How the Crisis in Europe Affects Your Wallet

Europe is in crisis mode, and nobody seems to care.

Several countries have borrowed and spent much more than they’re able to pay back. Central among them in Greece, which is in danger of pulling out of Europe’s common currency, the Euro.

Greece badly needs a bailout, but European leaders sharply disagree about the best path forward. On one side is Germany, Europe’s bankroller, who swears by the austerity measures they’ve implemented in their own country since the recession began 5 years ago. On the other side is a growing number of leaders from other countries, who believe it’s time for a different solution to the region’s troubles.

But why does this matter to us here in North America? Aren’t they across the big pond, thousands of miles away?

Here’s something you may not have considered. Europe accounts for 21% of all US exports, according to the Office of the US Trade Representative. That means over one fifth of all goods and services produced in this country are purchased by someone in Europe. If European countries and citizens are faced with austerity, do you think they’ll continue to purchase at the same pace as they always have?

A slowdown in Europe directly affects our economic situation here. With Europe buying less, companies have less need for labor, so they don’t require as many employees. Up goes our unemployment rate. Investors lose confidence that Europe will be able to cover their obligations, so stocks move lower. Down goes your 401(k) balance.

All of this causes us to consume less here, which slows down economic activity, prolongs the recession and gives companies even less incentive to hire new employees.

Another interesting trend is that policymakers have become the primary market influencers. Investors are now reacting to their perceptions of policy changes rather than economic data like retail sales and corporate profits. Because governments around the world have intervened to such an extent in the financial markets, the economy is now more dependent than ever on elected officials.

If you weren’t aware of how intertwined the global economy is, you should be now. As nice as it might be, you can’t control what goes on in other countries. Heck, we can’t even control what happens in our own country. But there are some things you can do in your own life to help you ride out these difficult and uncertain times.

Reduce the amount of debt you carry. Debt is a chainsaw to your finances. It cripples your financial health, giving your little margin for error. It requires a portion of your resources every month and gives you nothing in return. It adds pressure to meet obligations and stress and heartache when you come up short. Do everything you can to eliminate the amount of debt in your life.

Build an emergency fund. I’ve written about this several times on this blog. You need a pile of cash (preferably not stashed in the freezer) that you can rely on in a pinch. Start with $1,000 in an online savings account. Then build it to one month of living expenses, then two months and so on. This is your insulation against the bumps in life.

Watch your spending. You can make a budget, track every penny that you spend, or even put your credit cards in a block of ice. Whatever works for you. The point is to think about each purchase and how it makes your life better.

Save for your future. If your employer offers a 401(k) with a match, you have no excuses about why you’re not participating. Contribute up to the match and put the rest into a Roth IRA. Even with the markets on a roller coaster, your best chance of beating inflation is a diversified, low-cost portfolio of stocks and bonds. My favorite are the target-date funds. If you’re not sure how much you should be saving, see this post.

Who knows what will happen in Europe. But one thing is certain – it’s time to get back to basics. Following these tips helps you insulate your finances from the drama that’s playing out in Europe.

Are you worried about the crisis in Europe? What are you doing to protect your finances?

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12 thoughts on “How the Crisis in Europe Affects Your Wallet

  1. US accounts for like 80% of Canadian exports or something crazy like that and we definitely didn’t get hit with the US financial crisis even a little bit as hard as the US did. We were affected but it wasn’t nearly as bad. But I think you are right in that it’s good to always be prepared!

      • The Canadian financial system was much better prepared to deal with the crisis of the last 5 years. The American banks took idiotic risks with the knowledge that if they failed the taxpayer would bail them out. We have a few big banks here that are truly too big to fail, and they need to be broken up.

        As for investing in Europe, now’s the time! Stocks are down from their highs and everybody else is running. If you have the basics above taken care of, I’d argue that now is the greatest opportunity to invest in Europe.

  2. As someone who is just getting more into investing, I am definitely concerned about what is going on in Europe. It has at least forced me to be a bit more cautious with my investing decisions. I know that is the countries like Greece or Spain default on all their loans, the markets are going to get hit hard. Here in Canada the housing market didn’t get affected much in the 2007-2009 mess, but many people sure saw their investment portfolios drop.

    • It’s good that you’re concerned, but I would advise against being too cautions with your investments. Especially if you’re young, you need exposure to the stock market to help your money grow over time. Bonds and savings accounts aren’t getting it done right now.

      • My concern is rather mild since I’ve never gone through those periods where my portfolio plummets. So I don’t think I’ll let that concern hold me back. Plus I had a chat with someone who had some really good advice on how to setup my portfolio to limit the risk and build a lot of stability.

  3. The situation in Europe is troublesome. Each of the possible solution carries their own set of bad news for the US. Anyone who doesn’t acknowledge how intertwined our global economy is now has got their head in the sand. Recessions have a way of shifting from one country to another being passed around like a rotten potato. I’m really surprised that gold is selling for higher right now with such unrest.

    • I agree! Well stated.

      I’m not sure about why gold prices aren’t higher either. People love buying gold when the world is in turmoil, and it can be a good idea if you buy early and limit your investment to 10% of your total portfolio. With prices at nearly $1600 an ounce, now’s not the time to buy.

  4. Funny how so many countries joined the bandwagon to be part of the Eurozone. The ‘one size fits all’ mentality just hasn’t worked though, and the Euro has probably caused as many problems as it has solved.

    • Hi Joyce! Thanks for stopping by. A big problem I see with the Euro is that the countries using it all have different rules governing their financial systems. They disagree about how much debt each country should be allowed to carry and who should accept liability for those debts in the event of a default. Until more agreement is reached, it will be very difficult to move forward.

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