Why Europe does matter -- to everyone



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The biweekly nature of the New Hampshire Business Review makes it problematic to cover ongoing economic events. But what I can do is offer quarterly economic updates. This column serves as the first part of a third-quarter update.For almost a year, the mainstream economic and investment communities have been attempting to convince anyone within earshot that Europe doesn't matter. They say that Greece's economy is the size of Delaware's and that Europe isn't a major export market for us. The arguments rely on the theory of "decoupling," which espouses that the U.S. can withstand international economic shocks if our domestic economy is fundamentally sound.I think the "decoupling" theory belongs alongside trickle-down economics and the belief that you can lift up the lower economic classes by dumbing-down standards and indiscriminately throwing money at them.The reality is that the worldwide economic stature of the U.S. is continually diminishing. That's neither good nor bad, but the natural progression of a global economy. It also doesn't mean that we can't continue to prosper or continue to be a major economic force. However, what it does mean is that we will no longer be the overriding dominant force. It also means we will forever be affected by major international economic events.Our contribution to worldwide GDP has declined from about a third in 2000 to less than a quarter today. Collectively, the eurozone's economy is larger than ours. And with over 2 billion people in China and India, those countries have the law of big numbers on their side.These factors translate into an economic interconnectedness whereby our prosperity will be related to the prosperity of others.Indirect impactsAlthough company size dictates the type and magnitude of the impact, companies large and small will feel the effects. The impact to large companies is straightforward and directly proportional to the percentage of revenues generated abroad. This is one reason you can expect earnings at the Fortune and S&P 500 to soften.For small companies, the impact of overseas events is indirect. Europe's troubles pose a problem for Europe's largest trading partner, China. A slowdown in China means that Brazil's economy - which is heavily dependent on selling natural resources to China - hits the wall. But that means that the demand for commodities declines. This is a major reason oil prices have dropped about 20 percent from their recent peaks.Ironically, Europe's travails are a positive for mom-and-pop businesses. Small businesses typically generate little or no revenue from overseas, so they suffer no direct hit to revenues. On the plus side, lower worldwide demand has driven down commodity prices, including oil and gasoline, and that can translate into increased disposable income.So people who tell you that Europe doesn't matter simply doesn't know what they are talking about. It all matters, particularly the recent election in Greece. Although the outcome was favorable for maintaining some modicum of stability, the world is far from out of the woods with respect to the concern over Greece.The pro-austerity party won by the slimmest of margins. That means a coalition government must be formed. The failure to accomplish that feat the first time resulted in the June elections. If they fail again, another election will be necessary. We should know whether a coalition can be achieved by the time you read this. Hopefully, it can -- because that will be good for everyone.Next issue I'll make my predictions on what we can expect in the second half of the year.Author, professor, entrepreneur, radio and TV commentator, Tony Paradiso of Wilton is a marketing, management and macroeconomic expert. His website is tonyparadiso.com.

 

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