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Why You Should Care About What Happens in Europe

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Often, events that occur in some other part of the world do not seem relevant to us. For example, when we read about the European debt crisis and the problems in Greece, it’s all too easy to think of it as “their” problem and to not understand why we should care about what’s happening there. In fact, economic developments on that continent have a very real impact on our economy here at home, not to mention on our individual pocketbooks. Like it or not, economies across the globe are completely intertwined.

To understand, think of the world as your body, where everything functions interdependently and a problem in one area often affects another area. For example, if you twist your left leg and it swells up and is painful to use, you will probably compensate by leaning more heavily on your right leg. And so it is in the world. When another country experiences an economic crisis, the U.S. is inevitably affected.

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Here’s an over-simplified explanation of what happens and how it affects you: We lose money whenever we help another country with its debt because that country ends up paying us less on the debt than it originally agreed to repay, which has consequences for all of us. And, because we receive less on the dollars we invested in the country, not to mention not as much revenue from interest on our loans to it, there is less money injected into our economy—money that could have been used to make loans to you and me. Furthermore, as subsidiaries of the lending institutions that invested in the country, credit card companies also pull back on their card offers because their ability to extend credit to consumers has been diminished. It’s a matter of simple economics—if lenders don’t have sufficient money, they will restrict the amount and the terms of credit they offer us.

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Here is another way to look at the problem. Let’s assume that you loan your friend $100 and she agrees to pay you back $110 (inclusive of interest) in one year. Six months later however, she files for bankruptcy and asks you to accept as payment in full on your loan considerably less than you expected to receive. As a result, you may have to use a credit card or line of credit to cover all of your expenses, and/or you may decide that you need to cut back on your spending or do without some of the things you planned on purchasing with the money you had expected to receive from your friend. In other words, the financial problems of your friend have a very real affect on your own finances. And so it is with the problems in Europe and our economy here at home. Now that countries like Greece, Ireland, Portugal, Hungary and Italy have become leaky ships bobbing on the waters of world credit and the U.S. is helping them, there is less credit available to us. And as a result, we must either cut back on our spending or pay more for the credit we get. Yes, the world is truly in our wallets!

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Image: Andres Rueda, via Flickr

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