Photo (cc) by MPD01605
Although it’s not getting a lot of press here, Europe is in serious economic trouble. The continent never seemed to fully recover from the global economic downturn we all experienced seven years ago – that would be the downturn that decimated your 401(k) balance, remember?
Greece, Cyprus, Finland and Italy slipped back into recession this year, and analysts say the ongoing conflict in Ukraine could put the entire continent into an economic tailspin.
Who cares, you may say.
Well, you might, if it affects your job and your investments.
Overseas recession could impact U.S. recovery
Since exiting the Great Recession in 2009, the U.S. economy seems to have been humming along slowly but steadily. Unemployment is at 6.1 percent, down from a high of 10 percent in October 2009. Meanwhile, housing prices have climbed 10.9 percent in the past year.
However, the U.S. is not an island, and a European recession could impact our recovery and growth if trade slows with overseas partners. Although a European recession could be bad on its own, the ongoing events involving Russia and Ukraine could make it much, much worse.
In the event you’ve been too preoccupied with “Game of Thrones” to pay attention to world events, here’s the short version: Ukrainians overthrew their pro-Russian government, ethnic Russians living in a part of the country called Crimea declared their allegiance to Moscow, and now pro-Russian rebels are fighting with the Ukrainian military for control of the entire country.
You may remember that a Malaysian aircraft full of largely Dutch passengers got caught in the middle and was shot down in Ukrainian airspace, as if the loss of life on the ground weren’t enough.
Anyway, the West is quite certain the rebels are fighting with support from Russian troops and supplies, a claim Russian President Vladimir Putin denies. As a result of Western suspicions, sanctions have been issued against Russia. While those are still relatively minor, the issuance of new sanctions, particularly those that could impact the sale of Russian oil on the global marketplace, could have serious ramifications worldwide.
Reuters interviewed Mohamed El-Erian, the chief economic adviser at Allianz SE, about the situation last week. It reported:
El-Erian said just “one or at most two” more rounds of sanctions and counter sanctions between Russia and the West would likely push Europe into recession. That’s especially true if Russia cuts energy supplies during the coming winter heating season.
New Republican wrote in March about the possibility of sanctions leading to an energy shortage in Europe, which could trigger much higher energy prices and damage the U.S. economy as well.
Here’s what Moody’s Analytics chief economist Mark Zandi said in that article:
The worst-case scenario could be very dark — surging energy prices, crumbling stock prices, and much weaker trade and foreign direct investment. The timing is bad given that the U.S. economy appears set to finally kick into a higher gear. In this scenario, the U.S. economy would at best remain … stuck in the slow growth environment that has prevailed since the recovery began.
Why Europe matters to the U.S.
For those of us in the United States, this matters for several reasons, not the least of which is that the European Union is the second largest economy in the world. It’s also our largest trading partner, importing $471 billion worth of U.S. goods and services in 2013. The Office of the U.S. Trade Representative says our trade with the EU was directly responsible for about 6.8 million jobs in 2010.
Obviously, given those figures, a European recession has the potential to affect U.S. businesses and, in turn, U.S. jobs. It also has the potential to impact stocks, and don’t forget that money from your 401(k) and IRA may be invested in the stock market, too. If the global economy tanks and the stock markets go for a dive, they may take your retirement fund balance along for the ride.
What can you do?
All this brings us to the question that is probably on your mind: What can we do about it? Unfortunately, not much … at least as far the European recession is concerned.
However, we can be smart about our investments and retirement funds. We certainly don’t advise pulling your money out of the market and hiding it under your mattress. We do suggest you take a look at where your money is invested and consider whether it’s appropriately allocated and diversified.
For example, if you have a large percentage of your retirement savings in European-heavy funds (those will often, but not always, have Europe or European in the fund name), you may want to talk to your financial adviser about whether some of those dollars should be moved.
But it’s not simply European stocks you should consider. A serious European recession has the potential to affect markets across the world. Instead of only reviewing overseas funds, look at your whole portfolio and consider your overall risk. Do you have an appropriate balance of stocks and bonds? Or are you too heavily invested in a particular industry or single fund? A pro can help you sort out what’s right for your needs. In the meantime, read this article on the three steps to a perfect portfolio.
European economic woes may be out of our hands, but our investments and retirement savings are not. Keeping an eye on world events and responding appropriately is one hallmark of a savvy investor. Be that savvy investor.