Question: 1 Why are southern European countries particularly vulnerable to a

1. Why are southern European countries particularly vulnerable to a strong euro?
2. How does the relatively high inflation rate in southern Europe add to the problems created by a strong euro?
3. In contrast to southern Europe, northern Europe, especially Germany, exports more complex and brand-name manufactured items, such as automobiles, machine tools, and specialty chemicals. Would you expect German exports to be more or less sensitive than southern European exports to pricing pressures from a strong euro? Explain.
4. It turns out that Italian companies exporting food products such as Parma ham and Parmigiano cheese have not seen a drop in exports, nor have high-fashion exporters such as Armani and Valentino despite the strong euro. Explain.

Southern European countries (e.g., Spain, Greece, Italy, and Portugal) traditionally export low-tech manufactured items such as textiles, toys, and footwear that are in direct competition with inexpensive goods from China. The steady strengthening of the euro from 2002 through 2004 made exports from these countries more expensive and less competitive, costing them global market share. Unfortunately, the strong euro also came at the same time as relatively high inflation in southern Europe, especially Spain, Greece, and Portugal. By 2005, the euro's appreciation had driven many exporters in those countries to shift production to China and other countries with lower labor costs and weaker currencies.
One might think that these European manufacturers gained a reprieve when China ended its peg to the U.S. dollar in June 2010, allowing the yuan to rise over the next year by 5.73%, from ¥6.84/$ to ¥6.4696/$. However, by improving their productivity and accepting lower profit margins on their exports, Chinese firms managed to largely offset the impact of a rising yuan on their competitiveness in the United States. Indeed, the price of U.S. imports from China rose just 2.8% during that year. The news was even worse for the southern European countries: Because the euro rose almost 15% against the dollar during this period, the yuan actually fell over 8% against the euro, making life even tougher for southern European manufacturers that compete against Chinese products.

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