Why America’s currency is the world’s problem

The ailing US economy seems to be driving the exchange rate of the dollar inexorably downward, with serious consequences for the global economy. Politicians and central bankers are looking on helplessly as the economic outlook worsens by the day and European companies rack up huge losses.

It costs about four cents to produce a one-dollar bill, a pittance, compared to the Greenback’s influence on the world’s economy. The exchange rate of the dollar can boost the fortunes of companies and entire economies, or plunge them into crisis. Its rate against the euro fluctuates by a few hundredths of a cent each day. But in the past five years that fluctuation has more often than not taken the US currency on a downward trajectory, causing consternation — and now despair, among people around the world.

Last Thursday, Thomas Enders, the CEO of Airbus, gave a speech to employees in building 261 at the consortium’s production complex in Hamburg. He was there to tell them that a pain threshold had reached. The graph he had projected on the wall revealed the horrifying progression of the dollar over time. The US currency has lost 13 percent of its value against the euro since the beginning of the year. Conversely, the euro has risen in value, and for a short time last Friday it even approached the symbolic $1.50 threshold.

According to Enders, the rate at which the US currency is falling makes “reasonable processes of adjustment” a virtual impossibility. Every cent the dollar drops against the euro costs Airbus €100 million. This has even the normally optimistic Enders alarmed. “It’s life-threatening,” he told his audience.But he declined to say how Airbus would react, that is, whether layoffs would exceed the 10,000 currently planned or whether the company will be forced to close some of its plants. Apparently even he doesn’t know what will happen yet.

Like so many in politics and business, Enders hasn’t a clue what to do about the decline of the dollar, still the world’s reserve currency. The speed of that decline is especially worrisome. In the last 10 weeks alone, the dollar has lost 12 cents against the euro. Jean-Claude Trichet, the president of the European Central Bank, says that he already recognizes “brutal movements” in the international monetary structure.

Meanwhile, the price of oil is reaching record highs. A few years ago, anyone who would have predicted a euro exchange rate of $1.50 and an oil price of close to $100 a barrel would have been ridiculed as a notorious pessimist and prophet of doom. Either of these two numbers alone would have seemed sufficient to force the global economy to its knees.

But now these two pieces of horrific news are appearing in tandem, and yet the world economy continues to grow. Even stock prices on the world’s markets have remained surprisingly high. And yet every dollar increase in the price of oil and, especially, every cent the dollar loses in value heightens fears of the seemingly inevitable consequences, and fears that global growth could slow and, in an extreme scenario, even come to a grinding halt.

The world depends on the dollar. It is the most important currency in global trade. Aircraft, oil, steel and most natural resources are priced in the US currency. Central banks around the world invest a substantial share of their currency reserves in dollars. The competitiveness of entire continents depends on changes in the value of the world’s reserve currency. For these reasons, the dollar’s decline has the potential to send the world economy into a crisis.

Americans have been living beyond their means for years. That includes both consumers, who often buy their houses, cars and other consumer items on credit, and the government, which is adding billions to the national debt to pay for its programs, especially to fight terrorism and wage the war in Iraq. For a long time, this constant borrowing wasn’t a problem, because the United States enjoyed a virtually limitless credit line abroad.

But that confidence is now gone. Once the US real estate bubble burst, it became clear just how shaky the foundation of the country’s economic growth really is. Banks around the world could very well end up writing off hundreds of billions of dollars in bad debts. A number of major international banks have already fired their top executives for making overly risky investments. The world’s lenders have become cautious, making it increasingly difficult for American consumers and businesses to borrow money. Consumer spending and investment, the two main pillars of the US economy, are faltering.

This development has US critics and enemies alike practically dancing in the streets. “The realm of the dollar is collapsing,” said Venezuelan President Hugo Chavez last week, implying that the United States itself would be next. Iranian President Mahmoud Ahmadinejad was quick to ridicule the US currency as nothing but “a worthless piece of paper.” But what the US’s detractors apparently fail to realize is that the aftershocks of a US economic quake will also reach their countries. The Europeans, on the other hand, are already concerned about the fallout.

The German government has remained diplomatically low-key, although Chancellor Angela Merkel has said that the low price of the dollar is problematic for German exports. Merkel’s comments reveal a shift within the coalition government of Social Democrats (SPD) and Christian Democrats (CDU) in Berlin. Only a few weeks ago, Finance Minister Peer Steinbrück (SPD) could hardly contain himself as he praised the advantages of a strong euro. The high exchange rate reduces Germany’s oil bill, Steinbrück argued enthusiastically, adding: “I love a strong euro.” That love affair has apparently faded.

Steinbrück and Economics Minister Michael Glos, a member of the CDU’s Bavarian sister party, the Christian Social Union (CSU), have recently become noticeably reticent on monetary issues. Glos has taken to offering mumbled excuses, for example, that he has already taken current exchange rate developments into account in his outlook for the German economy. But this isn’t quite true. The government’s economic experts based their forecast on a euro exchange rate of $1.40, a level that has long since been exceeded — and that even staffers within Glos’s ministry don’t expect to return anytime soon.

Steinbrück’s experts are also taking a much more cautious approach these days. In an internal memorandum, they recently warned that a further rise in the euro would be “noticeably detrimental to competitiveness, growth and employment in Germany.” courtesy spiegel online 2007

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