How Europe's Troubles Could Become Ours, Too If Greece, Spain, Italy or other European governments were to suddenly default on their debts, European banks could find themselves holding worthless assets and becoming insolvent. That could lead to a global financial meltdown worse than the one in 2008.
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How Europe's Troubles Could Become Ours, Too

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How Europe's Troubles Could Become Ours, Too

How Europe's Troubles Could Become Ours, Too

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AUDIE CORNISH, HOST:

With all the stories of economic woe across the Atlantic, we've decided to look at what Europe's debt crisis means for this country, so we've invited an NPR senior business editor Marilyn Geewax. Welcome, Marilyn.

MARILYN GEEWAX, BYLINE: Hi. It's good to be back.

CORNISH: So a few days ago, our own Federal Reserve Bank stepped into this crisis, right? The Fed joined other central banks to make it easier for banks about the world to get their hands on dollars. So why would we do that? Because at first, it seemed like the U.S. really wouldn't get too involved in this.

BYLINE: Well, it can seem like Europe's troubles sound so far away and especially at a time when our own job market is still weak. Home prices are still falling. You'd think we'd have plenty of things to worry about right here at home. But really, we are so tied to the European economy that the United States cannot afford to ignore this European debt problem.

CORNISH: But how does it actually affect us?

BYLINE: Well, there's several ways. I'll start with just the simplest one. The European Union has 27 countries and together they're our single biggest trading partner. We do about a half a trillion dollars worth of trade with Europeans and, you know, they're very good customers. That means U.S. corporations get a lot of profits from Europe. Those profits help prop up our stock market.

So Americans have a lot of interest in seeing Europe continuing to grow. Believe me, whether you are a coal miner in West Virginia or a corn grower in Iowa or maybe a chemical plant worker in Texas, you do not want to see your European customers cutting back on their spending. We need Europe to stay healthy to maximize our own exports and our profits.

CORNISH: OK. So that's the issue of trade. I mean, are there any other connections that we can better understand this?

BYLINE: Well, we don't only trade with Europe, we also compete with Europe. We want to sell our goods to customers in Asia and the rest of the world. So if Europe's troubles are driving down the value of their euro, they have an advantage over us. German exports have been booming for a couple of years now in large part because this falling euro has given them a competitive advantage.

CORNISH: So it makes their goods cheaper?

BYLINE: Exactly. Think of it this way. Say you're a customer in China and you're trying to decide between a German car and an American car. If their currency is cheaper for you, well, the German car is going to be the better bargain, even if it really isn't the better vehicle. So that's a pretty unfair competitive advantage. But everything we've talked about has really just amounted to small potatoes compared with the really big issue. And that has to do with the banks.

CORNISH: So what is happening with the banks? And by banks, you mean the Europe's banks or what's happening here in the U.S.?

BYLINE: Well, it's both. Because whether we like it or not, big financial institutions are global today. You know, if you looked inside your own wallet, you might find a HSBC credit card. That company's based in London. Maybe you've got your savings with ING. That's a Dutch company. The reality is that our financial systems are really woven together. And unfortunately, the banks in Europe own a lot of the debt that was issued by those European governments. So if Greece or Spain or Italy, or any of those countries suddenly defaulted on their debts, those European banks would find themselves becoming insolvent.

They'd be holding a lot of worthless assets and that would be horrible for us. Remember in 2008 how bad the financial markets were when they were melting down?

CORNISH: I've got to say, I've got a feeling of deja vu here.

BYLINE: Yeah. Remember, we all remember that feeling pretty well. Three years ago, it was U.S. housing debt that triggered this. It could be that European government debt could trigger the same kind of contagion. But the big thing is coming up this week. In Brussels, the European leaders are going to get together. They're going to try to come up with a comprehensive plan and some economists are actually fairly optimistic at this point. They think everyone understands how high the stakes are, but don't break out that French champagne just yet because they've got a lot of work to do to really address the core problem of dealing with all of that government debt.

CORNISH: NPR's senior business editor Marilyn Geewax, thanks so much.

BYLINE: You're welcome.

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