Trouble in Europe can lead to woes in US

Associated Press

WASHINGTON

Your 401(k) could sink again. A plummeting euro may make it harder for American companies to sell goods overseas. Credit could be tightened.

These are all potential complications of a European debt crisis that risks spiraling out of control. And in today’s interconnected global economy, Greece’s troubles could over time become a headache for all of Europe and by extension the rest of the world.

That includes President Barack Obama as he faces an already difficult re-election bid, and voters as well, from machine-tool makers in Michigan to chemical-plant workers on the Gulf coast. Pensioners and home buyers also could be affected.

All this because Greece is at a crossroads, unable to form a government and decide whether it will continue on a path of harsh austerity measures or walk away from its debts and give up on the euro. That would leave many European countries holding their debts and shake the foundations of a currency used by 331 million people.

Here’s what a Greek debt default and exit from the 17-nation eurozone might mean for people in the United States:

BANKS

The short-term financial consequences of Greece’s defaulting may be limited across the Atlantic. American banks already have sharply reduced their exposure to Greece by more than 40 percent to $5.8 billion, according to the government, and Cornell University economist Eswar Prasad said he foresees little immediate blowback for the U.S. financial sector.

But the concern is that market speculation would then fall on the far larger economies of Spain and Italy. Both are deep in the red and heavily dependent on credit markets to stay afloat. And their debts are held by Europe’s big banks.

Economists call this threat contagion. Scared investors sell off their assets in Europe’s most-troubled economies, and the governments struggle to access credit while falling into deeper recession. A crisis as bad as Greece’s in a bigger nation would have severe global implications.

MARKETS

Many pension funds, insurance companies and other big investors have dumped or written off investments in Greece such as government bonds. But there’s no telling how the markets will respond to a default.

Each round of bad news from Europe raises uncertainty. No one knows how a Greek exit from the euro would work, and the financial swings have added to the stress on Europe’s economy. And every time stocks plunge and the borrowing costs for troubled countries rise, businesses and consumers grow more cautious. This makes them more reluctant to expand companies or buy more property.

TRADE

Exports have been a bright spot for the U.S. economy, and Europe has played a big role. More than half of U.S. foreign investment and a fifth of all American exports go to the European Union. A significant slowdown there could mean less revenue for U.S. companies, less expansion at home and lost jobs for American workers.

U.S. POLITICS

Any new economic crisis presents a problem for Obama, even if Europe’s problems are largely beyond his control.

Higher unemployment, a surge in gas prices or collapsing stock portfolios in the United States would undermine the president’s argument that he has slowly but surely guided the U.S. out of its worst downturn since the Great Depression.