How the European Debt Crisis Could Affect YOUR Finances

by Emily Guy Birken · 6 comments

European debt crisis

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:

Exports

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.

Banks

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.

Investments

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? 

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{ 6 comments… read them below or add one }

My Budget 360 December 8, 2012 at 1:30 pm

You are absolutely correct to point this out. The EU as a trading bloc is a $17 trillion machine so to think that problems abroad will not impact us here are simply unfounded. Back in 2007 there was all this talk about decoupling and how independent all countries were. That was clearly not the case. Europe is now in a deep recession and as you highlight, we export a good amount to them. A contraction in their spending will hit.

Spain is the bigger story and now some of the spillover is hitting bigger powers like France.

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MoneyNing December 8, 2012 at 9:43 pm

Sorry to hear about your situation Emily. You’re absolutely right that we shouldn’t assume the mess in Europe won’t affect us at all, especially if the European situation deteriorates further.

This is another reason why we should diversify as much as possible (whether it’s income or investments), so any one event won’t sink the whole ship!

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Bry December 8, 2012 at 10:49 pm

I stay away from europe and out of financials. The only way to insulate yourself is investing outside the country like south america, mexico, canada, australia, etc. and diversification among different asset classes, precious metals bonds cash. Europe is going down but you shouldnt have to go down with them. Just like we had to go down in 2008 and probably go down further until we get our fiscal house in order.

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Jerry December 10, 2012 at 4:57 am

Europe is a bit of a mess but if you are near retirement you shouldn’t have money in the market anyway. But, if it is news like what we have now should lead you to take the money out asap. There’s no insurance these days for where to put your money. If you have time then that’s the only thing that’s going for you at the moment.

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Lifeisdynamic December 13, 2012 at 9:17 pm

It happens both ways and always has since there has been global trade!

There is a big world beyond America. There is not just one player in the game! The ‘knock-on’ effect works downward, upward and sideways. There is no way the USA can remain insular of what happens beyond its shores or Americans can have an insular view of the World any more.

Surprised it has taken so long for some American’s to see past their own country. American’s don’t ‘make it’ in this World or ‘lose it’ either for that matter alone – never have! What happens to another country always affects others. What do you think America’s devaluation of currency and central bank zero interest rates are doing to other countries? What do you think happens in other seemingly unaffected countries when US decided to go to war?

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David December 14, 2012 at 10:52 am

David,

I disagree that buying a house is always a hedge against inflation.
I downsized to a smaller house and refinanced

But renting is a cheaper way to go. Rent increases won’t be more than closing costs and refi costs –$8,000+ . And renting gives one great options that owners don’t have.

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