Don’t be surprised if the next time you go to buy a French
bottle of wine or a new outfit at your local department store, the
price is much higher than it was three weeks ago.
The price increase is not because the liquor store suffered a
rise in property tax. It’s not because the local department store
suffered cutbacks and is making up for lost revenue.
The reason Americans are paying more for the goods and services
coming out of Europe is because the value of the U.S. dollar on
world currency markets is in a decline. This decline coupled with
the rapidly increasing value of the European Union’s currency – the
Euro – has left world banks scrambling to head off the looming
global economic backlash that will ensue as a result.
The value of the dollar has been declining for the past two
years bringing with it rising concerns among economies in Asia and
in the unified, 12-country European Union.
The banks in Europe and Asia want the value of the dollar to
stay high. The higher the dollar’s value on world markets the more
expensive U.S. exports are, including services. This has been the
world economic standard for many decades.
When the cost of American exports is inflated, countries in Asia
and Europe benefit because compared to the United States, their
exports and services are cheap and therefore highly sought on the
world market. But, when the value of the dollar drops, so too does
the cost of U.S.-made goods, which triggers higher outputs of
American exports. It also brings higher prices to imports coming
into the United States, especially from Asia and Europe.
The dollar’s value has been steadily falling while the value of
the Euro has been rapidly growing. This fluctuation in currency
rates is leading to rising concern among EU economic experts.
The European Union is concerned because Europe, especially
France and Germany, have relied heavily on exports to boost the
recovery of its economy. When the price of European exports goes
too high, foreign investors will take their production and
import-buying activity to other regions of the world. This will
leave the export-dependant European economy helpless and stranded,
halfway through its economic recovery.
On the other side of the Atlantic, the Bush Administration is
not exactly jumping at the opportunity to put stop-gap measures in
place to stop the decline of the weakening dollar. Just like the
rest of the world, the U.S. markets are still recovering from the
tech-heavy recession that occurred in 2000.
The weakening dollar has saved nearly 700,000 jobs in the past
two years, according to Global Insight, an economic forecasting
firm. Also, because the price of American exports has decreased,
numerous manufacturing jobs are in the process of being created in
the United States. During an election year, those numbers are
important, especially because many in Washington have been blurting
the phrase, “jobless recovery” when referring to the U.S. economic
Today, America is enjoying an economic boost in job creation and
export sales while Europe and parts of Asia are scrambling to find
ways to maneuver the value of their currencies down, to keep jobs
up and exports cheap.
There are two problems with this scenario. First of all, Europe
wants the price of the dollar to be high on global markets so they
can take advantage of the jobs and cheap exporting created by the
cheapened price of the Euro. This is fine, but why should the
United States continue to see millions of manufacturing jobs be
outsourced and suffer the economic backlash of expensive exports,
just so the economies in Europe, mainly France and Germany, can
enjoy an export-heavy recovery?
The second problem with the weakened U.S. dollar, although good
for America’s economy in the short term, is that it can eventually
lead to major economic hardships in the long term. This is because
America has accumulated a $500 billion trade deficit. In other
words, America pays many of its expenses by borrowing money from
foreign investors. If the dollar declines too much, then the
foreign investors who pay for our extravagant spending will pull
their money out.
The Federal Reserve will have to raise interest rates to lure
them back. This, coupled with the increased cost of imports coming
into the United States from foreign markets will lead to something
the U.S. economy hasn’t seen in almost 20 years – inflation. This
is why the French wine and clothing from Germany is more expensive.
It’s not the property tax or budget shortfalls causing the price
hike; it’s the rising cost of European exports caused by the
weakening dollar and rising Euro.
At the G-7 meeting last week in Florida, some of the world’s
largest economic players called for reform to head off the grim
future economic outlook for Europe and the United States. The
leaders of the summit issued a statement warning China that it must
allow its currency to fluctuate on the world market.
Currently, China has its currency pegged to the U.S. dollar,
thus always guaranteeing its currency will be less valued than the
U.S. dollar. This in essence allows China to always have lower-cost
exports than the United States.
Isn’t it too bad that that this “money” game being played on the
world currency market boils down to one easy to understand
conclusion? Getting a nice bottle of French wine or repairs made on
your Volkswagen is going to be much more expensive now than it was.
Jason is a senior majoring in journalism. He is the assistant