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Europe’s Economic Effect on US

October 3, 2011

 

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.

Source: NPR Planet Money

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:

 

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