How the Fall of the Euro Will Affect Us All

by Staff - Original publish date: July 2, 2012

Is the Euro on the Brink of Extinction?

Europe. Land of classic artistic masterpieces, of perfect flaky croissants, of crushing debt that threatens to destabilize the global economy.

These days, conversations about Europe are at least as likely to concern failing banks and government debt as the Eiffel Tower or the hills of Tuscany. But why? They're over there and we're over here. Why are we, and our media, following the sagas of Greece and Spain and Italy so closely? Well, it turns out there is more at stake for the United States than geography would suggest.

"If other countries can’t grow, they can’t afford to buy American goods and services," said Michael Quinn, professor of economics at Bentley University in Waltham, Mass. "That’s going to cost American jobs."

Greece, Spain & Italy

The main concern about Greece has been the possibility that the country will stop using the euro and revert to its old currency, the drachma. If that happened, the drachma would immediately plummet in value, as compared to the euro, Quinn explained. People and institutions who own Greek debt would then be paid back in a currency worth less than the euros they expected.

The global markets are also worried about Spain and Italy. Because investors are concerned about the stability of the Spanish and Italian economies, they are demanding much higher interest rates for money they lend to these governments (that's what the economists are talking about when they mention "high bond yields"). The two governments, therefore, find themselves having a harder and harder time paying off their debts while keeping things running.

Lots of Debt

So what does that all mean for the United States?

Nothing much, if Greece or Spain default on their debts and other European countries remain stable, Quinn said. Greece and Spain have small enough economies that even significant troubles are unlikely to have much impact in the U.S.

The U.S. government and American institutions held a total of $135 billion in debt from Greece, Italy, Ireland, Portugal and Spain at the end of 2011, according to a recent report from Wells Fargo. The sum might seem high to us laypeople, but is in fact "rather limited" according to the Wells Fargo analysis. Furthermore, the total is likely smaller today, as investors have been generally moving away from European debt.

Bad News for the U.S.

What would hurt the U.S., Quinn said, is if problems in countries like Greece or Spain "cause contagion and spread to other European countries that actually matter to us."

That could be the beginning of a chain reaction that leads directly to lost jobs in the United States.

Widespread economic troubles in Europe would cause investors to shrink away from the euro. Falling demand for the euro would lower its value while making the dollar relatively stronger. With their currency worth less, Europeans would buy fewer American products. And if demand for American products takes a hit, American companies need fewer employees.

"If there’s a panic and the euro zone starts dropping members and people start fleeing out of the euro and it plummets, that substantially harms our exports," Quinn said. "That is a real danger."

Silver Lining

There is, however, a bit of good news, he said. The riskier European debt seems, the more investors will be drawn to significantly safer U.S. bonds. And the more demand there is for bonds, the less interest the government has to pay. So the United States is currently getting a pretty good deal on its borrowing.

"It is good for us, given that we have a huge debt," Quinn said.