The euro will create manufacturing cost savings for automakers and is likely to lead to lower vehicle prices, according to General Motors' chief economist Mustafa Mahatarem. Mahatarem spoke with Staff Reporter Mary Connelly in Detroit about the pending monetary union.
What advantage does GM gain from the euro?
The biggest one is that it removes exchange-rate uncertainty from our business decisions, including pricing, sourcing, revenue and profits, and contracts. It reduces the risk of doing business within the euro zone. It forces the convergence of both economic variables and economic policies.
What is the impact on GM's manufacturing operations?
GM's major manufacturing bases within the euro zone are in Germany, Belgium, Spain and Austria. If we sell to Italy, for example, that creates a lira exposure for us. We can hedge that exposure financially or we can try to move some sourcing to Italy to create a natural hedge. There are costs associated with either one.
Now, Italy is part of the euro zone and will have the same currency as the manufacturing bases. There is an immediate cost savings because we no longer have to hedge.
What is the impact on the supply base?
With different currencies, long-term contracts were difficult to negotiate. When two countries were involved, there was the risk that exchange rates would change, that the countries would have different inflation rates and that economic conditions overall would be dramatically different. The euro clearly eliminates the first two risks and it minimizes the third risk.
What is the downside to euro implementation?
There are two concerns.
The first is at the macro economic level. What if you don't get convergence? Suppose you get an oil shock that is external to the system. France, which relies largely on nuclear energy, would be much less impacted than Italy and Spain, which rely on oil for energy. That could create problems and make it more difficult to adjust. Over time as economies converge it will be less of an issue. But in the initial years it is more of an issue.
And the second concern?
The second concern is at the business level. It will come from price convergence.
Right now, if you are sitting in Spain, it is more difficult to understand the price difference you see in Spain vs. Germany. But pricing will be more transparent with common currency. It will lead to increased competition.
Once there is a common currency, it will create arbitrage opportunity for traders. It will increase the volume of sales because prices more than likely will come down. But it will also increase the degree of competition. We will have to make up on volume what we lose in revenue.
What level will manufacturers price at?
That's hard to answer. For example, no one will price to Denmark's level, which has exceptionally high taxes on cars. It depends on how strategies evolve at the companies. The market will determine that.
There will be downward pricing pressure because of the ability to arbitrage between different markets. If prices come down, volume will increase.
Will it increase enough to offset a price reduction? My answer is yes, on aggregate. For individual companies, it might not. And there will be the associated cost reductions as well.
Do you support the whole idea of Economic and Monetary Union?
I am a real optimist about the EMU. I very strongly support this. The bottom line is that it will make Europe a more competitive location to produce cars or any other goods.