Europe’s Economic Effect on US
Today, stocks once again fell on the news that Greece is not likely to reduce its government deficit to the target of 7.6% of GDP. While the European debt crisis has been on many peoples’ minds for a while now, its effect on the US is not always apparent—other than how markets on both sides of the Atlantic have been negative on the news. However, the below graph highlights just how interconnected the two largest economies are. Taken from NPR’s “Planet Money”,the graph shows that the US tends to grow and contract in step with Europe’s largest economies.
While financial markets definitely play an important role in this trend, the real economies of the two economic heavyweights are also intertwined. As I reported earlier in “The Euro Financial Crisis’ Affect on International Trade,” the financial crisis also affects the exchange rate between the two currencies, which in turn impacts trade. The below graph maps the euro/dollar exchange since the creation of the euro and compares it with US exports to the countries that use the euro. As you can see, there appears to be a correlation between the two.
Unfortunately, the euro has not been doing well in the past few weeks, and has fallen 6.5% in the last month. If this trend continues, American exports to Europe will become more costly and European imports into the US cheaper, which would place American manufacturers at a disadvantage (see above link for an explanation). As a result, the euro’s damage to the US might just be beginning.
In order to help people understand the theoretical underpinnings of the European Debt Crisis and how it affect the US, the EU Center is pleased to be offering two upcoming events:
- A Comparison of Fiscal Centralization and Integration in Europe and the US , September 29that 4:00 in SPEA 167 on the IU Bloomington campus.
- “…Is the Euro Doomed? Why Europe’s Financial Crisis Might Worry All of US,” a discussion of IU faculty, which will occur October 20th at 5:30 at the Monroe Country Library in Meeting Room 1B in Bloomington.