European Markets Sharply Lower, May Spill Over to U.S.

Apr 23, 2012 1:26pm

Austerity measures in European countries are under fire, but there are no easy choices for the debt crisis many large European economies are embroiled in.

As a result markets in Frankfurt and Paris closed down about 3 percent today.  London’s FTSE was down nearly 2 percent.

The fortunes of the cereal company Kellogg give us a sense of the impact Europe can have.  The company cut its earnings outlook today and the CEO said in a statement, “we faced more significant challenges in both Europe and in some categories in the U.S. than we expected.”  Fewer Frosted Flakes and Pop Tarts sold in Europe means the company stock is being hammered today, down more than 5 percent.

U.S. markets are also lower, though the Dow is off the worst of its lows of the day, down 136 points to 12,892.

This all feels a bit too familiar.  About this time last year the U.S. economic recovery began weakening and the European crisis began to negatively impact global markets.

Europe’s crisis can affect the U.S. because:

·       Europe is a major export market for U.S. goods.  A weak Europe means a diminishing market for U.S. goods.

·       A drop in the value of the euro will cause the value of the U.S. dollar to rise, making it harder for the U.S. to export goods.

·       U.S. banks are exposed to European banks.  Though U.S. banks can likely withstand potential losses there, they will still be affected by the negative financial environment, which adds to a reluctance to lend to U.S. consumers.

·       Of course 401(k)s and pension funds are negatively impacted when stock markets suffer.

Update on U.S. markets HERE

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