I’ve been running a little series of macro-economics posts in the blog lately, so here’s my latest installment. After posting about the weak dollar, I thought I’d do a little reading on a flipside trend, the strong euro.

(If you haven’t checked these out already, take a look at my posts on rising commodity costs, the credit crunch, and soaring gas prices.

I got to thinking about this topic when I read this Business Week article, “Stalled in the USA: Europe’s Small Cars” by David Kiley. Bottom-line summary: even though there’s huge pent-up demand in the US for smaller, more fuel-efficient cars, the European masters of that category (VW, Volvo and BMW) are actually losing money with every U.S. sale – because their costs to build those cars are too high, all thanks to the strong euro. Well, I hate to be Mister Schadenfreude (or is that Herr Schadenfreude?), but it’s nice to see a little evidence of the weak U.S. dollar helping us to compete internationally.

Here’s another interesting read, while we’re on the subject. SeekingAlpha’s Matthew Hougan points out a great Financial Times article by Paul Betts, explaining the conundrum of the European Central Bank, which controls the Eurozone’s interest rates in the way the Fed controls them in the U.S. The pickle is this: raising interest rates in the Eurozone to manage inflation may be fine, but when it destabilizes the dollar (as it did a few weeks ago) that can spark rises in oil prices worldwide…which then come back to roost in Europe as more inflationary pressure.

James Saft of Reuters digs into this problem in a little more detail in the International Herald Tribune, also a fascinating read. Ironically, despite a strong currency, the Europeans have their own problems as a result of that strength. I guess it’s not all carefree lattes and motor-scooters for everyone in Europe these days, eh?

[image: Clouds on the Beetle by merfam on flickr]
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Will the weak dollar help us internationally once it is the currency of choice for the carry trade?

I'm guessing some of the problems Europeans are having is due to the fact it's now cheaper to iimport  American goods and services rather than manufacture these same goods and services over there.   In the long term, I see some good coming from the week dollar.  For one,  it's forcing american businesses to expand overseas at a faster rate.  Secondly, exports are rising ( which will hopefully bring down the trade deficit ).  It's also helping us become less wasteful and making us  look at ways to reduce our dependence on oil.  Oil isn't going to be here forever.  Better to tackle the problem now than pass it over to the next generation.   Although unemployment is increasing at the moment,  as new technology becomes available, and alternative energy sources become more mainstream,  those jobs will eventually return.

Also,  since you mention European auto makers  I read an article in the WSJ yesterday (regarding McCain's energy policy).   Automakers whose vehicles fail to meet certain emission levels in the US are fined each year.  Because it's more expensive for BMW, Mercedes, and some other European car makers to meet these levels,   they just pay the fine each year ( I think it was something like 300 million a year.   McCain is not to happy about this and wants to almost double the current fine.

Pretty fascinating stuff, guys. Will, good point about the dollar as a carry-trade vehicle, although I found at least one article that questions whether that could ever really take off. Not being much of an FX guy myself, I'd be curious to hear what you think of this guy's analysis:
http://www.rgemonitor.com/blog/setser/240500/

UPod, that WSJ article on European car makers was totally eye-opening. Interesting how they're speaking out of both sides of their mouth on the environment: taxing gas like crazy at home, but breezily paying to allow poor emissions standards here in the U.S. Did the article say what McCain plans to do with the extra fine revenue?

My guess is McCain will use the fine revenue to pay for the 'prize' to the winner of the new battery technology competition he is also proposing.

http://money.cnn.com/2008/06/23/news/economy/bc.mccain.energy.ap/index.htm?section=money_latest 

 I wonder who will get that prize? Perhpas one of the automakers who is currently paying the fines? Would that make everything nice and clean. (pun intended)

Here's a link to the complete article: http://online.wsj.com/article/SB121422729305496477.html

Thanks for the article, UPod! For some reason I was having a tough time finding it on WSJ's search...