Sunday, June 08, 2008

The Euro vs. the Dollar

The decline of the dollar versus the Euro was brought home to me painfully recently while I was in Europe for a combination of vacation and to attend the Interzoo show in Nuremberg Germany with my client who produces the Litter Robot ( At over $1.50 to the dollar, the Euro was dramatically different than my last trip in which I enjoyed a .83 Euro. Economists are predicting that the dollar will achieve parity again with the Euro in the future. The Euro is strong for reasons of pride and to demonstrate that the European Union's courageous experience in currency harmonization was a viable idea. I agree that the European Union and a common currency is a huge benefit as traveling from Italy to the Czech Republic to Germany was very easy (except for those Czech crowns that I brought home with me...) In order to prove it would work, the European Central Bank has kept interest rates uncompetitively high which may be good for the currency, but it raises havoc with local inflation, local jobs and it makes European products and services uncompetitive. It also burdens both consumers and businesses with a higher interest expense.

As a consultant representing a US made product, we received a warm reception from potential customers in dozens of countries. Bringing back manufacturing to the United States is only helped by this. The high Euro has also been a deterrent to travel to Europe but it hasn't stopped the Europeans from making trips to the US for shopping which is a huge bargain as not only are costs lower in the US, but they get to avoid those 20%+ value added taxes(VAT). The other observations I made was that the VAT was hidden in the prices of goods and that the cost of gasoline was in the $8-9 US range due to the high taxes. The European governments don't practice alot of transparency in terms of their taxes on purchases because they don't want the citizens to be reminded how much of the purchase price of goods goes to the government.

Bottom line is that nations compete just like businesses and the European Union has a losing competitive strategy in my mind. In their zeal to maintain the Euro, they are gutting their competitiveness and with the demographics working against them, the strong Euro is likely to be short lived.

I just read that in 2000, Italy and France had over 22% of their population age 60 or more compared to 16% in the US. Due to low birth rates and limits on immigration, their 60+ populations will comprise 26.8% (France) and 33% (Italy) in the year 2020 compared to an increase to 22.8% in the US. The burden of their demographics on retirement and health care are going to have a dramatic impact in the European Union long before the impending doom of Social Security in the US. It will be interesting to see how they handle it. I'm guessing that a few European governments will go bankrupt and they will either leave the EU or abdicate a greater part of their sovereignty to the union. As always, the future will always be interesting....

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