The euro crisis: Implications for U.S. exports

The European sovereign debt problem became the focus of world attention in 2010 when the interest rates on Greek government bonds rose dramatically, requiring immediate action by the European Union to avoid an imminent default.  It soon became clear that the problem was not limited to Greece when government bond interest rates on other Eurozone countries began to increase as well due to excessive accumulation of debt. The financial markets’ reluctance to fund continued borrowing by the EU debtor countries forced EU governments to come to grips with fundamental imbalances and underlying inconsistencies in the Eurozone economic system of using a single currency for a set of countries that lack a unified economic and political system.  The major consequences will be largely felt by the Eurozone countries themselves, who will be forced to go through some significant structural adjustments over the next few years. The adjustment process could generate a range of alternative macroeconomic outcomes—including differences in growth, exchange rates and investment—which could have significant implications for U.S. and global trade.  This paper attempts to allay some of that uncertainty by exploring a wide range of alternative macroeconomic outcomes and their potential impact on U.S. and global exports.  While U.S. exports vary, they should remain robust across the full range of potential outcomes explored. However, the Eurozone adjustments to significant current imbalances will take years to accomplish and is likely to slow Eurozone economic growth, the composition of world and U.S. trade. In particular, emerging market countries which have not been particularly affected by the euro crisis are likely to become a more important share of both world GDP and world trade.   While the EU has been an important destination for U.S. exports, the relative slow growth of markets there is likely to make this market less important over time and thus an increasingly smaller share of U.S. and global exports.  The direct impact of changes in European demand is likely to affect U.S. exports less than the secondary effects of changes in exchange rates and global investment patterns associated with alternative EU outcomes.