Effects of the Euro Debt Crisis on the US Economy (Essay Sample)

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Effects of the Euro Debt Crisis on the US Economy
Thesis
The impact of Europe’s debt crisis and the recession that subsequently followed had a significant impact on various economies around the world. This impact extended to the economy of the United States. The economies of all the seventeen countries comprised in the Eurozone boast of around seventeen percent or just above twelve trillion dollars of the global economy in terms of GDP (Steynar N.p). The substantial investment, financial and trade ties of the Eurozone countries with the United States are enough to ensure that the shocks in a single region can highlight significant effects on the other. The effects of the debt crisis and the recession bears evidence in the large degree of lost trade characterized by the reduction of demand for American goods due to decreases in the level of income in Europe (Steynar N.p). The major areas of the American economy affected by the spiraling debt crisis in the Eurozone include exports, investments, and the currency. Projections indicate that trend has a higher likelihood of continuing for the foreseeable future (Steynar N.p).
Areas Affected by the Crisis
Exports
The Eurozone adopts a strategic nature as one of the largest destinations for exports from the United States. The United States exports to the Eurozone account for fifteen percent of the total goods from the country and one-third of the total number of service exports (Steynar N.p). Prior to the onset of the debt crisis, Greece, which was the most significantly affected by the crisis accounted for seven hundred and seventy-two million dollars out of the total merchandise exports of the United States to the rest of the world (Steynar N.p). The total exports in this context exceeded the $ 1.6 mark. The prolonged trend of the debt crisis, which is the most likely event in light of the current scenario will result in crumbling the sluggish European economy. The resulting effect of this situation for the United States is that exports will most likely suffer decreases in a more significant manner. More than one-fifth of the exports from the United States go to the Eurozone. A considerable majority of the American companies operating in Europe continue to feel significant decreases in their earnings due to weaker sales and the extra strength of the dollar (Lachman N.p). The weaker earnings also emanate partly from the injecting of more money into the economy by the European central bank. The debt crisis experienced in the Eurozone is already causing significant damage to some interests in the United States. Great economic powerhouses such as major exporters and multinational companies have a major reason to show concern with the enthusiasm of earlier debt agreements giving way to dives in the stock market and pessimism (Lachman N.p).
Investment
The rate of cross-border investment between Europe and the United States has managed to increase in a dramatic manner over the last few decades. The level of American assets in foreign countries and foreign-based assets in the country has increased by more than six times in the period covering the years of 1994 and 2010. Around one-quarter of the earnings achieved by top companies in the United States come from Europe either directly or indirectly (Lachman N.p). The consequence of this scenario is that companies from the United States have a significant stake in the recovery of the European economy. From a short-term perspective, the financial markets will most likely remain volatile (Lachman N.p). Recent times have seen the fall of stocks in the United States although the effect is much less significant in comparison with those experienced in the Eurozone. The expectation of further declines will mostly lead to decreases in the level of consumer confidence and spending. In a similar manner, the level of prices has also drop partly due to the growing expectation that the economic turmoil in the Eurozone will slow the rate of demand (Lachman N.p). The crisis has resulted in lowering the costs of energy. While this scenario positive in light current circumstances, there is a higher possibility that it will prove mostly short-lived (Lachman N.p).
While the effects might take a longer time to materialize for entities such as exporters, the American companies with direct investments will feel the impact in a swifter manner. The Eurozone is one of the largest markets for American companies with direct investments. Up to a half of the sales achieved by the American-owned affiliates have their operations in the Eurozone (Christopher N.p). For instance, the crisis has resulted in dampening of companies such as General Motors to open significant operations in Europe. Recent times have also seen major entities such as Ford incur major losses in their operations in Europe. In a similar manner, European car giant Fiat, which has a significant stake in Chrysler, saw its earnings drop by up to ten percent. This scenario has resulted in forcing these companies to seek help from subsidiaries in their endeavors to weather the impact of the crisis. Major American companies have experienced drag-downs in their balance sheets due to the crisis (Christopher N.p). The example of General Motors and Ford exemplify the manner in which the reinvestment of more profits into the creation of jobs, the formulation and implementation of newer models and the construction of more factories in the United States will be difficult.
Currency
The Federal Reserve continues to adopt a mostly cautious stance in dealing with both the actual and projected impacts on the crisis on the dollar. To a larger extent, some effects on both the Eurozone and the global financial markets have the potential of spilling over to the United States and thus affect its outlook (Wolf N.p). However, the issues faced by major Eurozone debt crisis victims such as Greece are less likely to have a massive effect as central bank consider the option of raising their interest rates for the fist time in almost one decade. The primary concern of the Federal Reserve in this context is the overall performance of the economy in the United States. The trends and indicators continue to highlight mixed signals, thus indicating that policymakers are more interested in waiting for the confidence in the job market to rise and inflation to fall prior to the adjustment of interest rates (Wolf N.p).
The weakening of the value of the euro and the rising of the dollar will also have a primarily negative impact on the American economy. Currently, the euro has gradually decreased in value. While policy makers ...