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UMSL Economist Sees Trouble Here — If Euro Collapses

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Euro coin

Euro coin

ST. LOUIS–(KMOX)–Look for trouble in the U.S. economy, but also some positive effects if Europe fails to take action to save its common currency — the euro.

The Chairman of the Department of Economics at the University of Missouri St. Louis, Professor David Rose, says three main impacts could be felt here, if the euro collapses:

**European capital floods the U.S. credit markets, lowering interest rates and hurting seniors who rely on interest-income investments.  But interest rates for home loans could go down.

**Collapsing euro would make dollar soar, making U.S. exports too expensive for Europe, leading to possible layoffs in U.S..

**Assets flooding into the U.S. could increase inflation in the future, but that same “hot money” could find its way into the U.S. stock market. 

Rose says the impact on exports could be felt quickly, if the euro falls sharply against the dollar.

“What this would do, then, is it would make the cost of American goods sold in Europe skyrocket,” Rose said, “That would crush U.S. export demand. This would reduce the demand for American labor, and obviously, that’s the last thing we want with our already high unemployment rate.”

While European leaders are working to save the euro, Rose says even the potential of them failing may cause investors to sell off euro-based investments.

“This flight from euro-denominated assets would flood our credit markets,” Rose said, “What that would do is drive interest rates down even further, and that would make life even harder on older Americans than it already is.”

Seniors would suffer a loss of earning potential for the interest-bearing accounts,  but the the cost of borrowing money to buy a house could go down, Rose says,

Measuring the inflation impact here of a collapsed euro may depend on whether the item is exportable or not.  Rose declined to speculate on how the euro tumbling might impact consumers staples such as a gallon of milk.  He does warn that an “increase in our monetary base”  from a flood of assets could sew the seeds for long term inflation.

“That is like a time bomb for future inflation,” Rose said, ” So, one thing you’ve got to worry about with a euro collapse is that the inflation will then get exported to us.”

Copyright KMOX

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