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As developed-market monetary policy creates an environment of currency volatility in emerging markets, it would be easy for companies turn their attention away from Western Europe. The financial crisis has abated somewhat; eurozone countries hardly make the news.
However, executives should be prepared for problems emerging in the eurozone as a result of weaker emerging markets currencies. For example, emerging markets currency devaluations make euro-denominated exports relatively expensive, decreasing demand for those products. As a result, the efforts that southern European economies such as Greece and Spain have made to reduce labor costs and increase competitiveness do not yield the export growth that they had hoped.
Furthermore, attempts to diversify western European customer bases among emerging markets are now proving in vain, as currency devaluations sweep away the once bright spot of growing demand. Chronically high unemployment has muted demand the in the eurozone as well, the bulk of whose trade comes from consumers and businesses within its own currency union borders.
At the center of this dynamic is Germany, an economy that has long centered its growth on export health. Throughout the crisis, Germany’s exports to non-eurozone and emerging markets has increased drastically, insulating its economy more and more from weak eurozone demand.
Which means that as major emerging-markets currencies lose value at the same time….
…. Germany’s growth could suffer.
Executives must therefore increase the flexibility of their annual targets to respond to exchange rate and demand fluctuations that will continue to accompany global economic volatility.
You may download FSG’s corresponding podcast on Germany’s Quarterly Market Review by clicking here.
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