The Debt Crisis & the Great Euro Reckoning—What the Fallout Means to Americans

From Europe, Mitchell Clark takes an updated look at the sovereign debt crisis and how it will affect Americans. As I’m in Europe right now, talking to citizens of the wealthy European countries, I’ve discovered a consensus among financial types regarding the debt crisis that plagues the euro continent. As I’ve been writing, they too want clear action on the issue and most of the people I spoke with feel that Greece should not have been let into the European Union and euro currency. They also feel that Italy is too large a country (and economy) to treat similarly to Greece, Ireland and Portugal, who created their own various degrees of the sovereign debt crisis. Accordingly, rich euro nations may have to top up their bailout fund in the not-too-distant future. Regardless, the debt crisis is migrating into a political crisis and it will be up to Germany, France, Spain, the Netherlands, and Belgium to lead in a unified manner if they’re going to keep that place together.

The sovereign debt crisis represents the single greatest threat to your pocketbook, not the anemic U.S. economy. The reason for this isn’t the big swings in the Dow Jones Industrial Average or today’s weak investor sentiment—it’s all about the currency risk; specifically the euro currency, which is the world’s second largest reserve currency (see Investment Advice Matters, But Investment Risk’s Tops in My Book).

If a primary currency like the euro were to experience member country defaults, there would be turmoil in the U.S. dollar, then commodities, and then the U.S. stock market. Currency values can change dramatically over time, but it’s the big, short-term shocks that create depressions and long bear markets.

We are seeing political progress on the debt crisis in Europe, but it’s slow and mostly reactionary. It seems like that’s the way things are, no matter where you live in the world—politicians react to a debt crisis, rather than enact the measures necessary to prevent one in the first place. Case in point, the subprime mortgage debacle and Wall Street bailout. The euro currency has been stronger in recent days, but no trader expects any lasting strength. There’s just too much uncertainty out there.

Spain is the eurozone’s fourth largest economy and is not nearly as wealthy as the first three. The former has stopped growing and is about to hold a round of federal elections. There is a real reckoning going on in the euro continent and it doesn’t have to end badly. The debt crisis has forced new austerity measures among many euro countries and that’s good. But, what’s required is the fulfillment of those measures (several euro countries are known for not following through on enacted legislation) and the political will to keep things together. The debt crisis has forced the euro currency downward, but there is a decent chance that all the political reckoning that’s now taking place will make the European Union stronger over the long term.

The downside to your pocketbook is in the short term. With virtually zero growth in the four largest euro countries, political upheaval and budget austerity measures, the near-term result will be no GDP growth. This is the reality we now face for the next several years.