U.S. crisis hits Europe's economy most -- How to benefit

July 25, 2008

The U.S. economic crisis affects Europe's economy more than anywhere else in the world, according to the IMF's John Lipsky. That's because the euro has risen the most against the declining dollar, hurting exports from EU member countries. Asian countries have suffered less because the Chinese yuan continues to be controlled by the government.

As a result, EU factory orders are 4.4% lower than the year before, the biggest annual decrease since 2003, according to Eurostats. Other data supports a dimmer economic outlook for Europe:

• In France, consumer spending on manufactured goods was only 1% higher than the year before.
• In the U.K., industrial orders dropped sharply in July.
• In Italy, consumer confidence hit its lowest level since 1993.

The ECB has lowered GDP growth to 1.7% this year and 1.5% next year. slightly below projections of around 1.8% it issued in June. ECB president Jean-Claude Trichet said that the euro-zone economy would “trough” in the second and third quarters before staging a progressive recovery.

If the European Central Bank ( ECB ) would lower interest rates, it would help the euro decline against the dollar. However, the ECB has been too concerned about inflation, which has rising to 4% as a result of high oil prices. In fact, the bank increased rates to 4.25% in July, only making the euro stronger and the economy weaker. (Source: WSJ, Euro-Zone Factory Orders Fall as Outlook Dims, July 24, 2008)

What a slowing European economy means:

A high euro means more expensive vacations for Americans in Europe, as well as higher costs for imports from Europe. The good news is that it helps U.S. exporters to Europe. Unfortunately, the euro area only comprises 11% of total U.S. exports. (Source: U.S. Census, ytd as of May 2008)

Action steps:
Consult with your financial planner to determine if you need to shift some of your portfolio allocation away from Euro funds.

Read more articles on the European economy in European Union and Economic Evolution, a WorldMoneyWatch Top Ten Trend.

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