To get a sense of how vulnerable the U.S. economy could be if the euro currency union cracks apart, start with the volume of U.S. exports to the euro zone – $153 billion in the first six months of the year. Add several hundred billion dollars in investments by U.S. banks in the euro zone and several trillion dollars’ worth of other financial contracts between the two economies.
As European leaders meet later this week to try to resolve their spreading debt crisis and prevent the breakup of the 17-nation euro zone, U.S. politicians, corporate leaders and financial analysts are watching anxiously for a breakthrough.
The alternative could be staggering for the U.S. economy. American banks and other companies could find themselves battling with any country that leaves the euro union and reinstates its own currency.
“The risk is likely paralysis,” said Michael Hood, a market strategist at J.P. Morgan Asset Management. “You won’t even know what people owe you.”
The summit this week is the latest in a long series of meetings convened to deal with problems that have expanded from concern about Greece’s high levels of government debt into a full-fledged threat to the euro union. Although a solution has eluded them for two years, European officials insist that the worst-case outcome – an exit by one or more countries from the euro zone – will be avoided.
But a steady erosion of confidence in European leadership and the failure of previous crisis plans has made a once-taboo topic part of the mainstream discussion. And analysts are looking at different scenarios and sketching out the implications.
An exit by Greece alone could probably be stage-managed with help from the International Monetary Fund and the rest of the euro zone without much global fallout, according to a recent analysis by ING financial markets research chief Mark Cliffe.
Banks, companies and private investors have in a sense been preparing for that possibility for several months by pulling money out of the Greek banking system, liquidating investments and selling off Greek bonds at fire-sale prices.
Some analysts even advocate that Athens give up the euro as a way to help the country recover.
But Cliffe, Hood and others worry that a run of departures from the euro – starting perhaps with Greece and potentially continuing with Portugal, Italy and Spain – could have a catastrophic impact on the global economy.
The euro zone would rapidly lose as much as 10 percent of its roughly $12 trillion in annual economic output, Cliffe estimated. The falloff in U.S. trade, a downturn in the financial sector and other impacts would almost certainly throw the United States back into recession – a risk that the Obama administration has highlighted by pressing European officials to be more aggressive in their crisis response.