Is the European crisis good for America?

By Felix Salmon
May 18, 2010
Tim Duy has a provocative thesis: that the Europe crisis is good for the US economy, at least for the next few quarters.

" data-share-img="" data-share="twitter,facebook,linkedin,reddit,google" data-share-count="true">

Tim Duy has a provocative thesis: the Europe crisis is good for the US economy, at least for the next few quarters.

Bottom Line: The European crisis, by keeping US interest rates in check and oil prices low, may do more to help the US recovery than hurt it. In the process, however, we would expect the flip side of the resulting capital inflows into the US to emerge – namely, a rising external imbalance. Arguably, this simply shifts the ultimate adjustment to sometime in the future. Again.

Is this really true? Interest rates can hardly be any lower than they are, so for the time being they’re exactly where they would be even if there wasn’t a European crisis. The situation in Europe might at the margin make the Fed slightly more reluctant to start tightening, but it’s not going to make any real-world difference for a while yet, if ever.

As for the price of oil, again I think the influence of European news is marginal, and only secondarily due to fundamentally lower demand from Europe. Mostly, I think that the option value embedded in the oil price — the idea that you might be able to buy now and then sell in the future at a profit — has fallen, as the prospects for serious oil-price appreciation have eroded. In other words, the fall in oil is financial, rather than fundamental. Which still helps US growth: the price of oil is the price of oil either way. But I think the connection with Europe is a second-order effect.

More to the point, if the European crisis really does end up delaying and therefore exacerbating the way that the US is going to have to deal with its twin deficits, that bodes ill for future interest rates, and is likely to keep the yield curve steep for the foreseeable future. If global liquidity embarks on another flight-to-quality trip to the US, that’s a nice short term boost on this side of the pond. But it’s not at all sustainable, and I’m not even sure it can reasonably be considered a “net positive” if it only increases the likelihood of a W-shaped recovery.


We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see

How can lower interest rates be good for America? By inflating another bubble?

The fundamental problem with Europe is the central monetary policy and separate fiscal policies .Until this problem is resolved we will see Europe lurching from one problem to another.The sovereign debt problem in the slow growing PIGS countries won’t go away easily . Austerity programs will lead to GDP decline which will make debt servicing problems even harder.On the other hand high deficits are leading to the same problem.

Posted by AGreenInvestor | Report as abusive


Don’t you think it possible that the Fed would have dropped its “for an extended period…” language from their last statement were it not for the crisis in the Euro zone.

I think they would like to remove that language to signal that their will be tightening near year end… but to do so with the Euro in freefall would have been akin to pouring gas on the already raging fire.

I do agree that while exports will get hurt low oil prices and low interest rates will be a net positive for the US.

As always love your stuff!

Posted by y2kurtus | Report as abusive

I can’t figure out what Tim Duy was smoking when he wrote what he did. Obviously something that blanks out reality.

In addition to hurting exports which will start off a chain reaction of lost jobs, less consumer spending and lower company profits, consumer spending in EU will go down and hurt the bottom line of several companies. This in turn could lead to more job cuts. A weaker Euro will also decrease investment in the US by Europeans. In addition a weak euro will likely slow down the chinese economy which will in turn likely slow down the Australian economy.

The only positive is that with a cheaper Euro I can finally plan the european vacation i’ve been putting off for several years.

Posted by dicktracy150 | Report as abusive

The ten year bond, which tagged 4% in early April, has fallen below 3.5% with the latest outbreak of Greece. In principle, it’s long term rates that will affect investment, not short term rates. As you note, that would benefit GDP numbers in the next few quarters; as the first commenter notes, to the extent that that implies investment in capital goods that would not otherwise get investment, it may be malinvestment, and we may reap more whirlwind from that down the road. If there are “animal spirit” reasons for current underinvestment, though, more investment from lower long-term rates might be more of a good thing than a bad thing, even in the long term.

Posted by dWj | Report as abusive

Even lower interest rates will not help us out of the crisis, nor will further declines in the housing market.

Posted by kaitlyn | Report as abusive

It would be good for short term but could be bad for long term ! I dont think that europe can be again at the same place where it was before crisis.I have solid reasons , first Asia is becoming more powerful in technology day by day. China and India are emerging as big economies, they will not letting their people to buy things from western countries. first of blance is coming to its place and ofcours europ will feel it more German cars will be exported you know even hard hit war country Pakistan has its own vihicle manufacturer.only those country will servive to gain thier current position who will be more advance in technology , Greece is not a country on the top list as you know ! American war has locked the door of mostly muslim countries , that is an other reason of crises . If you want to get your world more peaceful any economical strong enough to provide better food , just Love this world , feel the pain of others , do the right job . and invest worldwide without racism , that will ofcours give you peace of mind and you will be strong enough Inshallah.

Posted by Yaminmaher | Report as abusive