Europe’s Effect on the US

Chicago Fed President Charles Evans made some interesting remarks about the economy. He said that the problems in Europe are bad but they made not hurt us that much:

There are a few channels through which the European sovereign debt problems could influence us here. European efforts to lower debt will likely weigh on their economic growth over the medium term. This will translate into less demand by Europeans for U.S. products. In addition, the dollar already has appreciated relative to the euro. This means that European consumers find our products to be relatively more expensive than before. At the same time, prices for European goods in terms of the dollar have fallen, boosting our demand for European imports. All of these channels work in the direction of lowering U.S. net exports, which, all else being equal, would tend to reduce the outlook for U.S. GDP growth.
However, a couple of factors suggest that these trade effects of the European fiscal situation on the U.S. economy are likely to be limited. Although the euro-11 economy is large, it represents only about 15 percent of U.S. exports. In comparison, our single largest trading partner, Canada, accounted for over 19 percent of domestic exports last year. And while the dollar has appreciated almost 18 percent relative to the euro since late November, the broad dollar exchange rate that is a trade-weighted average across all currencies has appreciated only 5.1 percent over the same period.
Nonetheless, if events in Europe evolve so that they have a more severe and broad impact on financial markets, then the scope of the problems for the U.S. could be magnified. Fortunately, our direct exposure to European debt is limited. But an intensification of liquidity or solvency problems in Europe and some related spillover losses in U.S. markets could cause a marked increase in investor risk aversion. More lenders could pull back on intermediation, restricting the flow of credit to fund worthy spending projects of U.S. firms and households.

Posted by on June 8th, 2010 at 10:40 am


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