The Rising Influence of Rising Affluence

[DewDiligence]

Euro falling helps USA based multinationals profits right?

The answer is complicated and depends on the proportion of a company’s overall revenues and costs that are in the EU. For companies who sell a lot of product in the EU but don’t spend a lot in the EU on manufacturing, a weaker Euro depresses margins and is bad. On the other hand, for companies who manufacture stuff in the EU for sale elsewhere (this includes many pharma companies who manufacture in Ireland), a weaker Euro increases margins and is good.

In either of the above cases, a weaker Euro (relative to the US Dollar) lowers profit derived from Europe when it is translated into dollars for GAAP reporting. Unlike the effect in the above paragraph, which is real, the translation effect described here is an accounting artifact that has no bearing on the health of the underlying business.

Yet another effect of a weaker Euro is that companies who hold cash and fixed-income investments denominated in euros will see the nominal value of these assets declined when translated into dollars. This too is an accounting artifact; it is generally excluded from operating earnings, but it included in a metric known as comprehensive earnings.

On balance, a weaker Euro probably does more harm than good for US-based multinationals.