How Europe's Ailing Economy Affects the American Industry

Player utilities

This story is based on a radio interview. Listen to the full interview.

Audio Transcript:

Marco Werman: I'm Marco Werman, this is The World. Issue no. 1 this presidential election year, you know what it is, it's the economy and today there was worrying news on that front from Europe. New official figures today show that the combined total debt of all seventeen nations using the euro currency has now risen to 90% of their gross domestic product. That means the euro debt crisis is far from over, which is bad news for the US economy. Jacob Kirkegaard is with the Peterson Institute for International Economics. He says Europe's ailing economy does impact us here in the US.

Jacob Kirkegaard: The first effect is the direct effect on US exports that slowdown that Europe has had. Basically, as the economy there is weaker, the US economies can sell less goods, and European companies are less likely to invest here in the United States. The second effect that is quite straightforward and measurable is the effect that the slowdown in Europe has on the earnings of US firms with operations in Europe. Right now, for instance, if you look at companies like general motors or Ford, where it's actually making quite a bit of money here in the United States, but they're losing a lot of money on their operations in Europe. And then there is a third effect which is a little harder to pin down, but it is the confidence effect because if for instance, there is this nagging fear in the back of a company owners saying look, maybe the owner is about to collapse and maybe as a result the global economy and the US economy will be very significantly affected by this, maybe I should just hold off on that frantic expansion or that new equipment that I wanted to buy until we have clarity about that. So this actually, I believe, is the biggest negative effect from the euro crisis because it also affects financial market confidence.

Werman: Now, Mitt Romney says the US doesn't wanna go down the road to Greece, but I just saw these statistics, incredible statistics that the US is already on the road to Greece with an enormous debt to GDP ratio just behind Belgium and Portugal. Explain that and what hazards does that represent?

Kirkegaard: Well, there's no doubt that if you have debt to GDP ratios the size of Greece, you're ultimately unlikely to be able to get private investors to finance that for you, that's certainly the experience that Greece has had. But the US is in a better position because first of all, it has much better growth prospects than does Greece. I mean Greece has had a cumulative decline of GDP of about 20% since its crisis began in 2009. So the fact that we here in the United States had compared to Greece a much shallower recession in 2008-2009 and have been growing all by relatively slowly, it puts us in a much better position than Greece.

Werman: Well, I mean on paper it does seem the potential is there for transatlantic economic contagion, so why aren't the presidential candidates talking about this?

Kirkegaard: I think there's two reasons for it. First of all, because the situation in Europe has stabilized somewhat in the last 3-4 months or over the summer, and then there is the other element here, which is that sort of brutally honest, there's not very much the US president can do about the situation in Europe and that's not something that presidential candidates like to admit, this degree of impotence about their degree on world affairs before an election.

Werman: Jacob Kirkegaard, a research fellow at the Peterson Institute for International Economics, thank you.

Kirkegaard: My pleasure.