Mercedes Hands Germany Competitive Edge as Euro Divides Europe

Mercedes Hands Germany Competitive Edge as Euro Divides Europe


Oct. 29 (Bloomberg) -- Germany is finding quality counts when it comes to the rising euro.

While its 17 percent gain against the dollar since March has been called a “disaster” by French officials worried it will dent the recovery, Germany is banking on the reputation of exports such as BASF SE chemicals and Daimler AG’s Mercedes cars. Germany sells almost a third of “high quality” European exports, according to economists at the Paris-based CEPII institute. France has 12 percent and Spain just 3 percent.

Germany’s ability to cope with the stronger euro may help it pull away from the rest of the euro region as global trade picks up. Its success also highlights the risk that the currency will further widen the growth gap between Germany and nations such as Spain that were already lagging behind the global recovery and struggling with gaping budget deficits.

“Historically, Germany has typically seen the strength of the currency as a sign of the economy’s strength and German businesses have not really competed on price for their exports,” said Ken Wattret, chief euro-area economist at BNP Paribas in London. “It’s much less a problem than it is for some of the other economies.”

German exports may rise almost 6 percent next year, Deutsche Bank AG forecasts, compared with 4.4 percent for the euro region as a whole. French exports will rise 3.8 percent and Spanish foreign sales just 2.4 percent, Deutsche Bank says, while Italian exports may drop 3.4 percent.

Worst Recession

That would help Germany emerge more quickly from Europe’s worst recession since World War II. The European Commission says the economy probably grew 0.7 percent in the third quarter compared with 0.2 percent for the euro area and contractions in Spain and the Netherlands. Germany reports figures on Nov. 13.

Germany has relied on exports to power its economy since the 1950s, when sales of Volkswagen AG cars and Siemens AG communications technology powered the economic boom that pulled the country out of the rubble of World War II.

Germany’s share of high-end exports is almost three times Italy’s, says Professor Lionel Fontagne at the CEPII and Paris School of Economics. His research gauges the additional price customers are prepared to pay for similar products.

“The kind of specialization of Germany is very much based on what we could call incremental innovation,” Fontagne said. “You keep exporting the same products, and from year to year you just improve the quality of the product.”

German exporters have benefited the most in Europe from China’s emergence as the world’s third-largest economy. Last year it accounted for almost half of the EU’s sales to China and German exports to China more than tripled between 2000 and 2008. French and Italian exports doubled in the period.

Overrated

The euro’s strength “shouldn’t be overrated,” says Anton Boerner, head of the BGA exporters’ association. He says exports may rise as much as 10 percent next year.

Other countries are striking a more alarmed tone. In France, Henri Guaino, an aide to President Nicolas Sarkozy, said on Oct. 20 the euro at $1.50 was a “disaster.” European Central Bank President Jean-Claude Trichet has also stepped up his rhetoric against the currency’s appreciation, though he’s so far stopped short of warning investors against future gains.

“Excessive volatility” in currencies is “bad for economic development,” Trichet said on Oct. 19. The euro traded at $1.4796 yesterday.

Stronger Currency

The danger for the euro region is that the stronger currency will hurt some countries more than others. Spanish exporters are already suffering because they don’t have brands that foreigners will buy when the stronger euro makes them more expensive, said Balbino Prieto, chairman of the Madrid-based Spanish Exporters and Investors Club.

“If you’re going to buy a Mercedes-Benz, you’re not going to not buy it because of a small move in the exchange rate” he said in an interview.

Some economists nevertheless argue that Germany is overly reliant on exports, which account for almost half of its gross domestic product. The slump in global trade last year and earlier this year will help wipe 5 percent from GDP in 2009, according to government forecasts.

“Euro strength is particularly troubling for growth prospects in euro-zone economies with high trade openness such as Germany and the Netherlands,” said Martin van Vliet, senior economist at ING Bank in Amsterdam.

German exporters are also threatened by manufacturers in foreign markets. Thorsten Herdan, president of VDMA Power Systems, a manufacturers group, said in July that German wind- turbine sales in China may shrink this year amid a move toward domestic products.

Export Nation

Chinese foreign sales measured in dollars have exceeded Germany’s on a monthly basis since March, threatening its position as the world’s largest exporter.

For now, German Chancellor Angela Merkel isn’t showing signs she’s concerned about an overdependence on exports as she prepares for her second term as chancellor.

“Germany’s strength lies largely in the fact that the Federal Republic is a center of industry and that it’s an export nation,” Merkel said on Oct. 14. “All those who now say we’ve depended too much on exports are undermining our biggest source of prosperity and must be rebuffed.”

bloomberg