From one financial angle, troubles in Greece and elsewhere in Europe may have little effect on America's economy.
THE debt crisis in Europe has already had a significant psychological impact on Wall Street, sending the Standard & Poorâ??s 500-stock index down 10.5 percent from its April high.
But if investors are afraid that Europeâ??s woes could retard the recovery in the United States, a question arises: What does the crisis in Europe really mean for domestic growth?
The answer depends on which aspect of the crisis youâ??re looking at. The possibility of another shock to global financial institutions is certainly cause for concern, as we shall see. But if investors focus solely on the fundamental health of Europeâ??s economy, and its ties to the United States, the situation may not look all that worrisome.
To be sure, Europe is a major customer for the goods of American manufacturers. In fact, the 16 countries that use the euro represent around 13 percent of total United States exports. But the nations that are hit hardest by this crisis account for only a small fraction of that.
The major southern countries of Europe, including Greece, Italy, Spain and Portugal, together account for less than 1.5 percent of total United States exports. And Greece and Portugal, where budget problems are most pressing, represent only two-tenths of 1 percent of the total, according to Brian G. Belski, chief investment strategist at Oppenheimer.
Some strategists, meanwhile, say Europeâ??s problems could actually aid the consumer recovery in the United States, not slow it.
â??The problems in Europe are good for consumers by putting more cash in their pockets,â? says Jeffrey N. Kleintop, chief market strategist at LPL Financial in Boston. For example, the crisis has already helped push oil prices lower globally, which in turn has reduced the price of gasoline for American drivers.
It has also prompted another flight to safety on Wall Street. And as investors have raced into Treasury bonds, interest rates on long-term Treasuries have fallen, sending mortgage rates tumbling. Mr. Kleintop says that this could lead to a new wave of refinancing, which could promote more consumer spending.
This means that once the initial fears wear off, and investors start focusing on the fundamentals, domestic stocks are likely to be a relatively attractive place to put money to work. Mr. Kleintop says he thinks the recent correction in the market is only a pullback and not the start of a bear market.
But what if the health of Europeâ??s economy continues to deteriorate?
Nigel Gault, chief United States economist at IHS Global Insight, recently analyzed that possibility. He asked: What if the economy in the euro zone expands by just 1 percent next year, not the 1.4 percent that he currently forecasts? And assume that the euro keeps falling until itâ??s at parity with the dollar, down from the current $1.23. How would the American economy be affected?
Mr. Gault believes that such a situation would chip away at economic growth in the United States â?? by three-tenths of a percent in 2011 and another three-tenths of a percent in 2012.
â??Thatâ??s the difference between growing at around a 2.9-to-3-percent pace to 2.6 to 2.7 percent,â? he said. â??Thatâ??s enough to be noticeable, and it could be painful, but thatâ??s clearly not, in and of itself, going to pull the U.S. back into recession.â?
For a so-called double-dip recession to occur, market watchers say, there would probably need to be another shock to the economy.
And that raises another significant concern. Aside from the economic fundamentals, many analysts worry that Europeâ??s credit issues could set off another liquidity crisis in the global financial markets, similar to what transpired in the wake of Lehman Brothersâ?? collapse in 2008.
Right now, the numbers seem to say that this isnâ??t likely.
One way to tell is by looking at the so-called TED spread, the difference between the rates that banks charge one another for short-term loans and low-risk Treasury debt. The measure is considered a gauge of fear in the banking system.
In the midst of the global credit freeze in 2008, the spread jumped to a whopping 4.63 percentage points. This time around, it stands at 0.38 points, which is above its long-term average and double where it stood at the beginning of May. But it is still nowhere near its level in the financial panic two years ago.
Still, â??the rise in the TED spread would suggest there is anxiety building in the financial system,â? said Michele Gambera, head of quantitative analysis at UBS Global Asset Management in Chicago.
MR. GAULT says a liquidity crisis â??is less of a concern than it was during the Lehman Brothers episode,â? in part because he believes that the United States banking system is in far better shape than it was then. And central banks have already had the experience of dealing with the Lehman fallout and are determined to forestall another crisis of such magnitude.
But he acknowledges that there is still some risk of deeper problems. â??If we learned one thing from that experience,â? he said, â??itâ??s that linkages between various financial markets are pretty tight.â?
Paul J. Lim is a senior editor at Money magazine. E-mail: fund@nytimes.com.
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