Europe's on sale, the dollar's on a tear. But….
The price may be a steep one to pay on both sides of the Atlantic
All of Europe is on sale—20% off and only getting cheaper as the Euro plunges to 20 year lows and the dollar soars. On the one hand that's good news. That summer vacation on the continent hasn't been cheaper in 20 years, same for that Ferrari you've had your eye on for decades, that Chanel handbag, those Ferragamo shoes.
The downside is far less attractive: Fewer foreign tourists spending money from Disneyland to Broadway; investments from stocks to bitcoin, art to NFTs suddenly becoming that much less attractive to foreign investors. Any number of products from American farms to factories rely on foreign markets to stay profitable, or even afloat.
On Thursday, the Commerce Department released the latest trade figures—for April. Not surprisingly, they looked terrific: the deficit plunging 19.1%, the most in a decade, exports surging 3.5% to an all-time high, imports down 3.4%. The problem is that this was just about the time that the dollar began its record surge against the Euro and most other currencies. That fact alone would make goods America was exporting increasingly expensive, while everything we're buying from abroad and importing increasingly cheap. It will be interesting to follow the course of our trade deficit since April when figures become available.
The dollar-Euro reversal is a major fulcrum for the shape and trajectory of the American economy writ large. For the first time since the earliest days of adoption of the Euro at the turn of the century, suddenly today a 1.0-1.0 parity of the dollar and euro seems not inconceivable. Indeed, Friday morning, the dollar edged within eight-thousandths of a point of parity before pulling back just a hair.
Friday morning we had another key economic indicator out of Washington—the closely-watched monthly jobs report. That number—372,000 new jobs created in June—was seen as only continuing the inflationary push. The key Consumer Price Index (CPI) is due out on July 13. As long as the Federal Reserve remains more hawkish on interest rates to control inflation than the relatively timid European Central Bank—now contemplating a narrow 25 basis point increase in Euro interest rates—that march toward parity, or below, is unlikely to be halted or reversed.
Without question, inflation and the American central bank's sharp response to it—a succession of rises in interest rates—are major contributing factors to the rise in the dollar. But much of the dollar's strength and the Euro's weakness is due to any number of economic, social, and political dislocations, not to mention a war on Europe's fringes that appears unlikely to finish anytime soon.
Rising prices from energy to food, themselves a tribute to sanctions on Russian oil and gas as well as ongoing sanctions on Iran, and the Russian blockade of Ukrainian ports raising food prices and cutting supplies of critical wheat and other agricultural exports, only add to the economic dislocations that have been pummeling the euro.
Broader trends on world financial exchanges suggest a tangible power shift—a tilt in the balance from a Europe that really cannot get its house in financial if not political order to an America that despite all the panic over inflation and a host of political and social issues is still in a far stronger position than it has been in years. And this shift is unlikely to change very much at all in the foreseeable future.
Let's look at some of the underpinnings of the problem.
First, political issues. No single European country or leader has emerged, especially since the start of the war in Ukraine, to assume a defining role as the continent's leader—an unofficial position held by Germany's former chancellor Angela Merkel for 16 years. The new German chancellor, Olaf Scholz is only a weak-kneed front-man of a shaky ruling coalition in the Bundestag.
French president Emmanuel Macron, who lusted after Merkel's designation as the capo of Europe on her departure had his legs cut out from under him by French voters. They failed to give him little more than a narrow plurality in the National Assembly rather than the unassailable majority he'd enjoyed during his first term as president, leaving him today twisting in the wind. Just this week, the chairmanship of the powerful finance committee of France’s National Assembly went to the radical left MP, Éric Coqeurel, a longtime member of France's Revolutionary Communist League, who's described himself as a determined opponent of neoliberalism and capitalism—both foundations of Macron's governing principles.
No other country on the continent has either the governmental stability or the economic muscle of either France or Germany. A number of countries in eastern and southern Europe are still effectively economic basket cases. And all are suffering in one fashion or another from the dislocations of Russia's invasion of Ukraine and the West's responses.
Indeed, the war in Ukraine, sanctions and the drain on national treasuries to subsidize the resistance to Russia and the more than seven million Ukrainian refugees pouring across the border into Europe are having a far greater and more immediate impact on the Eurozone than the dollar zone.
In many of these respects, America has stood as the beacon of strength in so many ways. In terms of military aid, the United States has appropriated more than $25 billion worth in the first five months this year, compared with $2.5 billion by Britain, $1.5 billion by Germany and $170 million by France. On the other side of the ledger, however, the Europeans have absorbed far more pain from sanctions against Russia—a larger trading partner in everything from energy to industrial products—than the United States.
Some European countries are especially tied to the Kremlin, Hungary perhaps the most closely. Its leader Viktor Orban succeeded in having the European Union exclude from a sweeping embargo the petroleum products it receives via pipeline at bargain-basement rates from Russia. One result, its petrol prices are barely half the price in France—$4.16 a gallon—provided you have a Hungarian license plate on your car.
Some simple figures are suggestive of the scope of the pain others are experiencing. The average U.S. gas price of $4.75 cents a gallon (down from $4.91 a month ago) compares with France's price of $8.11 (a surge from $7.01 a year earlier). By one measure, the Washington Post calculated that $40 worth of gas will get you 247 miles in the United States compared with 158 miles in France in a comparably-sized car.
Across the board, there are inflationary pressures sweeping the continent, comparable in intensity to the United States. May inflation in the EU hit 8.6%, four times the 2% annual target set by the European Central Bank. This is the highest ever recorded in the EU and identical to the rate in the U.S. But on Europe's fringes, inflation is surging even faster—from 9.1% in Britain to 78.6% year-over-year in Turkey. Even within the EU, there are vastly disparate rates of inflation—from 6.5% in France (itself a record high) to 22% in Estonia. Indeed, 15 Eurozone countries clocked in above the average for the 19 nations overall.
Effectively, what we are seeing here is a perfect storm that is only beginning to sweep across not only the developed world but a host of other regions, often at a frightening pace. A Pew Research report showed that the pace of increase in inflation— an even more important measure in domestic political terms—has surged 25-fold in Israel from 2020 to 2022, some 20-fold in Italy and Greece, though a more manageable, while hardly acceptable, four-fold in the United States.
The big question going forward is precisely how these apparently chilling numbers will be affecting the appetite of governments of these countries to sustain the kind of geopolitical initiatives that are vital to restoring even a modicum of equilibrium in the wake of Russia's unchecked aggressiveness. At the same time, many are hobbled by the eagerness of voters to retool any administration that seems unable or unwilling to control plummeting purchasing power at home.
If the Federal Reserve can move quickly, however radically, to restore a degree of equilibrium and rein in inflation in America, perhaps it will have the effect of lighting a fire under its EU counterpart to react with equal aggressiveness. Only then might we restore a degree of equilibrium in our currencies, rein in inflation and support the vital priorities of standing up to even the most toxic challenges to democracy.