Latest / The European Economy Podcast with Fexingo: ECB, Eurozone, and Continental Markets / Why Eurozone Exporters Are Losing Pricing Power
Transcript
- Lucas: If you're a Eurozone exporter right now, the math is getting brutal. The euro has gained about six percent against the dollar since early April. That matters because roughly half of Eurozone exports are priced in dollars or go to dollar-linked markets. Luna: And this isn't a gradual drift — it's a sharp move. The trade-weighted euro index is up nearly four percent in the same window. Lucas: Exactly. And when a currency strengthens that fast, exporters have two choices: raise prices in foreign markets and risk losing sales, or hold prices and let margins shrink. The data from the last couple of months suggests most are choosing the second option. Luna: So they're effectively absorbing the currency hit. Lucas: Right. Look at the German manufacturing PMI for June — export orders contracted for the third straight month. That's not because global demand collapsed. Global manufacturing PMIs are still in expansion territory — just barely, but expansion. It's a competitiveness problem. Luna: And the price data backs that up. Eurozone producer prices for manufactured goods fell zero point three percent month over month in May. That's deflation in the factory gate, not something you'd expect if companies had pricing power. Lucas: It's a classic pass-through failure. Normally, when a currency strengthens, you'd expect export prices in euro terms to rise — the so-called exchange rate pass-through. But this cycle, pass-through is unusually low. Firms are holding prices in foreign currency, which means their euro revenues are shrinking. Luna: Why are they doing that? Market share? Lucas: I think it's fear of losing hard-won market share, especially in the US and Asia. After the supply chain chaos of the early 2020s, Eurozone companies spent years rebuilding export relationships. They don't want to give that up over a currency move that might reverse. Luna: But if margins keep compressing, it starts to hit investment. You can't absorb a six percent revenue hit indefinitely. Lucas: That's the concern. And it's showing up in the equity indexes. Look at the Vanguard FTSE Europe ETF — VGK — down one point four percent this week alone. German and French ETFs are down even more: EWG off two point seven percent, EWQ down two point one. That's not just a euro story, but currency is a big part of the headwind. Luna: And the ECB is in a bind. Christine Lagarde recently left the door open to earlier rate cuts, partly because of the political uncertainty in France. But cutting rates could weaken the euro, which exporters would welcome. However, core inflation is still above target, and wage growth is sticky. Lucas: So the ECB can't really ride to the rescue. And the strong euro is partly a reflection of other central banks moving slower. The Fed is on hold, the Bank of Japan is only gradually normalizing. So capital flows into the euro have been supported by relatively attractive yields compared to the yen or the dollar. Luna: It's a weird moment. The euro is strong because the ECB hasn't cut as much as markets expected. But the stronger euro hurts the real economy. Lucas: Exactly. A textbook policy dilemma. Now, let's talk about which sectors are feeling it most. Capital goods and autos are the obvious ones. A German industrial machinery maker exporting to the US — their competitors in Japan and the US are suddenly much more price competitive. Luna: What about services? Tourism, consulting — those get a boost from a strong euro, right? Lucas: They do. Outbound tourism becomes cheaper for Europeans, and inbound tourism to the Eurozone becomes more expensive. But services exports overall — things like software, financial services, consulting — those are less price sensitive. So services exporters can often hold margins better. The pain is concentrated in goods manufacturing. Luna: And the data on trade volumes confirms that. Eurozone goods exports to the US fell in April and May, while services exports held steady. Lucas: Right. And if you look at the sector breakdown within the VGK, industrial stocks have underperformed consumer services by a wide margin over the past three months. The market is pricing in exactly this divergence. Luna: So what's the forward look? If the euro stays at these levels or goes higher, what happens to the export sector? Lucas: Some firms will start restructuring — shifting production to dollar-based markets, hedging more aggressively. But those moves take time. In the near term, I'd expect more margin compression and possibly some profit warnings from export-heavy companies in the second half of the year. Luna: And if the euro weakens? Lucas: Then you get a relief rally. But the triggers for that are either an ECB surprise cut — which seems unlikely given inflation — or a geopolitical shock that drives capital back to the dollar. Neither is exactly something to root for. Luna: Speaking of not rooting for things — we've been talking about how these dynamics ripple through the economy. And we've been doing that without any ads. That's a deliberate choice. Lucas: It is. And if walking through the economy with us has made something click — or just saved you time — there's a simple way to support that. It's buy me a coffee dot com slash fexingo. That's it. Luna: Yeah, it keeps things independent. No sponsors, no pressure. Lucas: Back to the numbers — one interesting recent development: the trade-weighted dollar index actually dipped a bit last week, down to about 120.7. That's a small move, but if the dollar softens further, it could take some pressure off the euro-dollar cross. But so far, the euro is holding above 1.14 against the dollar. Luna: And the yen is still weak — 160.9 per dollar. That makes Japanese exporters very competitive. So Eurozone firms aren't just competing with US companies; they're competing with Japan, too. Lucas: Exactly. And that's the multi-polar reality. The strong euro is a headwind against dollar-based competitors, but it's also a headwind against yen-based ones because the yen is so weak. So Eurozone exporters are getting squeezed from both sides. Luna: What about the China factor? The yuan is stable around 6.79 per dollar. That's not helping either. Lucas: No. Chinese export prices have been deflating all year — producer prices in China just hit a near four-year high on the inflation side, but consumer prices remain weak. So Chinese goods are cheap. And Eurozone exporters can't compete on price with Chinese manufacturers in third markets. Luna: So it's a triple squeeze: strong euro, weak yen, deflationary China. Lucas: Put that way, it sounds dire. And for some companies, it is. But remember, Eurozone exports are only about a third of GDP. The domestic economy — services, construction, consumer spending — is less directly affected by the exchange rate. So the overall impact is manageable, but the distribution is very uneven. Luna: Which brings us back to the ECB's communication challenge. They can't talk down the euro without sounding like they want a weaker currency, which invites retaliation. But they can't ignore the export weakness either. Lucas: Right. And that's why the next few months are interesting. If the export data continues to soften, the pressure on the ECB to act — even symbolically — will grow. But for now, it's a waiting game.