The European sovereign debt crisis should be coming to a head during the first half of 2012, and how Europe handles the crisis has large implications for the U.S. economy, particularly the freight environment. The eurozone (the 17 countries within the European Union that have adopted the euro as their currency) has more than 600 billion euros of debt maturing in 2012 and about 40% maturing in the first four months of 2012.
Eurozone countries need to increase investor confidence to support purchases of eurozone debt, in particular the debt of Portugal, Italy, Ireland, Greece and Spain. If that doesn't happen, some members of the eurozone will not be able to afford to refinance their debt in 2012. This would have large implications for the global financial system. What is the best-case scenario? Europe falls into a recession but contains the sovereign debt crisis, thereby preventing a global credit crunch.
A European recession would slow the growth rate of U.S. exports, causing freight volumes through the manufacturing segment of the supply chain to decelerate. This would not significantly harm the U.S. financial system, so credit remains available to support higher consumer and business spending resulting in expanding freight volumes.
What is the worst-case scenario? The euro collapses and eurozone countries re-establish their previous currencies, resulting in havoc throughout the financial system. Failure of European financial systems could result in a government bailout needed to prevent a financial system collapse, similar to what happened in the U.S. Financial havoc in the global financial system would result in a global credit crunch that would disrupt the flow of trade, triggering a global recession.
Since nearly 21% of U.S. exports are sent to European Union countries, a European recession will slow the pace of U.S. exports. But a global recession would result in steep decreases in U.S. exports.
During the previous global financial crisis, U.S. exports decreased at seasonally adjusted annual rates of 23.4% and 32.8% in the fourth quarter of 2008 and first quarter of 2009, respectively, causing industrial production to decrease at seasonally adjusted annual rates of 16.7% and 20.4%, respectively. How successful Europe is in handling the sovereign debt crisis has large implications on the U.S. freight environment for this year.
The European sovereign debt crisis has been ongoing for more than two years, but to date it has had a marginal impact on the U.S. freight environment. So why does it have large implications for the U.S. freight environment in 2012?
The European crisis began with Greece, which is a relatively small country. Ireland, also a relatively small country, then followed. But what started in those small countries has now spread to larger economies such as Spain and Italy, and has recently started affecting the largest economies in Europe — France and Germany.
To date, the European Union has been able to contain the sovereign debt crisis, but the policies adopted with Greece and Ireland are no longer applicable since the costs of containing the crisis have increased substantially as larger economies weakened.
The European Union is in the process of adopting new policies to contain the sovereign debt crisis, but this is a difficult process due to the large number of countries that make up the European Union.
In the U.S., the “Super Committee,” which was composed of Democrats and Republicans tasked with reducing the budget deficit, could not agree on the policies to accomplish that goal. Now imagine how likely it is that 17 member states will come to agreement on a strategy to solve Europe's sovereign debt crisis. It's a very difficult political process.
In conclusion, how much of a risk is this crisis to the U.S. freight environment this year? Well, it all hinges on how successful Europe is in preventing a global credit crunch.
Commercial Motor Vehicle Consulting publishes the monthly newsletter “Visibility of the Supply Chain” for general freight carriers. To order a copy, contact Chris Brady of CMVC at [email protected] or 516-869-5954.