The Myth of Decoupling

Ordinary Europeans should not be fooled by arguments that Europe's economy has become "decoupled" from that of the US. Special interests in Europe would not be peddling such dubious pabulum if they felt confident about the economy’s future.

PALO ALTO, CALIF. -- The fact that America’s economy is slowing is bad news for Europeans, regardless of claims that Europe’s economy has successfully decoupled itself from the United States. Decoupling is an idea that is based on bad economics – and on some Europeans’ reluctance to accept the fact that Europe’s short but sweet economic expansion is also coming to an end.

True, the US market has become less important for European exports, while Asia’s trade significance for Europe has grown. So what? Trade is just one among the many linkages between the US and European economies that matter. In today’s inter-connected global economy, uncertainty about the US economic outlook increases one day, and Dutch consumer confidence, for example, takes a tumble the next.

The links between Europe and America are, frankly, much more complex than the advocates of decoupling appreciate. The US Federal Reserve, for example, is aggressively cutting interest rates to forestall a possible recession. As a consequence, the euro is rising not only against the US dollar, but also against Asian currencies, whose central banks intervene in foreign exchange markets to fix their currencies’ value against the dollar.

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