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How the European Debt Crisis Affects Us

Europe’s deepening sovereign debt crisis could well be the straw that breaks the camel’s back in the United States, tipping our economy from recovery to decline.

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Europe’s deepening sovereign debt crisis could well be the straw that breaks the camel’s back in the United States, tipping our economy from recovery to decline. But what happens in Europe is beyond the influence of U.S. policymakers. What we can do at home, however, is prepare for a downturn in our exports and a potential rise in the value of the dollar.

But first, let’s look at how the shockwaves from a crisis in Europe might emanate across the Atlantic. The European and the American economies are deeply intertwined. Trade is the major channel through which ongoing stress in the European Union will affect the United States. In 2010, 22.5 percent, or $412 billion worth, of U.S. exports in goods and services went to the European Union. A sharp economic downturn in Europe means demand for U.S. products and services is likely to decline significantly.

But that’s not all. U.S. exports of intermediate goods and services to other countries that export to the Euro area may also go down, as well as U.S. exports to countries that are generally affected by a slowdown in Europe. Falling U.S. exports will be an additional drag on the economy and on jobs at a time when America can least afford it.

The reason: Exports are one part of the otherwise struggling U.S. economy that have been doing well. Exports grew by 11.3 percent in inflation-adjusted terms in 2010. This was the fastest growth rate since 1997. Data for 2011 show that exports have remained strong so far, overcoming weaknesses elsewhere, such as in consumer spending, but a drop in U.S. exports related to any crisis in Europe would shake already-fragile business and consumer confidence in the United States.

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