NAFCU Services Blog

Jan 31, 2012 by Evan Shelan

All Eyes on Europe in 2012

Guest post written by Evan Shelan, CEO,

In 2012, Europe may become one of the best geo-political barometers to determine future economic growth in the United States. Europe’s woes may negatively impact the credit union’s business model as Europe’s sovereign debt escalates.

As The ECB continues to focus on the short-term issues of Europe, such as monetary policy, the real issue at large is each country's fiscal responsibilities. Watch for the European Central Bank (ECB) to continue drawing the line with Quantitative Easing (QE). The ECB is willing to support banks by injecting short-term liquidity, but unwilling to support governments and their excess borrowing.

Without the ECB solving Europe's sovereign debt issue, world markets may become negatively impacted in 2012. It is advisable for credit unions to begin devising contingency plans in the event any one of the below economic irregularities occur:

1. A Dropping Euro

Watch for the Euro to drop below 1.20 levels vs. the U.S. Dollar. A downward spiral will result in export prices escalating 25% from 2011 peak euro levels. A stronger dollar may result in possible layoffs in the U.S. due to higher prices and slower product demand. With unemployment rising to even greater heights, how will a weak euro/strong dollar scenario affect your credit union and its members paying down debt?

2. Sovereign default

Should one or more countries enter into default, Europe may easily go into a depression causing systemic repercussions in the United States, Asia, and the rest of the world. To avoid such action, watch for the United States to continue putting pressure on the ECB to bail out countries in need prior to collapse. In the event the ECB continues to ignore fiscal policy, watch for the U.S. to bail out Europe to prevent systemic failure. What are the repercussions to the U.S. economy in the event the United States elects to bail out Europe? Conversely, what are the repercussions to the U.S. economy should the ECB continue to administer monetary policy?

3.  Countries exiting the Euro

Recent talks have confirmed that weaker European countries including Greece are in contingency mode to exit the Euro. In the event an exit occurs, will it be done in a disorderly or an orderly fashion? We can only hope for an orderly exit. By an orderly exit countries should continue to accept Euros for one year while new national currencies are being introduced. A disorderly exit may freeze capital from businesses depositing large sums of Euros in foreign accounts, thus causing a systemic disruption.

4. Possible market correction

Watch world markets to continue reacting negatively towards the ECBs blind-eye bailing out countries that are in-need. How will a 25% or greater market correction affect your credit union and its members?

Do some financial modeling to determine how this affects your members with significant equity portfolios or retirement accounts weighted towards equities, and also what this means for any income streams derived from those members. Continue to exercise caution prior to committing to certain capital expenditures, or at the least stress test for another dip in the economy before full recovery.

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