While I’ve heard plenty in the news about the debt crisis in Europe, I have to admit that I haven’t paid a great deal of attention.
Not only are the roots of this crisis very difficult for a lay-person to understand, but it seems as though the economic woes in Europe are pretty far removed from my life.
But two months ago, the American company that employs my husband announced that it would require temporary layoffs among its workers — a reaction to the depressed market for the company’s products in Europe.
Admittedly, there are other factors influencing the financial troubles of my husband’s employer. But, the fact that our family would have to handle a temporary layoff, partially due to this crisis, made me realize that the financial problems across the pond can very much affect our finances in the United States.
Here’s what you need to understand about the European debt crisis’ potential effect on American businesses and finances:
The problem my husband’s company has encountered is the loss of exports to Europe. Around 22% of exported American goods are sold to Europe, so a decline in their market is no small matter for U.S. companies. In particular, U.S. auto manufacturers like Ford and GM are finding that they cannot count on their usual level of sales. Middle-income Europeans are tightening their belts, both individually and through government-mandated austerity measures. This means no extra money for new cars or other non-vital American exports.
And this reduction in European sales can mean employment issues right here at home. For those manufacturers who count on the European market — such as my husband’s company — the loss of revenue might mean temporary layoffs, or even pink slips, for American workers.
We live in a global marketplace, which means American and European banks lend to each other all the time. American banks, however, are concerned about potentially having to shoulder major losses in their European holdings. This means that our banks are less willing to make loans to American companies and individuals, since they want to keep more capital available should the situation really deteriorate.
Unfortunately, even borrowers with excellent credit might have trouble getting capital from banks for major investments or projects.
It’s likely that your retirement accounts include several European assets, since diversifying your portfolio is a smart way to protect yourself. You may even own more European assets than you realize.
For example, according to the AARP, “As of April 30 [of this year], almost 55 percent of the holdings of Vanguard International Explorer Fund were European.”
This means that those investors who are nearing retirement might have to keep a careful eye on their investments or even ride out the debt crisis before officially stopping work.
The Bottom Line
The financial crisis in Europe may seem unrelated to your personal finances, but the fact is that it can affect you. As complex as this issue is, it’s a good idea to stay informed about the ongoing crisis and remember that the American economy does not exist in a vacuum.
Have you done anything differently with your finances in light of the European debt crisis?