Euros Performance Bodes Well for Trade

Bobbin, Oct, 1999 by Irving Vigdor

While the euro has not performed as expected, it remains an indicator of positive trade opportunities for apparel firms expanding in Europe.

As the euro's 1-year birthday approaches, the world's newest currency continues to show signs of strength, despite less-than-ideal economic conditions in Europe during the first half of 1999.

As discussed in part 1 of this article (see "The Euro: A New Profit Engine," Bobbin, September 1999), the euro should serve as an inducement to sewn products firms that are looking to expand their trade with Europe, or make their initial ventures into the market. It represents a powerful economic force in that it reduces the foreign exchange risk and expenses previously associated with doing business in Europe. Whereas part 1 of this article explored how the euro is changing trade for the better for U.S. apparel firms dealing in Europe, this article takes a closer look at the currency's actual performance.

Overvalued at Birth

The euro was euphorically greeted by speculators the first two months of 1999, when it began trading at [epsilon]1.00 = US$1.17. Thereafter, like most toddlers, it did not perform according to most of the international economic gurus' predictions for stability and increased valuation. By March, it was worth US$1.08 to US$1.09, and following a continuing deluge of woeful economic news from the European Union (EU), especially from Germany, France and Italy, it fell briefly below US$1.03 for two days in June. Then it picked back up to US$1.04 to US$1.05 by late June and early July.

When the European Monetary Union (EMU) nations showed no improvements in their double-digit unemployment rates and lowered their gross domestic product (GDP) growth projections, the economic gurus predicted the euro could fall below US$1.00. But while the euro fell below US$1.02 for several days in July, it bounced back to US$1.05 on some mildly good news from the region and closed July 30 at US$1.08.

While the euro's initial downward trend is negative, it's really more an indication of an initial arbitrary overvaluation of the new currency. This overvaluation occurred, in part, because: 1) it was anticipated that the euro, which replaced the European Currency Unit (ecu) at par, would be more stable; and 2) it was predicted that the European economies would immediately improve and show growth under the new, more stable monetary system.

The euro was expected to be more stable than the ecu, which was subject to the fluctuations of all of the EU currencies, because the relative currency values of EMU members are permanently fixed to the euro. However, the economic community was wrong in predicting the euro would spur significant growth in Europe's economies, which have shown negative or almost no growth since the euro's debut.

While inaccurate speculation may have led to the euro's initial overvaluation, however, the varied and underlying strengths of the currency remain. As the European economies improve, it's expected that the euro also will settle in-to a fairly narrow fluctuation slot in relation to the U.S. dollar.

In fact, the young currency continues to show its strength, in direct relation to the U.S. dollar and compared with other EU currencies as they have faired against the dollar. Even after the EU nations lowered their growth expectations for 1999, the market didn't react negatively, and the euro's value remained virtually unchanged for weeks during June. In comparing U.S. dollar exchange rates for the first half of 1999, it's evident the market has continued to support overvaluation of the euro, even as the basket of EU currencies and the euro have devalued by about 12 percent and 11 percent, respectively. (See Chart 1.)

Significantly, the euro's performance is based on free market rates because the European Central Bank (ECB), the equivalent to the U.S. Federal Reserve Bank, has not moved to strengthen the currency, though it has the right to do so. The ECB is expected to eventually peg the euro to the dollar to avoid significant fluctuations and, should it be deemed necessary, the bank might move to halt the slide or growth of the euro.

It will be very interesting to Watch "l'enfant euro" continue to mature as it approaches its first birthday Jan. 1,2000.

For apparel and textile firms waiting for an invitation to the party: It's time to brush up on the market, and get into European exporting, importing and/or retailing.

Irving Vigdor is managing consultant of Redwood Associates, and an author. His latest book, Export Strategies For The Millennium, for textile exporters, was sponsored and published by the Cotton Council International. Subject to obtaining sponsors, he plans to write Global Strategies For The Millennium, for apparel importers and exporters.

Vigdor is well known for his forthright essays, presentations and seminars on topics related to his slogan, "Export or Die." Starting in 1987, he began urging textile and apparel firms to pursue global exporting as a survival strategy. His work has reflected his belief that low labor cost countries would increase their U.S. apparel market shares because the U.S. government uses the textile and apparel industry as a sacrificial lamb to achieve other goals, apparently unable to halt illegal transshipments. In later works, Vigdor has discussed Western industrialized nations' movements to open their markets to less developed countries through preferential trade agreements. Taking a realistic view of the foreseeable future, Vigdor's new slogan is "Globalize To Survive."