With all eyes still on the Euro Zone, many are wondering how the issues they are facing will affect the United States.  As you will see below the answer is it will heavily impact the U.S. – Europe has the second largest economy in the world.
Because Europe and the U.S. are heavily intertwined in their banking system, a slow down in Europe will directly affect lending here in the U.S.  Many European banks invest heavily in the U.S. for many purposes.  They invest in small business, they lend money to our banks and they invest in our stock market. If we see further trouble in Europe it will affect each of the three areas discussed above.  This will affect households in two ways.  First will affect the liquidity of the financial markets, which will make it harder for individuals and businesses to get loans – because many of the European banks are lending the money to make this possible.  Wither it is borrowing through a: credit line on your home, credit cards, auto loans or buying a home; consumers here in the U.S. have become more dependent on borrowing to meet their obligations.  Second, Many small businesses also depend on short term loans to meet payroll, buy product and sustain their normal business expenses.  If the markets begin to tighten, and banks are not lending, it will have a direct impact on consumer and business lending.
The Stock Market will also be heavily impacted by the Euro Zone – this will affect 401K’s and other investments of our citizens.  Many of the investments individuals hold in their retirement accounts are tied to Europe.  Many of the U.S. businesses people invest in rely heavily on export to Europe.  If we see a further slowing of Europe’s economy  – this will hurt the stock value of companies who rely on selling their product to Europe.  Also, many individuals have invested in U.S. banks with their retirement accounts.  Many of these banks have invested heavily in Europe’s debt.  If the European debt defaults it will directly hit the U.S. banks who have invested in their debt – and the investments of Americans.  Both of scenarios will directly impact the investments in 401K’s and other investment accounts.
As we discussed above, any business who depends heavily on European export will be hit hardest by economic woes in Europe.  This will affect unemployment in the U.S. – as businesses who have less product to sell to Europe will need to cut back their workforce to stay in business.
As we continue to watch the markets around the world, and specifically in Europe, we can see how heavily our economy depends on strength abroad.  It is also important to note, the U.S. has financial problems of their own.  To prevent a debt crisis like the one Europe is facing, it is imperative that the United States puts their financial house – or we will see a similar issue here.  With the U.S. being the larges economy in the world, a financial collapse here would be devastating.
*This chart will help you to see how the U.S. Debt has grown over the years, and in relation to our gross domestic product.