Europeans to Replace Americans as Consumers of Choice?

The European Union has broken another record. In June, unemployment in the 12 nations that use the euro fell to its lowest level since the EU’s statistical agency started keeping records in 1998 (abc News, August 1). Although this may be good news for Europeans, it may not be so good for Americans.

An important shift within the global economy is taking place: Japanese and European consumers and companies, for the first time in years, have started spending again. The March 20 Wall Street Journal explained the significance of this shift: “[T]he re-emergence of spending in those nations has implications far beyond financial markets. For one thing, it means that the world might be less dependent on the American consumer, whose willingness to borrow and spend has been a primary driver of world growth for the past five years” (emphasis ours).

European and Asian consumption replacing that of the U.S. could have huge implications for Americans, because if China, Japan and other exporting countries no longer depend on the U.S. consumer to purchase their goods, they won’t need to buy U.S. Treasuries to prop up the dollar.

So far, Americans have been able to avoid the consequences of living beyond their means because Asian nations, especially China and Japan, have chosen to willingly lend money to the U.S. To this point, this policy has benefited those nations: By readily buying up U.S. Treasuries, Asian nations have kept the value of the dollar high and the value of their currencies relatively lower. Thus, American consumers have been able to purchase more Asian goods.

But now things are changing. As America’s massive debts have increased, propping up the dollar in this way has become a greater credit risk. Foreign nations already hold hundreds of billions of dollars’ worth of U.S. debt, and they seem increasingly reluctant to keep financing America’s profligate spending habits.

Today, as the Wall Street Journal implied, Europe is finally starting to rise from years of slow economic growth. Unfortunately for America, if Europeans really do replace the U.S. as the consumers of choice, support for the dollar may start drying up—and that probably means higher interest rates, a weaker dollar, or both. Since so much of America’s economy in recent years has been based on rising housing prices and consumer spending, that is not good news for the U.S. economy.