The depreciation of the euro threatens public support for the ecological transition and the car industry

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The car industry's dependence on politics and public funding is traditional. It is particularly pronounced in 2022 given the need to share the burden of the transition. More than its effects on the cost of imports and/or on the capacity of the European car industry to export, the evolution of the dollar/euro exchange rate, which has seen the European currency lose more than 15%, is important for its effects on the macroeconomic situation. Indeed, the forced march towards the electric vehicle, which is already difficult to digest for the European car industry, would be even more difficult if the relative generosity of the States observed up to now were to be called into question by the rise in interest rates and the consequences that would be drawn from this in terms of public finance.

In 2022, and for a few more years, the European automotive industry will be undergoing a transition imposed by climate change, which politicians have deemed not to have been taken into account quickly and vigorously enough by industry. In the face of this timidity and fears - well-founded - of exposing oneself to the duplicity of manufacturers, a very interventionist consensus emerged in Europe in 2015 and was strengthened step by step thereafter to lead to a ban on the registration of combustion vehicles - including hybrids - in 2035.

As a result, the strategic agenda of the European automotive industry has changed radically compared to the one it had ten years earlier: The problem is no longer to take advantage of the growth of emerging markets by 'intercontinentalizing' to escape the sluggishness of the mature and stagnant European market; the problem is no longer to export to China or the United States to escape the phenomena of overcapacity in Europe; the problem is to manage the forced march towards the electrification of 100% of the vehicles sold in the space of less than 15 years as painlessly as possible.

Clearly, this strategic course is imposed by politics and, no less clearly, even in a traditionally liberal Europe, which is not very quick to conceive and conduct industrial policies, it implies abandoning the doctrine of 'technological neutrality' which had been the EU's approach until then.

For the automotive industry, as for all the industries concerned by the ecological transition, until now, and before the outbreak of the Ukrainian crisis, the counterpart of this very illiberal injunction was the rather great generosity of the States. Thus, with regard to electric vehicles, supporting demand as well as investment in R&D, the creation of battery-producing companies, the construction of production capacities or the financing of recharging infrastructures was the responsibility of the states and the EU, far from opposing it, adjusted its macroeconomic doctrines and/or its assessment of the conditions for free and undistorted competition accordingly.

From this point of view, it is striking that, until the end of the last decade, even in Germany, the prevailing view of macroeconomic matters changed radically. To put it very - too - quickly, after it became clear that austerity policies would not be a way out of the Greek crisis and all the public debt crises that were emerging in Southern Europe and the threats they posed to the Euro, quantitative easing was de facto accepted and very low or even negative interest rates without inflationary pressures resulted.

In the cascade of consequences that resulted, the fact that the automatic increase in the debt burden resulting from interest rates higher than the nominal growth rates of national GDPs (the so-called "snowball effect") disappeared and that the reverse was true was decisive. Indeed, the primary fiscal balances stabilising the debt as a percentage of GDP declined to negative levels.

Insofar as, globally, savings appeared to be in excess of investment, the fact that interest rates were very low was readily analysed as a normal situation. Similarly, since private investment was insufficient and implied that companies did not express strong financing needs, the fact that governments took over and mobilised the idle financing capacities of households seemed normal.

The result was a macroeconomic consensus in Europe and the world which, while still very anti-Keynesian in the early 2010s, had become much more ready to accept both public spending and deficits.  
Thus, when one compares the management of the Covid crisis in the early 2020s with that of the effects of the 2009-2010 financial crisis, one will note that, without even mentioning the financing of the ecological transition, we have been able, with Angela Merkel's blessing, to apply in 2020-2021 a "whatever it takes" that has made it possible to take care of short-time work and to avoid lay-offs. Brussels-Berlin budgetary orthodoxy had forbidden this ten years earlier. In the national and European recovery plans that were negotiated up to the Ukrainian crisis, the need for public intervention in the context of the pandemic and the need for massive public support for the transition combined to justify that "return to normal" or debt reduction were no longer priorities. 

In this context, the fall in volumes sold by the car industry and the colossal expenditure required to withdraw from the traditional sector and invest massively in the electric sector seemed manageable to the manufacturers: by making their suppliers and governments bear the burden of the fall in volumes and paying taxpayers the additional costs of purchasing clean vehicles, they benefited from a fairly good deal and could almost all claim that the excellence of their management had given them unprecedented "pricing power. The construction industry, the producers and installers of wind turbines or solar panels or the nuclear industry are in the same position: they can only prosper if public spending continues to be legitimate, even when it is necessary for it to increase in debt.

With inflation and the gradual questioning in the United States of Quantitative Easing and low interest rates, this whole fragile edifice is in the process of collapsing and, from this point of view, the evolution of the euro-dollar parity is particularly threatening for the European economy and for the automobile industry. Indeed, as we have seen with the long-delayed and finally implemented increase in interest rates in Europe, the evolution of the dollar rate is explained by the excess demand for this currency resulting from the difference in yields on investments in euros and dollars.

Partly because the public finances of the States and the European economies need low rates and partly because Christine Lagarde considered that there was a difference between the increase in prices observed and the installation of our economies in a self-sustaining inflation, the ECB had long refused to align its policy with that of the FED. 
The fact that the dollar is now appreciating means that the price of oil and imported raw materials invoiced and paid for in dollars will rise. The resulting imported inflation will undermine C. Lagarde's thesis and this may well prove the case for those who would like to see rates adjust upwards quickly first and then a return to a more orthodox approach to debt and public finance management.  

More than the resulting cost increases for the automotive industry, it is the consequences for public finances and support for the ecological transition that are to be feared for the European automotive industry in the coming months. In comparison, the favourable effects of the depreciation of the euro on exports, which Airbus can benefit from against Boeing when airlines compare the prices of aircraft expressed in dollars, are of little concern to the European car industry: intercontinental flows of vehicles in general and transatlantic flows in particular are small; in Europe, they practically only concern top-of-the-range car manufacturers for the - minority - share of models that they sell in the United States and do not produce locally; the French car industry is not concerned.

As the Ukrainian crisis shows, our dependence on imported raw materials and, in particular, on fossil fuels is as it was in 1974 or 1979, which weakens our European economies and makes the euro-dollar parity highly problematic. As Eric Heyer points out, "normally", the currency of an economy with a trade surplus is supposed to appreciate (to make its exports more difficult and its imports easier) while that of an economy in deficit should depreciate. Because of international capital mobility, the opposite is currently happening between the structurally deficit US and the EU. A trade surplus economy is structurally saving (it spends less than it pays out) whereas a deficit economy borrows from the rest of the world. It is therefore essential that Europe invests to take advantage of its ecological and energy transition to be more indifferent to this dollar-euro parity. By choice, for the automotive industry as for European economies, keeping rates low should be a priority.

The weekly column by Bernard Jullien is also on www.autoactu.com.

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