Tumbling euro fails to halt push into US

Date: 19/10/00

The euro's weakness has not deterred EU businesses from embarking on a massive transatlantic spending spree which is helping Europe to catch up in the new technology race. Bruce Barnard reports

THE economic news from Europe gets grimmer by the day. The value of the euro is still falling, capital is fleeing overseas, interest rates are rising, inflation is creeping up, credit-rating agencies are downgrading once high-flying telecoms companies, Frankfurt's Neuer Markt crashes 12.5% in a single day to a year's low. Worse, oil prices are hovering around ten-year highs and another interest rate hike by the European Central Bank to prop up the euro cannot be ruled out.

There is no doubt that Europe is facing a tough time, but talk of a currency crisis or economic downturn is far wide of the mark. Quite the opposite. Europe is finally catching up to the US in the new technology race and has pulled ahead in a couple of new economy sectors, notably Internet-based mobile telephony.

Growth in the euro zone will probably reach 3.5% this year, the highest in a decade, and unemployment is still falling. But the US 'miracle' economy is expected to grow by as much as 5.2%, and that is why Europe's performance looks decidedly second rate and some investors are bailing out of the euro.

That is not how it looks, however, to large corporations which are building global businesses or to feisty high-tech start-ups which are challenging their Silicon Valley rivals. Ironically, their strength has contributed to the euro's weakness. European firms are selling euro to buy dollars to finance a massive US spending spree, snapping up companies in every industry from investment banking and pharmaceuticals to movies and trucking.

Capital outflows from Europe reached 210.6 billion euro in the first half of the year, according to the International Monetary Fund, with foreign direct investment accounting for 117 billion euro, almost all in the US. And the trend is continuing: by the end of August, pending acquisitions suggested a net inflow of 59.6 billion euro into the dollar and a net outflow of 67.9 billion euro from the euro, according to investment bank J.P.Morgan.

The tumbling euro and buoyant US share prices have not deterred European firms from buying American companies, often paying top dollar, because a presence in the world's biggest market is vital to keep pace with galloping globalisation. And they are climbing up the world ranks: 12 of the world's top 25 multinational corporations ranked by foreign assets last year were European, according to figures from the United Nations Conference on Trade and Development (Unctad).

Europe's corporate investors are not being driven to the US by poor prospects back home. In many cases, they are buying into American-dominated industries: the French media and utility group Vivendi is running Hollywood's Universal studio following the acquisition of its Canadian parent Seagram; Spain's Terra Networks' purchase of Internet service provider Lycos has put it at the heart of the US new economy; and Vodaphone and Deutsche Telekom have moved to the top of the country's mobile phone market with their respective acquisitions of AirTouch and VoiceStream Wireless.

Smaller European companies are also buying abroad to achieve the critical mass to survive the consolidation sweeping most industries: that is why Dublin-based drugs company Elan has just paid 2.11 billion euro for Dura Pharmaceuticals of California.

Europe is also closing the transatlantic technology gap by snapping up US high-tech leaders. ASM Lithography is buying Silicon Valley Group in a 1.8-billion euro deal which will make the Dutch company the top player in the 8-billion euro-a-year world market for machines which print circuit images onto computer chips. The UK's Smith & Nephew is preparing a bid for US artificial limb manufacturer Zimmer which would double its sales and make it the world's biggest orthopaedics group, and German electrical engineering giant Siemens is considering a 1.76-billion euro bid for Honeywell's industrial control and automation business.

So far the weak euro has been bullish for European business, boosting both exports and earnings, while a lengthening list of US firms has issued euro-related profits warnings as their European revenues are translated into dollars. Some European firms are beginning to hurt - French tyre maker Michelin said a weak euro was partly to blame for the 29% tumble in its profits in the first half of this year - but it still is a competitive currency rather than a weak one.

The euro's fall has not overfed inflation either, although the recent surge in dollar-based oil prices could briefly push up the annual rate in the euro zone to between 2.5% and 2.8%, way above the European Central Bank's target ceiling of 2% and the highest since the euro's launch in January 1999.

An ever cheaper euro could prove troublesome soon, however, as the euro-zone economy has peaked and growth is likely to slow to around 2.3%-2.4% next year. Higher import prices also will push the its trade account into the red - Deutsche Bank is forecasting an 21-billion euro deficit compared with a 24.6-billion euro surplus last year. That could tempt the ECB to increase interest rates - they have been raised seven times since last November - to repatriate capital from the US. But that would stifle growth, the last thing European companies need when the markets start to contract.

Some commentators say the ECB's strategy is flawed because capital flows are not determined by interest rate differentials - US rates are currently 1.75% above the level in the euro zone. Rather, money is flowing across the Atlantic because the US is adapting much more quickly to the new economy than the Europe's single-currency bloc, which is still snared by rigid labour and product markets and high taxes.

The euro still has some way to fall, according to some analysts, who reckon it could go as low as 75 cents, becoming so cheap that even its sternest critics would buy it. Economists say that would still leave it well above the 69 cents which an 'imaginary euro' based on the average value of its predecessor currencies touched in 1985.

Major feature. The euro's weakness has not deterred EU businesses from embarking on a massive transatlantic spending spree which is helping Europe to catch up in the new technology race.