In global financial circles, there's an old saying: "When America sneezes, the world gets a cold." But in the age of globalization, that quaint expression looks increasingly like a relic of a bygone era.
These days, "every consumer in the U.S., Europe, Asia, and elsewhere is connected to a global economy," says Bruce Yandle, distinguished adjunct professor of economics at the Mercatus Center at George Mason University's Washington, D.C., campus. "When the great wealth-creating machine slows down -- whether in Europe, the U.S. or China, consumers worldwide face dimmer prospects."
Put simply, the sovereign debt crisis that began in Greece has spread throughout much of the eurozone. The eurozone crisis already has had a direct impact on consumers in Europe. But in an interconnected world, experts agree any fallout won't be limited to Europe. Read on to find out how the eurozone crisis could affect your pocket book.
Trade and the economy
While it may not feel like it to most American consumers, the U.S. economy is mending. But the modest growth may fizzle if the eurozone crisis deepens, says Werner Bonadurer, clinical professor of finance at Arizona State University.
"Recent U.S. economic growth has been fueled by government spending and exports," Bonadurer says, pointing out that exports to Europe account for about 20 percent of U.S. gross domestic product. "A reduction in exports will reduce GDP because Europe is one of the largest export markets for the U.S. That will dilute the U.S. recovery."
But if there's an immediate silver lining to Europe's woes, it's that many financial analysts predict that a "flight to quality" may encourage investors to park their money in U.S. Treasury bills because of their perceived relative safety as an investment. According to Bonadurer, that should keep interest rates low in the U.S., but he warns that too much liquidity in the U.S. economy could "lead to a higher domestic inflation risk." That could be exacerbated if European central banks keep their rates low for an extended period of time.
Recently, American investors have seen bad news from Europe on one day drive U.S. stocks down the next. But that pattern doesn't just affect the Wall Street crowd. According to Terry Connelly, dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco, widespread bank failures in Europe or downgrades in European sovereign debt could spell disaster for the average American.
"A run on the euro banks, a France downgrade or both could well provoke an equity market crash of 1,500 points or more very quickly," Connelly says. "(Those scenarios) would kill off the U.S. recovery, blow out 401(k)s and IRAs just getting back on track, and create a consumer-driven recessionary fall in spending (that may trigger) the prospect of deflation in the U.S."
So which U.S. stocks are most likely to tumble on bad news from Europe? According to Bonadurer, 20 percent of the Standard & Poor's 500 index earnings come directly or indirectly from Europe. And while the damage is likely to be widespread, Bonadurer believes sectors such as aircraft, machinery, and professional and financial services are likely to be hit hardest. But he says equity markets across the globe also are likely to suffer, making it difficult to predict which types of businesses will feel the most pain.
We think of money market funds as safe investments. But as some consumers learned in 2008, money market funds that are heavily exposed to assets falling in price may see their own net asset value drop below $1 per share, what is called "breaking the buck."