World Economy

Weak Euro Could Help EU Companies

Weak Euro Could Help EU CompaniesWeak Euro Could Help EU Companies

The euro’s slide towards parity with the dollar will provide a much-needed boost for European companies this year and force US rivals to adapt their businesses or risk losing market share.

While currency hedging arrangements mean the benefits may not be seen straight away, the currency’s weakness has already cheered European chief executives by making their products cheaper overseas and lifting the value of dollar-based sales, Reuters reported.

“We have been handicapped by the strength of the euro, but now it seems that the wind is turning and we intend to make the most of this very positive currency effect that will help us deliver a nice increase of our sales and our profits in 2015,” Jean-Paul Agon, CEO of French cosmetics group L’Oreal told investors last month.

Other companies predicting a tail wind from the around 20 percent drop in the value of the euro over the past six months to $1.06 on Friday include jet manufacturer Airbus, German car and truck maker Daimler and French engineering groups Schneider Electric and Alstom.

Some U.S companies also see positives from the weaker euro, including lower borrowing costs, better performance at European units which export, stronger demand from eurozone-based customers and, for the leisure sector, increased travel into the continent.

However, most US groups that discussed the currency in recent weeks including Apple, Dupont, Priceline, Caterpillar and General Electric, have warned they may face headwinds in Europe and elsewhere, and some, including Xerox, have cut earnings guidance as a result.

  Weakness May Persist

With euro weakness likely to persist due to the European Central Bank’s quantitative easing program and a likely hike in US interest rates on the back of a stronger US economy, longer-term planning is a must.

Many companies said hedging contracts would mean the impact of the lower euro would take time to feed through. Paris-based Alstom and Swiss-headquartered engineer ABB, which has manufacturing plants in the eurozone, said it may not be felt until the second half of the year.

Airbus said it was fully hedged for 2015, 2016 and “largely” for 2017, leading analysts to predict it could be 2018 before the group experienced any meaningful uplift.

In the meantime, the weaker euro may actually weigh on some European companies’ earnings because companies must report drops in the values of hedging instruments, which move in the opposite direction to companies’ revenues.

A number of companies said they would look at cutting costs. Others said they would try and push through euro price rises in Europe to try and compensate for the fact the euro is now worth less, although deflationary pressures across the continent means companies have little pricing power.