ReutersFrench President Francois Hollande at a February news conference at the European Parliament.
BRUSSELS (MarketWatch) — France and Germany disagree about the euro.
French President Franois Hollande said this week the common currency is overvalued and argues that its valuation can’t be allowed to hang “on the mood of the markets.” Germany responded by announcing that the euro isn’t overpriced.
They are both right. From Berlin’s vantage point, the euro is, if anything, cheap. At its current level, Germany’s export industries are doing very nicely. For France, it is anything but.
Calculations by analysts at Morgan Stanley, published this week, put the fair value of the euro for Germany, if it were standing alone, at $1.53. For France, it is $1.23. The euro is significantly undervalued for the German economy and overvalued for the French.
France’s dilemma is described in a November report on competitiveness to the French government by Louis Gallois, the former chief executive officer of EADS (US:EADSY). Bottom line: Unlike their counterparts across the Rhine, French industrial companies have ended up in the wrong segment of global product markets.
French industry finds itself “caught in the middle,” Gallois said.
German industry is protected by being positioned at the premium end of most of its markets, where there is less price sensitivity, and by the country’s success over the past decade in reducing costs.
From the other side, French exporters are being assailed by lower-cost competitors.
French companies have, over the past decade, cut profit margins in a bid to stay in the game, but they’ve lost ground in the productivity stakes.
“French industry has not succeeded, with some exceptions (luxury goods, aeronautics, nuclear, pharmaceuticals, and some food products), to move upmarket,” Gallois concluded.
It isn’t only for France that the rising euro is painful. For other economies in Europe, particularly those on the struggling fringes, euro strength threatens to negate their efforts to make their economies more competitive.
“All the potential effort that these countries are doing painfully for internal devaluation — by cutting wages, keeping them below productivity growth and so on — can be undone by the strength of the euro,” economist Nouriel Roubini said last month in Davos.
The euro’s strength has followed what appears to be the receding threat of a euro-zone breakup, thanks to pledges from the European Central Bank to stop speculative runs on the region’s banks and governments. With aggressive easing by the central banks of the U.S., U.K. and Japan, the euro is left as the least ugly dog.