By David Berman
Despite upbeat economic news in the United States, Europe remains a wildcard for investors: Deep budget cuts there, along with a simmering sovereign-debt crisis and big concerns about Greece, is threatening to pull the euro zone into a recession, if it isn't there already. A contraction of any sort, but especially a deep one, is no doubt going to reverberate beyond Europe, but the extent is an open question.
Paul Krugman, writing on his New York Times blog, sounds surprisingly upbeat for someone who has often argued that austerity measures during economic slowdowns can be disastrous. He looked at state-by-state export levels to Europe, and found that they are surprisingly small: Overall, they average about 2 per cent of U.S. gross domestic product.
He argues that "it's still very questionable whether Europe's looming recession will actually have that much negative impact here. Decoupling didn't hold in 2008-2009, but that was an epochal disaster. This time might be different."
Yes, skeptics of skeptics will no doubt linger over those final five words and point out that, in fact, this time rarely is different. Maybe Mr. Krugman is beating them to the punch, pointing out a few caveats to his optimism. For one, low exports aren't the end-all of the U.S. relationship with Europe: There are also services to take into consideration, and they could increase the numbers by 25 per cent. As well, there is the chance of a Lehman-like event in Europe, where a big financial firm implodes and drags the region -- and perhaps large parts of the world -- into another financial crisis.
"And I should say that there is a long-standing puzzle concerning world business cycles: economies move in synch more than can easily be explained via concrete linkages in the form of exports," Mr. Krugman added.
Sure enough, those are weighty caveats. Still, the divergence of global stock markets implies that investors are with Mr. Krugman's initial observation. The Dow Jones industrial average on Friday hit its highest level since May, 2008 -- meaning that it has recovered entirely from last year's Europe-induced correction.
And though stocks are down on Monday in late-morning trading, with squabbling Greek policy makers raising alarms about Greece's financial health, the retreat is by no means severe: The Dow fell 43 points or 0.3 per cent. Either investors are sure that Greeks will come to their senses and make the necessary decisions to get the next round of bailout cash, or they are shrugging off the economic consequences of a euro zone member sliding into default.
Disclosure: None
