Question

international marketing The Euro Yo-Yo

Since the inception of the European Monetary Union (EMU) on January 1, 1999, the ups and downs of the euro have created challenges and opportunities for global companies. The euro’s volatility has also compounded the economic problems of the 12 countries in the euro zone. The euro began its life as an electronic medium with an exchange rate set at €1 equal to $1.161. Then, the unexpected happened: The euro’s value plunged relative to the currencies of Europe’s major trading partners. The lowest point came in October 2000, when one euro was worth only about 83 cents. By December, the euro has strengthened to about 97 cents; it then plunged again in mid2001. Euro coins and bills began to circulate on January 1, 2002, after which the euro began to steadily gain strength. By mid-2003, as the war in Iraq and the ballooning deficit raised concerns about U.S. economy, the euro’s value had strengthened to a monthly average of $1.17. The euro’s volatility forces businesses that export to Europe to think carefully about business strategies and policies. One such company is Markel Corp, a Philadelphia-based manufacturer of cable-control tubing and insulated wire used in the automotive and appliance industries. About 40 percent of Markel’s $26 million in sales is generated in Europe; important euro zone customers are located in Spain, the Netherlands and Germany. In an effort to build up market share, company president Kim Reynolds aim to hold prices steady for Markel’s euro zone customers; contracts with euro zone customers call for payment in euros. The strategy is paying off; today, Markel commands about 70 percent of the global market for high-performance tubing. This success came at a cost, however; as the euro plunged in value, Markel’s losses mounted. In 2000, the company suffered a currency loss of $650,000; losses in 2001 and 2002 amounted $400,000 and $225,000 respectively. However, Reynolds hedges his exchange risk by buying forward contracts that guarantee him a set number of dollars for each euro his customers pay. Even so, Reynolds was forced to institute pay cuts for salaried employees and cancel year-end bonuses and dividends to shareholders. The situation has changed dramatically as the euro has gain strength again; in 2003, Reynolds expects a currency gain of up to $500,000. Policy makers in the 12 euro zone nations are also facing challenges. Here too, an analysis of the Euroland economy must begin by addressing issues related to the currency’s volatility. Twelve nations make up Euroland: Germany, France, Spain, Portugal, Luxembourg, the Netherlands, Ireland, Italy, Austria, Finland, Belgium and Greece. Sweden voted in late summer of 2003 to retain the Krona. No doubt the volatility of the euro was a consideration, as was the desire to preserve Sweden’s generous social welfare system. There is more support for the euro in the remaining two holdouts. According to Eurobarometer, an EU public opinion poll, 53 percent of the citizens of Denmark now favour the common currency. By contrast, in the United Kingdom, only 24 percent support a change to the euro. It is possible that both countries will wait until 2006 to put the euro to a vote again. Given the challenges faced by companies such as Markel and the governments in the euro zone, it is fair to ask whether the euro experiment has been a success or a failure. Is there a bright future ahead for the new currency zone or will the old problems of an inflexible labor market and slow growth continue to plague Europe? European economic success will depends on a strong American economy. Trade with the United States will create economic growth in Europe. Increasingly stressed relations resulting from American export tax relief and European Union preferential tariffs work to limit free trade and growth. 2 | P a g e M K T G 3 4 1 0 / J u n e 2 0 2 0 Enlargement of the European Union is sustaining the drive toward open free trade and competitiveness that began with the coal and steel communities, but Europe needs to wake up to the fact that globalization has passed enlargement by. Global capital flows, global sourcing of products and global movement of people are facts of modern economic life. While Europe goes about the business of building its federal nation state, it must also go about the business of building institutions and attitudes that are necessary to accommodate the global market.

1. What are the business implications due to the volatility of the euro?

2. Why 74 percent of citizens of United Kingdom are not support the euro?

3. Why Markel Corp suffers from currency losses?

Answer 1

1. As Euro is very volatile businesses which trade with European countries face hardships as they suffer losses because of this volatility. For example the contracts call for payment in Euros. Thus when the Euro depreciates against the dollar, one gets less dollars as earlier €1 was equal to $1. Now €1.5 is equal to $1. Thus as the contract is based in Euro's, if the business increases to €1.5 from €1, the firm still earns $1. This leads to costs mounting up and prices of the products are also kept unchanged which mounts up the losses further. This leads to pay cuts cause even though output increases, because of the currency risk, the firm earns less in dollars.

2. 74% of the citizens of UK are not supporting the Euro because it is highly volatile and the major trade partner is U.S, which increases the risk of trade drastically, if U.S decides to not continue trading. It affects business strategies and policies as volatility affects global capital flows and movement of people.

3. Markel Corp suffers from currency loss because it has to trade in Euros, thus the firm gets Euros which it then has to convert to dollars. But as the Euro depreciates and appreciates constantly, it faces a risk as it has to keep its products priced at the same rate, otherwise firms won't buy their products. Thus if the contract is for €100 mn, but as the Euro depreciates against the dollar (€1.5 /$1 vs. €1/ $1 earlier), so even if the business increases to €150 mn the firm still gets same number of dollars in return, when in fact it should get more and costs are paid in dollars, this increases the currency losses.