How financial problems in Europe could impact the US


by Jay Crandall

Posted on May 22, 2012 at 11:37 AM

Updated Tuesday, May 22 at 11:46 AM

TEMPE, Ariz. -- If you have been tracking your 401k, chances are you've seen it shrink.

The Dow has slumped to its lowest levels since early this year, and a lot of the blame has been placed with Greece, as speculation swirls as to whether it will dump the Euro.

Clinical Finance professor, Werner Bonadurer, Ph.D., at ASU’s WP Carey School of Business, said if Greece exits the Euro, putting even more pressure on Italy and Spain, the chances of the Eurozone diving into a recession go up dramatically. That would have dramatic effects here in the US, especially on the stock market

“So you know the US is directly and very severely affected by whatever happens in Europe. About 20 percent of earnings out of the S&P 500 companies are related to what is happening in Europe.”

But, Bonadurer cautions, that is just the beginning,

“About 20 percent of all U.S. exports go to Europe “

Dwindling demand for products in Europe could drag the United States into recession as well.

While some argue it would be a good thing to let Greece, and maybe Spain and Italy as well, leave the Euro,  Bonadurer said there is a big downside, to downsizing the Eurozone.

“It would mean Europe as a political union would become fairly irrelevant and it would probably divide Europe into various fraction, from peacekeeping , foreign policy, even military security point of view it would create a very different ballgame.“

While exiting the Euro would allow Greece to devalue its currency and get relief in the short term, in the long run, no problems are really solved, according to Bonadurer,

“Fundamental problems like lack of competitiveness, lack of market reforms, maybe a blown out of proportion build up of welfare.“

All of which has left some wondering why the Euro has stayed relatively strong compared to the dollar, even as the Dow has tumbled. Bonadurer said the answer to that lies in our own state of affairs.

“From a purely fundamental point of view, people have a problem with the dollar too. Huge debt, fiscal conservation not even started yet, not yet there, budget deficit yes. “

Bonadurer does not believe it would be good for Greece to leave the Euro, but also says the kind of structural reform needed in the Eurozone could take years.