When the euro was introduced nearly two years ago, it was supposed to make business in Europe easier. But today, the common currency is so anemic that it's causing companies headaches and raising concerns about the future health of Europe's economy.
The euro's precipitous fall - it's down 24 percent against the dollar since its January 1999 launch - has prompted an extraordinary intervention by European and American central bankers, who hope to at least stem a further decline of the currency. For Europe's nascent Internet Economy companies, many of which rely heavily on technology and equipment from the U.S. that has to be paid for in dollars, stability is critical. And any further drop in the euro could force central bankers to raise interest rates, slowing development across the board.
"The new economy demands aggressive investing," says Abe Golkowitz, chief global strategist of Deutsche Banc Alex. Brown (dossier). "And that's hard to do where the currency is weakening, inflation is worsening and it's all confounded by oil prices."
For many U.S. companies, Europe is looking less like a land of opportunity and more like a danger zone. Intel (INTC), for example, cited sluggish business in Europe when it warned of weaker-than-expected revenues last month; the company gets 27 percent of its revenues from Europe. Oracle (ORCL) says the weak euro may affect its earnings, and printer manufacturer Lexmark says the euro knocked $43 million off this quarter's revenues.
While few U.S. Internet companies are yet big enough in Europe to break it out in their earnings reports, they are clearly being affected as well. Net Perceptions (NETP), a marketing software company, and Sitel, an Internet business software company, warned last week that slow sales in Europe would hurt third-quarter earnings.
It's true companies love to blame business troubles on macroeconomic factors outside of their control. And investors often overreact to currency-related fluctuations, which aren't a good barometer for the overall health of company. Still, the math is brutal: When the euro is falling, even stable profits and sales shrink in dollar terms. That has led some companies to start reporting European sales figures in euros (or in the local currencies that are tied to it).
"The continued weakness in the euro affected us more before when we reported only in dollars," says Glenn Manoff, director of marketing for GTS, which runs a broadband network in Europe. "Wall Street would look at the dollar figures and say 'You aren't growing quickly enough.' We were, but it was understated because of the foreign exchange translation effect."
For European politicians and business leaders, the euro troubles go far beyond the impact on quarterly earnings. The euro, which dictates the value of currencies of 11 countries and is scheduled to replace those currencies entirely by 2002, is a crucial tool for economic and political integration across the Continent. But countries that have declined to join the euro - notably the U.K. - are now all that much harder to persuade. Just last week, voters in Denmark rejected a referendum on Denmark's adoption of the beleaguered currency. Denmark has long opposed the euro, but the vote, coming on the heels of the euro's extended slump, could further erode confidence in the unified currency.
A weakened euro is not all gloom. It makes imports from European countries cheaper, potentially lowering costs for companies in the U.S. and elsewhere and benefiting U.S. consumers. It also lowers the costs of setting up a business in Europe, which may narrow the losses for firms just starting out there.
But other clouds are forming on the economic front that could make for a stormy passage for Internet companies heading into Europe. Rising oil prices could mean higher inflation, which could in turn prompt a jittery European Central Bank to raise interest rates and dampen investments. The Organization for Economic Cooperation and Development expects inflation in countries tied to the euro to rise 2 percent in the second half of 2000 and 2.2 percent in the first half of 2001 - the latter figure is higher than the European Central Bank's requirements.
