Why A European Financial Crisis Will also Affect US Markets

Europe as an entity is the largest economy in the world with a GDP of $18.8 trillion in 2018, and is one of the biggest trading partners of the US. The trade relationship is also one of the biggest in the world and is driven by two-way investments. One third of trade is comprised of transfers between companies. What affects one, affects the other.

The catalyst for the last European and US crises was the housing bubble and ensuing credit crisis. In addition, some European governments, mostly notably Greece, sidestepped best practices in coping with increasing debt and deficits creating national economic crises within the union.

Since European and US banks are closely linked, US bank exposure to credit risks in Europe impacts unemployment due to lay-offs and acts as a drag on both economies. The financial relationship is made more complicated by arrangements between both economies involving complex financial instruments such as derivatives, hedge funds, and credit default swaps. Equity markets in the US are also susceptible to events in Europe and have reacted negatively to news as the credit crisis unfolded.

High unemployment rates in Europe led to a weakening consumer market, which effected US exports. Big ticket items were particularly affected, such as auto sales and large appliances. The weakened dollar counteracted slowing exports, but a strong Euro does not help exports for Europe’s manufacturing powerhouse, Germany.