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How contagious is Europe’s troubled economy?

Tracey Samuelson Jul 10, 2014
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How contagious is Europe’s troubled economy?

Tracey Samuelson Jul 10, 2014
HTML EMBED:
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Worries over one Portuguese bank Thursday very quickly became worries over Europe’s broader financial health. Trading was suspended in one of Portugal’s’ largest banks, Banco Espirito Santo, after its stock price dropped 17 percent on news of missed debt payments and preexisting concerns about its parent company.

But why the jump from this one bank to concerns over Europe as a whole?

All it takes is one teetering financial institution to remind investors that Europe’s troubled past is still very much a part of its present, says Kent Hughes with the Woodrow Wilson International Center for Scholars.

“Clearly, memories are still fresh about a very difficult situation in Europe,” he explains. “All you have to do is get a couple people moving and you don’t want to get left behind.”

Fears about Banco Espirito Santo cast doubt over other banks as the  European Central Bank (ECB) reviews the assets of its major financial institutions,  says Robert Kahn, a senior fellow for international economics with the Council on Foreign Relations.“Because there’s so much uncertainty about the bank review, any single event, in a sense, is extrapolated by markets.” 

And more generally, it reminds investors that European growth remains too slow, says Kahn. “Their process of cleaning up their banks has a long way to go and the policies the Europeans are doing are far from ideal from a U.S. perspective.”

However, while Europe is America’s largest trading partner, it’s unlikely that today’s market anxiety will translate into tangible impacts in the U.S, says Clay Lowery with Rock Creek Global Advisors, unless this trend continues or worsens in coming weeks and months.

“If the European economy is not growing as well as one would hope, then that could harm [U.S.] exports,” say Lowery. “People don’t have as much money to buy things. Companies don’t have enough money to buy things, etc.”

Companies heavily invested in Europe might also suffer. But for the most part, the interdependency of American and European economies is a good thing, says Lowery.

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