Latest / The European Economy Podcast with Fexingo: ECB, Eurozone, and Continental Markets / How the Euro Is Quietly Undermining German Exports
Transcript
- Lucas: So the euro has been sliding for weeks — we're at one point one five against the dollar, down from one point one six just a week ago. The trade-weighted dollar index is at one hundred twenty point four, its highest since late 2023. Conventional wisdom says a weaker euro should be great for Eurozone exporters. But Germany's factory sector is actually bleeding jobs. Luna: Yeah, this is one of those 'it depends on the details' moments. The weaker currency helps if your main problem is price competitiveness. But if your main problem is weak demand and rising input costs, it doesn't help much. Lucas: Exactly. And the data this week is pretty stark. S&P's flash PMI showed factory job cuts in June approaching levels we saw during the financial crisis and Covid. I mean, those are extreme comparisons. And the job cuts are concentrated in Germany, not in France or Spain. Luna: So the currency boost is bypassing the sector that needs it most. Lucas: Right. Let me put some numbers on it. Germany's manufacturing PMI has been below fifty — that's contraction — for over a year now. And the export orders sub-index is still deep in negative territory. A weaker euro should normally lift export orders, but it hasn't. Why? Because Germany exports capital goods and cars, and China — their biggest customer — is buying fewer of both. China's own industrial output is slowing, and they're also making more of these goods themselves. Luna: So it's not a pricing issue. It's a demand issue. You can't cut your way to growth when the customer isn't buying. Lucas: And there's another layer. The weaker euro also makes imported energy and raw materials more expensive. Germany's industrial energy costs are already high after the Russian gas cutoff. So their input costs are rising at the same time that revenue in euros is falling. That's a margin squeeze. Luna: Interesting. So the currency move is actually tightening the vise on industrial margins? Lucas: Exactly. Meanwhile, France's services sector is humming. Their PMI is above fifty, tourism is strong, and they don't rely as heavily on exports of physical goods. So the same weaker euro is a net positive for France: cheaper exports of services, like consulting or tourism, without the same input cost shock. Luna: So the ECB is in a tough spot. One interest rate for two very different economies. Lucas: That's the core dilemma. If they cut rates to help Germany, they risk overheating services inflation in France and Spain. Core inflation hit three point four percent in May, highest since October 2023, per the Fed's preferred gauge — but the ECB's own core measure is also sticky. If they hold rates, Germany's factory slump deepens. There's no clean option. Luna: And the euro's decline is partly a reflection of that policy paralysis. Markets are pricing in more ECB cuts than the ECB wants to deliver. Lucas: Right. The euro is weak because the market expects the ECB to eventually capitulate and cut more aggressively to save the industrial sector. But if they do that, they risk reigniting inflation in the services-heavy economies. So the weaker euro is both symptom and cause. Luna: Let's talk about one specific industry that captures this tension. Automakers. Lucas: Perfect example. Volkswagen, BMW, Mercedes — they all reported weaker first-half sales, especially in China. A weaker euro helps them compete against Japanese and Korean rivals on price. But their supply chains are global, so they're paying more for imported semiconductors, lithium, and other components. The net effect is ambiguous at best. Meanwhile, their Chinese competitors like BYD are gaining market share in Europe itself. Luna: And the political dimension? The French government has been pushing for a more dovish ECB to support growth. Germany historically wants price stability above all. That tension is playing out in Brussels. Lucas: It is. But look, the ECB's mandate is price stability. They can't target exchange rates or sectoral output. So they're left hoping that services inflation cools on its own while the industrial downturn doesn't get worse. That's a thin hope. Luna: And if it doesn't cool? What's the scenario where this breaks? Lucas: If Germany enters a technical recession — we're close, GDP was flat in Q1 — and France's services inflation stays above three percent, the ECB would face a full-blown credibility crisis. Either they break their mandate or they let a major economy suffer. That could force a political intervention, like a joint fiscal expansion from Berlin. But Germany's debt brake makes that difficult. Luna: So the euro weakness is a canary. It's telling us the currency is adjusting to a deeper structural problem. Lucas: Exactly. And the adjustment isn't working the way textbooks predict because the problem isn't price — it's demand and supply chains. The euro is cheap, but nobody wants to buy what Germany sells, and Germany can't produce it cheaply enough. Luna: It reminds me of the Japan analogy from the 1990s. Yen weakness didn't revive exports because companies had already moved production offshore. Lucas: There are parallels. But Germany hasn't offshored as much as Japan did. Their car plants are still mostly in Germany. So they're stuck with high fixed costs and a shrinking order book. The weaker euro is a lifeline, but it's not enough. Luna: Alright, so what should an investor or a business owner take away from this? Lucas: I'd say: don't assume a weaker euro is automatically bullish for European equities. You need to look at the sector. Services and domestic-oriented companies benefit. Export-oriented industrials are still under pressure. And the currency move is a signal that the ECB is trapped — that's not a great backdrop for risky assets. Luna: And for someone just trying to understand the macro picture? Lucas: The euro's decline is a mirror of the Eurozone's internal fractures. One currency, many economies, one policy. The weaker euro is the market's way of saying the current mix isn't working. And until the bloc addresses the structural divergence — whether through fiscal transfers, structural reforms, or something else — the euro will remain under pressure. Luna: That was a really helpful framing. Thanks, Lucas. Lucas: Sure. And hey — if walking through the economy with us has made something click, and you'd like to keep this show ad-free and independent, you can support us at buy me a coffee dot com slash fexingo. No pressure, just if today's episode was worth a coffee to you. Luna: Yeah, it's the simplest thing. Keeps the lights on and helps us keep diving into these nuanced topics without any sponsorship noise. Lucas: Exactly. So back to the data — one more number I want to flag. The trade-weighted dollar index at one twenty point four is a twenty-year high. That's not just a euro story; it's a dollar strength story. And a strong dollar tightens global financial conditions, especially for emerging markets. That's a headwind for Eurozone exports to places like Turkey or Brazil. Luna: Right. So even if China demand stabilizes, the strong dollar could still drag on Eurozone export volumes. Lucas: Yes. And that's why the ECB's job is so hard. They're fighting on multiple fronts: domestic inflation, external demand, currency effects, and fiscal policy constraints. There's no single lever. Luna: So as we wrap, what's the one thing you want listeners to remember from this episode? Lucas: That the euro's weakness is not a simple 'good for exports' story. It's a symptom of a deeper imbalance within the Eurozone itself. And until that imbalance is addressed, the currency will keep reflecting the strain. Luna: Well said. Thanks for listening, and we'll be back with another episode soon.