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Q&A: Falling euro is mixed bag for U.S.

WASHINGTON — The rapid slide in value of the common European currency known as the euro continues to rattle global investors amid signs that problems on the other side of the Atlantic could spread and infect other economies, even slowing growth in the United States.

The problems in Europe stem from having a single currency in 16 nations with widely varying levels of economic health and debt. Not even the recent trillion-dollar bailout stemmed concerns, which range from slower growth to fears of an outright crumbling of the European Union.

Here are some answers to questions about why problems in Europe offer Americans both risks and opportunities.

Doesn't the euro's drop against the dollar make it cheaper to travel there?

Yes, for ordinary Americans with the means to travel abroad, Europe looks like it will be on sale this summer.

On Tuesday, the euro was worth $1.23, well below a peak of $1.60 in late 2007, and analysts are talking about the real chance of equal value between the euro and the dollar.

What about neighboring countries?

England, a popular tourist destination that doesn't use the euro, also has seen a steep drop in the value of its currency, the pound, vs. the U.S. dollar. The British pound now trades at $1.44, well off the high of $2 in July 2008.

Any other benefits for ordinary Americans?

Oil prices are falling sharply, and that should be felt at the pump in the coming weeks.

Aren't cheap European travel and cheaper gas good for the United States?

It's good for those who travel there, but the slide in the euro and pound make U.S. exports more expensive in the global marketplace relative to products from England and the European Union. More troubling is the reason why these currencies are dropping — too much debt and too little economic growth. There's bad news sinking in with investors that European economies have generous social safety nets that are proving very costly to maintain. Citizens there don't want to pay more in taxes, but they don't want to lose government benefits to which they've grown accustomed.

Why are problems in Europe our problem?

The days of isolationism are long over, and in an interconnected global economy, problems in one major driver of global growth, Europe, are felt everywhere, especially in the United States as it limps back into an expansion mode.

To head off its widening financial crisis, the European Central Bank has pledged up to $1 trillion in lending, and governments could be borrowing to get out of problems caused by borrowing. Additionally, European countries are under pressure to impose bitter medicine on their economies: tax increases and spending cuts on social welfare programs.

Optimism at Federal Reserve

LONDON — Federal Reserve Bank of St. Louis president James Bullard said Tuesday that the European debt crisis probably won't derail the U.S. or global economic recoveries. "There are several reasons why this new threat to global recovery will probably fall short of becoming a worldwide recessionary shock," Bullard said in a speech in London. "Sovereign debt crises have been with us for many, many years. There is nothing intrinsic about such crises that they need to become important shocks to the broader, global macroeconomy. … Recovery (in the U.S.) generally remains on track," Bullard said.

Bloomberg News

Q&A: Falling euro is mixed bag for U.S. 05/25/10 [Last modified: Tuesday, May 25, 2010 7:38pm]
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