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What is the impact of the Eurozone crisis on the U.S. economy?

Question submitted by Soumaya Maghnouj, from Sciences-Po, September 16, 2013

Answered by: Robert Kahn, Steven A. Tananbaum Senior Fellow for International Economics


Europe's debt crisis and recession have been felt around the world, and the United States has not been spared. The economies of all seventeen euro-area countries comprised 17 percent of the world economy in 2012, generating $12.2 trillion in GDP (close to the $15.7 trillion U.S. economy). Germany's economy alone is the fourth largest in the world. Strong trade, investment, and financial ties with the United States ensure that shocks in one region have important effects on the other.

The crisis in Europe has been directly felt through lost trade, as lower European incomes reduce demand for U.S. goods. The eurozone is the third largest export destination of the United States, accounting for 15 percent of total U.S. goods exports and one-third of service exports.

Cross-border investments have increased dramatically in recent decades. U.S. assets abroad and foreign-owned assets in the United States increased more than six fold between 1994 and 2010, according to a U.S. government report, and it has been estimated that one quarter of the earnings of top U.S. companies come directly or indirectly from Europe. Consequently, U.S. companies and investors have an important stake in a European recovery.

Financial sector linkages also matter. While U.S. banks do not have many direct financial holdings in Europe's "peripheral" countries experiencing the most formidable fiscal woes, the indirect effects of a European debt blow-up could be "quite significant" in U.S. financial markets, according to Federal Reserve Chairman Ben Bernanke.

On the positive side, the United States benefits from its role as a safe haven for investors. When Europe's problems intensify, investors often will turn to the relative security of the United States. This will bid up stocks and bonds, boosting stock markets and lowering interest rates.