Europe unlikely to be hit hard by US recession

Europe unlikely to be hit hard by US recession
AP
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First Published: Tue, Jan 22 2008. 10 40 AM IST
Updated: Tue, Jan 22 2008. 10 40 AM IST
Frankfurt: If the US falls into recession, Europe likely won’t go with it, though the ride may be bumpy.
Despite the maxim that “if the US economy sneezes” the world gets sick, Europe’s biggest economies like Germany, France and Britain appear poised to push through any contagion, due to diversifying markets and a lesser exposure to the credit squeeze caused by the U.S. subprime crisis.
But that’s not to say a US recession can easily be shrugged off.
“With roughly 25%, the US is the far biggest single economy in the world,” said Andreas Rees, economist at UniCredit in Munich. “This makes negative spillover effects to Asia and Europe , via exports, a certainty.”
Added to that is the US dollar, which lost 11% in value against the euro last year as the European common currency soared near US$1.50 , making exports from Germany or anywhere else in the 15-nation euro zone more expensive to American buyers.
If the US does go into a recession, there will indeed be bumps in the road for Europe, said Holger Schmieding, Bank of America’s chief European economist, they just won’t be as jarring.
“Europe is vulnerable to everything that happens in the US because there is no general decoupling,” he said, but also added that “Europe is in better shape than in the past because it can stomach, or is a bit more resilient, against the US virus.”
Big exporters like Germany, for example, are seeing the value of the goods they send to booming economies like India and China grow at a faster rate than those to the U.S. But demand from within Europe is also a factor, Schmieding said.
The decoupling idea is buoyed by market reaction in the past several months to recurring revelations by big banks of wider exposure to the subprime crisis and bigger write-offs. US markets endured a roller coaster ride that often caused Asian markets to swoon, while European markets generally saw more moderate reactions.
That’s because European companies have made it a point to look not only to the US but elsewhere, said Software AG Chief Executive Karl-Heinz Streibich.
“Software AG is present in 70 countries; two-thirds of our business is outside the United States,” he told The AP. “That means if ... there would be a business impact on the private sector in the US, which is around 10% of our revenue, that would result in 1 or 2% of our total revenue.”
Such a decline would “definitely be more than compensated” from the company’s presence in emerging markets in Asia, Africa and the Middle East, he said ,illustrating the benefits of global diversity.
The bottom line, Schmieding said, is that the US remains the world’s top economy and one of the most important bellwethers of global economic health, but it is not the only one.
“There are other countries around the world that are more important than they used to be, eastern Europe, Asia, the oil countries,” he said. “Nobody is resilient but the U.S. is a bit less important than it used to be.”
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First Published: Tue, Jan 22 2008. 10 40 AM IST
More Topics: Europe | US | Recession | Economy | International News |