Indiana State economist: U.S. cannot change or escape economic malaise in Europe

By: ISU Communications and Marketing Staff, ISU Communications and Marketing Staff
August 8, 2011

Economic thrashings battering Europe will continue churning the economy of the U.S., which is powerless to affect the situation, said a public policy economist at Indiana State University.

Several nations in the eurozone, which is the group of European Union countries utilizing the euro as currency, are at risk of default because of their sovereign debt. Eurozone member Greece has already received bailouts in an attempt to stave off default, while fellow members Portugal, Italy and Spain are appearing more precarious, said Robert Guell, an economics professor at ISU. The uncertainty of the eurozone's stability, which he noted contributed to recent stock selloffs following the recent debt ceiling deal, will continue to influence the economic recovery in the U.S., he said.

"There's nothing the U.S. can do to solve, resolve or even contribute to the financial health of the eurozone," Guell said. "We are merely spectators in that circumstance, and there's not a great deal we can do to insulate ourselves from the effects. The only thing we can do is take a serious look at our own fiscal circumstances to make sure that we don't follow them into" a monetary crisis.

The United States currently has publicly held debt equal to 70 percent of the nation's gross domestic product, said Guell, who pointed out that when a country reaches 90 percent of public debt to GDP, it has "serious economic growth consequences."

"Europe is there. We're not," Guell said. "We're within five years at present spending pace to get there."

Since Italy, Spain and Portugal are at greater risk for default, because of their debts, the interest rates on funding they would borrow to help pay bills are higher than in the past, Guell said.

"It's just like a family that is drowning in debt and they get a worse credit rating, which means the interest rates they're going to be paying on that rise," he said, "which makes it almost" impossible to repay the debt.

Several eurozone countries first got into trouble when they realized that the euro allowed them to borrow at lower rates than they could with their previous currencies, Guell said. They continued to borrow at rates that led to the difficulties they are facing today; Italy, Guell points out, already had publicly held debt that was more than 100 percent of its GDP before the 2008 economic collapse.

More investors have shifted their money to American treasury bonds because of all the uncertainty in Europe. Though that might help the U.S. economy, Guell said that the decreased standard of living in some European countries will cause a decrease in American exports sold to the continent, which will hurt the U.S. economy.

"It is probably that latter effect that will overwhelm the former effect," he added.

Guell was a speaker at the annual Groundhog Day Economic Forecast at ISU in February. During his speech, he predicted that the economy would slowly add jobs through the course of the year. He realized Friday that his forecast was more optimistic than it should have been, though it was still fairly gloomy.

"I am not suggesting that a recession is a certainty," he added, "but very slow growth to muddling along is my guess as to where we're headed in the next year, year and a half."

Guell estimates the chances of at least one European nation defaulting at "greater than 50 percent," which would add increased pressure on economic struggles that existed since before President Barack Obama was elected in 2008.

"It is unfair, but it is true, that presidents are often held responsible for things that are not their fault and they could not have prevented and couldn't have fixed," Guell said, "and this president will find that he will be held responsible if the economy were to dip into another recession as a result of what is going on in Europe."

Photo: http://isuphoto.smugmug.com/Other/2011-Groundhog-Day-economic/020811groundhogday-0656/1181579764_BoAgp-L.jpg (ISU/Tony Campbell)
Robert Guell, professor of economics at Indiana State University, speaks during the Groundhog Day Economic Forecast event in February.

Contact: Robert Guell, professor of economics, Indiana State University, 812-237-2169 or robert.guell@indstate.edu.

Writer: Austin Arceo, assistant director of media relations, Office of Communications and Marketing, Indiana State University, 812-237-3790 or austin.arceo-negrich@indstate.edu.