Legacy Of The Euro Crash

5/24/2010


One byproduct of the financial and economic mess in Europe is the collapse of the euro. Concerns about high unemployment — the jobless rate in Spain, for example, is 20% — over-leveraged sovereign balance sheets, and expectations of sluggish economic activity in the euro zone have caused investors to flee the euro.

The currency’s value has declined 15% versus the U.S. dollar so far
this year, reaching its lowest level in four years. A weaker euro makes European imports cheaper for U.S. consumers.  

On the other hand, U.S. exports are now more expensive to most European consumers than they were at the beginning of this year. That pricing trend further strains a region already reeling from joblessness and austerity measures that will pinch the spending habits of its citizenry.

About one-fifth of all U.S. exports go to the European Union, so the weak euro has important implications for one of the major drivers of the U.S. stock market — corporate profits.

Much of the market’s rally since March 2009 has been fueled by better-than-expected corporate profits. Investor expectations are higher now than they were in 2009, reducing corporations’ margin for error. Continued weakness in the euro could prevent some companies from meeting Wall Street’s expectations.

To be sure, a strengthening U.S. economy and growth in emerging markets should take up some of the slack left by sluggish European
demand for U.S. imports. Just how much slack will become more evident when U.S. multinationals begin to report second-quarter earnings in July.


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