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Fallout From Europe Lands On U.S. Markets

JOHN YDSTIE, host: Stock markets open again tomorrow and those of you who have investments are probably steeling your nerves. For several weeks now, we've seen some wild gyrations. This past week was no exception. For the week, the Dow lost 5 percent and is down 14 percent in the last month. Here to discuss why and to discuss some implications we can draw from the volatility is NPR's Yuki Noguchi. Hi, Yuki.


YDSTIE: So, it seems that European leaders still haven't come up with a plan that would allow them to put the debt crisis behind them and that kept European markets unsettled, but why the big fallout in the United States?

NOGUCHI: Well, you know, the European illness is very contagious to our systems because we're interlocked in so many different ways. I mean, for example, U.S. banks have investments in French and German banks. And our banks also lend to their banks. Our mutual funds also lend to their banks. And to a lesser extent, our banks also own sovereign debt in those troubled countries. But part of the problem is no one really knows how big this amount is that we have on the line, and in the absence of information, investors grow nervous.

YDSTIE: Well, German Chancellor Angela Merkel and French President Sarkozy did meet this week and they agreed to increase cooperation within the European Union on economic issues, but apparently that didn't end the problems. So, is there any calm in sight?

NOGUCHI: Not that I can see because it's still not clear how the troubled countries emerge from those troubles. I mean, you know, the markets were clearly hoping for more than what those leaders announced on Tuesday and investors didn't hear anything to convince them that things might get better. Also, you know, Europe isn't the only one of our problems. There's also our own economy, which is looking increasingly bad.

YDSTIE: Oh, that's right. There's a report this week that showed manufacturing activity in the Mid-Atlantic states has plummeted actually, home sales are down and that high unemployment rate isn't getting any better. But the economy has been in a weak patch for some time. So, I guess the question is what's new?

NOGUCHI: Well, you know, we used to speak of it as a soft patch, as something temporary, but these past few weeks has been a real blow to confidence. And what you have is that banks are getting nervous again because of their exposure in Europe. And, you know, what might be worse is that you're having sort of a general slowdown. And so that means that the growth prospects for those banks just took another hit. You know, U.S. and Europe are both talking about austerity measures, which, you know, means less spending and less trade and that certainly doesn't help the unemployment problem either.

YDSTIE: And now we're hearing a lot of people say there's a greater chance we may slip back into recession.

NOGUCHI: You know, about a month ago I was talking to economists and I'd ask them this question and they'd say, no, the latter half of this year is going to get better. But just in the last two weeks, I'm hearing something different. They're talking about a higher chance of falling into recession. And if that's the case, John, Congress and the Federal Reserve do not have a lot of options left that they haven't already been tried.

YDSTIE: Well, I guess that means we better cross our fingers.

NOGUCHI: I guess.

YDSTIE: NPR economics correspondent Yuki Noguchi. Thanks very much.

NOGUCHI: Thank you, John. Transcript provided by NPR, Copyright NPR.