Euro’s Collapse Could Bring Crisis for American Economy

Liana Teixeira

For about 13 years, millions of Europeans in 23 countries have shared a common currency—the euro. Since the euro launched in January 1999, 17 of the 27 members of the European Union (EU) have adopted it as their official currency. Recently, however, some experts suggest that the euro is weakening to the point of collapse.

Some countries in Europe may abandon the use of the euro as a common currency, affecting not only the European economy, but the American economy as well.

Good news for Americans: those visiting the continent can get more for their money. The U.S dollar is strengthened by the weakened euro. Unfortunately, this also means that Europe gets the short end of the stick.

However, the U.S. is not necessarily out of harm’s way. The euro’s failure would obviously cause currencies to revert to their original values, according to country. But the hassle of swapping American dollars for multiple European currencies is only the beginning. Experts believe that reverting back to individual national currencies would hurt American business and the economy.

“If the euro collapsed, a country like Spain would leave the eurozone and go back to its own currency. And that would be chaos,” said Chris Telmer, associate professor of financial economics at Carnegie Mellon University’s Tepper School of Business, to the Associated Press.

“Anything that happens in Europe has implications for the U.S. in general,” said Erasmus Kersting, an economics professor at Villanova University School of Business.

George Haley, a professor of marketing and international business and director of the Center for International Industry Competitiveness at the University of New Haven, also weighed in on the issue. “U.S. companies doing business there would take real losses,” he said. “The growth in U.S. manufacturing would slow down, and it’s been the most consistently performing section of the U.S. economy for the last three years.”

Additionally, U.S. banks and corporations have large operations in Europe. For example, Westinghouse Electric Co. has approximately 4,000 employees and 25 percent of its $5.2 billion in revenue last year came directly from Europe. However, spokesman Vaughn Gilbert reassured that the company is “not dependent on the strength of any single currency.”

“A severe decline in economic activity (in Europe) will be noticeable in the revenue and profits of U.S. companies and banks,” Kersting said.

Of course, the situation would be less worrisome if European countries were not defaulting on their debts or asking to be bailed out. Just last year, Greece received a bailout from the European Union. The country would need to adopt austerity measures in return for the aid; however, Greek leaders have asked for more time to implement these reforms while still accepting additional aid. Some fear that Greece may abandon the euro completely.

“The fear is that if Greece left, other countries that are bigger might leave, such as Portugal and Spain,” Kersting said.

In fact, the EU bailed out Spanish banks earlier this year. Telmer says if Spain’s banks get any worse, the government may revert back to pesetas and value them relatively low to other currencies.

If the euro failed, Gerald Hanweck Sr., professor of finance at George Mason University, says “U.S. companies would want contracts restructured in U.S. dollars, and that would hamper trade substantially because these countries would not have access to enough U.S. dollars.” Individual national currencies would have to be reintroduced to the economy, and exchange rates and business contracts would all have to be reset. However, Hanweck believes it is unlikely that Europe will abandon the euro.

These occurrences tend to lean toward a recession period in Europe. According to data from European Union’s statistics agency (Eurostat), the economic output of the 17 EU nations using the euro fell by 0.2 percent in a three-month period ending June 30. They posted zero growth in the previous quarter ending on March 30.

This evidence strongly hints toward a recession. In Italy and Spain (Europe’s third and fourth largest economies), recession has already begun. Eurostat shows that growth in Germany’s economy, Europe’s largest, slowed to 0.3 percent last quarter, while France’s economy has remained at zero growth for three straight quarters.

As of now, the ball is in Germany’s court. In early September, a German high court will rule whether the country’s constitution allows them to participate in EU bailouts.

“There’s a willingness in the strongest economy—Germany—to keep (the EU) together,” Hanweck said, “but I’m not sure they can fix this with monetary policy and bailing out banks and the various countries.”