European Debt Crisis

Greek crisis may have impact in U.S.

Marketplace Staff May 21, 2010
European Debt Crisis

Greek crisis may have impact in U.S.

Marketplace Staff May 21, 2010


Tess Vigeland: So one way or another, Greece is gonna have to pay down its debt. And Greek families will take the hit. But what about American families? Stock market investors are certainly paying close attention to every word out of the European Union about rescue packages and the like. But what could troubles in Greece really mean for us?

For some answers we turn to Jacob Kirkegaard of the Peterson Institute for International Economics. Welcome.

Jacob Kirkegaard: My pleasure.

Vigeland: I’m going to start with the very basic of basics, and ask you to explain for us why what is happening in Greece has anything to do with us.

Kirkegaard: Well, first and foremost, what is happening in Greece has been sort of a canary in the coal mine. It basically points to a freeze in the credit markets, similar to what we saw after the collapse of Lehman Brothers. And if that had happened, that could’ve had very dramatic implications for the United States economy more broadly, and most certainly for the U.S. financial system.

Vigeland: Let’s try to draw the line from that to a blue-collar worker here in the U.S. Why is there a trickle down effect?

Kirkegaard: It’s going to have a net-negative impact on the job-generating capacity of the U.S. economy. When the European economy goes into a tailspin, the ability for U.S. manufacturers to sell their goods in Europe declines. That’s the first order. There’s another equally important effect: We’ve seen a very dramatic decline in the exchange rate of the euro vis-a-vis the dollar. And that has meant when European and American manufacturers compete for export orders, European competitors now have a significant pricing advantage, because of the decline in the exchange rate.

Vigeland: Now, it also seems that the panic in Europe is affecting stock market recovery. Is it the case that if things continue to go badly over there, that it’s going to affect stock markets here and worldwide?

Kirkegaard: Oh yes, absolutely. I mean, that’s the kind of message that we’re now seeing in the stock markets — basically, thinking well, “If Europe — a large part of the global economy — is going to underperform, that’s not going to be good for the overall global recovery.”

Vigeland: You mention the fact that the euro has dropped against the dollar recently, and there are negative effects of that worldwide. And yet, if you are a potential tourist in Europe, I suppose, this would be the time to go.

Kirkegaard: Well, most certainly. I mean, the Icelandic volcanoes permitting, going to Europe during this summer is going to be anywhere between 20 to 25 percent cheaper than it was last year. The exchange rate, which used to be easily 1.50 to the euro, might now decline to as much as 1.10. That’s a lot of money if you want to go to restaurants and spend money in Europe.

Vigeland: Let me ask you this then, even around our office, here at Marketplace, there have been questions about “boy, should I go out and buy euros right now?” Is now the time to buy euro, if you’re planning, perhaps, to travel or should you wait a few months and wait for it to go down even further?

Kirkegaard: Oh absolutely, yeah. If you’re planning to travel to Europe during the rest of the 2010, I would certainly not want to buy my euros now, because my prediction, to the extent that anybody’s willing to predict a foreign exchange rate, well, I’m going to stick my neck out and say I would certainly wait as long as I could to do that, because my distinct feeling is that the euro has got some way to go down still.

Vigeland: Alright, well, thanks for checking in on your crystal ball for us. Jacob Kirkegaard is a research fellow at the Peterson Institute for International Economics. Thanks so much.

Kirkegaard: My pleasure.

Vigeland: And just in case there one nagging question in your minds about our interview, I wondered, too. I mean, how many Kirkegaards could there be, right? So before we started chatting about the Euro, I asked, is he related?

Kirkegaard: In theory, yes.

Vigeland: Really.

Kirkegaard: I’m originally Danish and nobody can say that they’re related to Kirkegaard, because he didn’t have any children. But one of his paternal uncles was my many-times great-grandfather. So that is the connection.

Vigeland: So, are you a philosophical, political mind then?

Kirkegaard: Well, you know, actually, sort of existentialism has come in handy in the last couple of years.

Vigeland: I love that.

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