Europe Exports Weakness

10/17/2011


With 10-year Greek government bonds yielding nearly 24%, the big question is not whether Greece will default on its debt. Instead, the question is how a default (or "restructuring" or "adjustment" or whatever word is used to describe the haircut that lies ahead for Greek bonds) will impact the rest of the euro zone, its banking system, and the U.S.

It will be virtually impossible for the U.S. to avoid some contagion if credit problems in Europe escalate. Together, the European Union (EU) and U.S. account for about half of the world economy and nearly a third of world trade flows. U.S. investment in the EU is three times higher than it is in all of Asia, according to EU data.

Interconnections breed dependency, especially when it comes to trade. Europe accounts for about 22% of all U.S. exports. A stronger dollar makes U.S. goods and services more expensive to overseas buyers.

Should the euro continue to weaken as a result of credit fears and anemic euro zone growth — EU stalwart Germany is expected to see economic growth of just 1.5% in 2012, and forecasts for several other EU members project flat or negative growth next year — U.S. exports to Europe will suffer.

For big multinationals with exposure to Europe, that represents a potential drag on corporate profits at a time when investors are already skittish about bottom-line growth. S&P 500 companies worth special focus because of their large euro zone exposure include Ford ($11; F), with roughly one-fifth of total sales from Europe; Johnson & Johnson ($64; JNJ), 27%; and McDonald's ($89; MCD), 40%.


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