is higher profit margins for american companies in Europe, and European companies struggling to cut a profit in the United States.  A good example of this is the MSRP of a car in Europe and in the United States.  A Focus costs much more in Europe than in America, which makes sense, because it is designed and produced by an American company, but a Mercedes also costs more in Europe, which makes less sense, since it is made by a European corporation and then exported to America.  Prices in Europe are reflective of its companies manufacturing cost, while prices in the States are reflective of American manufacturing costs.

In order to stay competitive in the world, European companies must make smaller profit margins than american ones.  This results in lower profits, and in turn will be reflected by lower salaries over a long run, as companies can't keep up with increased costs and reduced profits.  

Another area where a high Euro hurts European economy is in tourism.  Europe has always has a large portion of its income based on tourism.  France was for a long time the leading country in tourism revenues, only to be recently surpassed by Spain.  This mean Europe has the two biggest incomes from tourism in the world.  When the Dollar was strong, Americans flocked to Europe to vacation, and left their money there.  Now it is a different story.  The newest trend in Europe is to take a quick trip to New York to go shopping.  Want a nice vacation?  A ticket to Miami isn't too expensive, and staying there is much cheaper than vacationing in Ibiza.  When Europeans leave their country and go outside the EU, they help the place they go to by leaving their money there, and hurt Europe's economy by taking their money away.  In lowering the income of the tourism industry in Europe, those hotels and restaurants are also forced to lower wages and cut jobs in order to keep making money.

In Europe a strong Euro, along with some of the highest taxes in the world, make it extremely difficult for European corporation to compete on a worldwide level.