Tuesday, April 24, 2012

Surprise from Europe: Austerity Is Not Popular

The headline in this morning's Financial Times says it all:

"Leaders face austerity backlash"

Not surprisingly, most Europeans are not thrilled that they are being asked to accept a lower standard of living; high unemployment; fewer government services; and higher taxes.

Recent economic data released across Europe tell a recessionary tale.  Stock markets have also moved sharply lower - Spain's equity market, for example,  is now back to the lows seen in 2009.

So the question for U.S. investors is:  Does Europe matter?

In a global interconnected world, the obvious answer is that Europe matters very much.  However, here in the midst of earnings season, many U.S. companies are reporting earnings that are matching or bettering expectation.

Robin Wells wrote a column in today's London Guardian titled "European turmoil, American collateral".   In her piece she notes:

What are the implications for the US, economically and politically? Direct links between the US and eurozone economies are fairly minor: we don't export that much to them, they don't import that much from us, and US banks have had an extended time to cut their exposure to eurozone risk. Yet the collateral damage could still prove significant.

When the stock markets fall, consumer and business confidence falls, leading to cutbacks in spending – bad news for an American economy that is still mired in recession. In addition, crisis in Europe makes for a stronger US dollar, as investors flee to safer abodes. Again, bad for the economy as a stronger dollars hurts US exports.


I am inclined to agree with Ms. Wells.  The direct economic link between European angst and our economy may be more significant psychologically than in actual economic damage.

Still, psychology obviously plays a crucial role in financial market performance.  If investors begin to sense that Europe's troubles are spreading to our shores, it could make for a very long summer.