How The Crisis In Europe Affects U.S. Consumers

photo: lpinseel

Talk about a Greek tragedy. Just when a happy ending was in sight for the economic downturn, a debt crisis that began several months ago  in one of the smallest European Union economies is threatening to spread throughout the continent – and, quite possibly, across the Atlantic.

That should come as no surprise, of course: we all saw the widespread repercussions of the U.S. mortgage meltdown. Banks throughout Europe and Asia, it turned out, had loaded up on our homegrown toxic mortgage assets (otherwise known as MBS, or mortgage-backed securities). Economies worldwide slumped. It took a concerted effort by the world’s leading economies and a massive bailout package in the U.S to contain the downfall.

In a painfully similar manner, the European Union has now announced its own bailout package of unprecedented proportions: nearly $1 trillion in loans available to European countries and the European Central Bank at the ready to purchase Euro-zone debt (that is, bonds issued by European governments and companies).  

While the moves have helped restore confidence in the markets for now, economists and market analysts are already questioning the sustainability of this move, calling it a short-term solution to a long-term problem.

As a consumer, you are probably thinking there’s very little for you to do but sit back and watch the play unfold. That’s not necessarily the case. Just like the Wall Street crisis of 2008 quickly spread to Main Street (or was it the other way around?), few American consumers today are entirely immune to Europe’s troubles.  In fact, you could even use them to your advantage. Here are some suggestions.

1. Euro down: Vacation plans looking up?

Watching the Euro’s steady appreciation has been painful for many travelers, making that European vacation all the more expensive each year or outright unaffordable.  The one sliver of “good” news coming out of the Greek crisis has been that your dollars can, at least temporarily, buy a few more Euros these days. On May 10, 1 Euro was worth $1.29 – 15% lower than the $1.51 you needed six months ago.

“If you are planning a European vacation this summer or even later this year, you have probably been focused on air travel prices and volcano activity,” says Lynn Ballou, a CFP and principal of Ballou Plum Wealth Advisors in Lafayette, Calif. “Instead, why not buy your Euros now?” Already, we are seeing the Euro rebound after Monday’s bailout announcement – this may be a good time to lock in a relatively low price.

2. Jittery stock market: An opportunity to buy?

It’s hard to remain calm when the stock market is racing up and down like an office tower elevator (remember “the crash of 2:45” last week?). We dare think we speak for everyone when we say that we never want to watch our 401(k) turn into a 201(k) again.

But instead of letting panic creep in at the sight of these rapid swings, try to remember the basic principle of investing is “buy low, sell high.” (Too many investors, unfortunately, do just the opposite.) “From an investment standpoint, it might be time to rebalance your portfolio,” Ballou says. Any time a specific asset class is harder hit than others – as is the case now with European stocks (or, broadly speaking, international stocks) – is a good time to consider buying more of that class in order to maintain an asset allocation appropriate for your risk tolerance and investment horizon. Now may be a good time to talk to your financial adviser (if you have one), or take a look at your overall investment picture.

3. Low consumer confidence: Reminder to sustain healthy spending habits

If anything good came out of the market crash of 2008, it was Americans’ long-overdue reassessment of their spending and saving habits. Suddenly, we realized living an unsustainable lifestyle on credit could lead to no good and, collectively at least, started paying off our credit cards and spending less. (See our “Coming Up For Air” infographic for the data behind those trends.)

Ironically, living beyond one’s means is why Europe is in trouble, too. “There is too much debt in the world and right now that problem is poking itself most obviously in the southern European economies,” says Hank Mulvihill, the founder and co-manager of the recently-launched Strategic Investing Long-Short Fund. “Regrettably, we’re going to deal with this for a long time. It’s simply not possible for those debts to be repaid.”

That is likely to translate into lower consumer confidence – both in Europe and on American soil – which is bad news for the economy. But when it comes to individual consumers, it may be a very welcome return to reality: one where we don’t spend money we don’t have and remember to save for a rainy day.