Readers Question: Effect of EU Crisis on US economy

Readers Question: If Britain’s economy gets hurt how will the Americans be affected?

A recession in the UK would have a negative impact on the US. Lower growth in the UK would cause lower consumer spending and therefore the US would experience a small fall in exports and therefore lower growth. However, exports to the UK, make up a relatively small % of US GDP, therefore on its own it wouldn’t derail the US economy. However, if a UK recession is part of a wider EU recession then the impact on the US economy would be much more serious. The US would see a decline in trade and there would be an adverse impact upon consumer and business confidence

A financial crisis in the UK would be more harmful for the US economy. The UK economy is relatively small as a % of the world economy, but the UK’s financial sector is one of the major financial centres. If the UK banking crisis deteriorated with fresh losses, this could contribute to a further decline in global liquidity. Banks would find it more difficult to lend and this could further depress growth. Many US companies and financial institutions have a stake in UK financial markets. If the UK stock market fell, it would have adverse consequences for the US.

Real Threat to the US Economy

The real threat to the US is a deterioration in the EU debt crisis which precipitated a double dip recession.

If Greece and one other country (like Portugal, Ireland or Spain) defaulted it could have very serious adverse consequences for global economy. For example, if the Irish government defaulted, it would cause significant losses for banks in other European countries. There would be another adverse shock to bank lending.

Also, any default would increase the pressure for other European countries to embark on more austerity – spending cuts and tax rises to try and reduce the budget deficit. However, EU countries would have to be cutting spending without recourse to any real alternative to promoting growth. This combination of spending cuts and debt crisis would lead to even lower growth across the EU. This would definitely affect the US economy in a negative way.

Impact on US bonds

A debt crisis in the UK or EU could cause even lower bond yields on US debt. If markets feared to hold EU debt they may switch to holding US treasury bonds for their perceived greater security. It is interesting to see that in recent months, bond yields on US debt have continued to fall to historic lows and bond holders prefer the ‘relative’ safety of US.

Overall, the UK has only a fairly limited impact on the US economy. There is a much bigger impact the other way, i.e. problems in US economy have an adverse impact on the UK economy.

However, if problems in the UK are related to problems in the EU economy it would be a serious problem for US economy.


  • How would recession in US affect UK and EU economy
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