"The Eurozone Crisis Is a Disaster for the U.S. Economy."
Not yet. The eurozone crisis has undeniably damped economic growth across the globe and helped slow the U.S. recovery. And yes, if the crisis worsens, it could do severe damage to the U.S. economy and President Obama's re-election chances. From early 2010, when Greece shattered the façade of the euro's unshakeable foundations, European instability has driven down U.S. consumer and investor sentiment, reduced spending, and heightened uncertainty for firms, reducing investment. The risks of financial contagion have reduced credit and posed new threats to U.S. banks and other financial actors with significant exposures to Europe. The EU and the United States have the world's largest bilateral trade relationship, and as the continent stagnates or contracts, U.S. exporters may be hit especially hard. This summer's domestic corporate earnings testify to the drag that Europe is exerting on the U.S. private sector.
It's not all bad news, though. First, reduced consumer sentiment and decreased economic activity exerts downward pressure on commodity prices, particularly gasoline. With summer typically the season of peak U.S. energy demand and with the sheer number of geopolitical developments buffeting energy markets -- from U.S. and EU sanctions on Iran to chaos in Syria to instability in Libya and pipeline disputes in Sudan -- the gasoline market could use a little slack. While many analysts predicted prices at the pump to exceed $5 per gallon this summer, prices have dropped to below $3.40 nationwide, and may fall still farther.
Second, Europe's financial turmoil reinforces America's safe-haven status. A lack of alternatives means that investors looking for assets to stuff under the proverbial mattress still outbid one other for blue-chip U.S. Treasuries, keeping interest rates low (even negative in real terms) and inflation manageable. Those same low rates translate into lower borrowing costs for businesses and homeowners.
Finally, as long as Europe appears near (or in) crisis, the United States won't face sustained market pressure over its shaky fiscal trajectory, and thus there's not likely to be market pressure to force action by Congress and the president on difficult decisions like the extension of the Bush tax cuts or softening the automatic spending reductions that hit at year's end -- thus preventing a self-induced hit to the U.S. economy before it is able to recover. While it is obviously necessary that we grapple with our very real fiscal challenges, it is certainly nicer to do so on a timetable of our own, and not one set by markets forcing our hands and risking the onset of a double-dip recession.
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