Schadenfreude is the act of deriving pleasure from observing the misfortunes of others. It helps to explain our enjoyment of tragedy, comedy and reality TV. It's also a convenient emotion to access when we read about economies that are in worse shape than ours. We would be well-advised, however, not to submit to the urge to feel superior to the slow-motion train wreck that is the European Union. What's happening in that dysfunctional coalition promises to have severe consequences for U.S. exporters.

The EU is in the midst of a sovereign debt crisis, the resolution of which is far from clear. Fears of the collapse of the Greek economy were lessened somewhat by the conclusion of a debt deal which included a second bailout fund of around $171.5bn. But public and political support for that solution remains shaky. And a far worse crisis is looming in the much larger economies of Spain and Italy.

The cost of servicing Spain's debt has been rising as the value of the euro has dropped. (The number did fall recently with Spain's successful sale of $5.6bn worth of 12- and 18-month treasury bills, although there remains much uncertainty over the country's long-term economic prospects.) In response, many investors are bailing out of risky EU positions in favor of U.S. assets, causing the relatively safe dollar to appreciate against the euro.

For the U.S., the timing couldn't be worse. Recently we've seen a record surge in exports, accounting for roughly half the nation's economic growth since the Great Recession of 2008. Now, thanks to a stronger dollar, that trend threatens to reverse itself, further fueling the chronic U.S. trade deficit. Bottom line: American goods will cost more in foreign markets, and be less competitive with those from Europe.

In June and July of this year, the euro was trading below $1.27, versus an average of $1.40 in 2011, according to a recent report from the research firm IBISWorld Inc. The report charts a 21-percent drop in the currency from its 2008 peak, forcing up borrowing costs for heavily indebted countries such as Greece, Ireland, Portugal and Spain.

The value of the dollar versus the euro rests on the financial stability of the 17-member eurozone, according to Brian Bueno, lead research analyst and co-author of the IBISWorld study. "Further financial turmoil in the region could send the euro crashing relative to the dollar," he says. "Beyond the overall economic implications of such a turn of events, an appreciating U.S. dollar could wreak havoc on U.S. industries that are heavily dependent on, or threatened by, trade with Europe."

The link is inescapable. As Bueno points out, a 4.6-percent drop in the strength of the euro in 2010 was accompanied by a 27.9-percent surge in the U.S.'s trade deficit with its 15 largest EU trading partners, to $93.3bn. (Total U.S. exports to the EU15 are expected to reach $236.8bn this year, barring any further economic disasters.) Between 2004 and 2012, the report says, "the trade deficit between the United States and the EU15 has moved largely in line with the euro and dollar exchange rate."

Despite continuing economic uncertainty in Greece, Bueno views Spain as the most immediate source of danger, thanks to its 8.7-percent share of EU gross domestic product, the poor state of its banking sector, and high unemployment rate. Spain's failure to service its debt would have a serious ripple effect on other EU economies, not to mention the U.S.

IBISWorld checks off a number of sectors that would be affected by an even stronger dollar and weaker euro. U.S. industries that are heavily dependent on exports to Europe include copper, zinc and lead refining; coal mining; plastic and resin manufacturing, and computer and peripherals manufacturing.

Domestic manufacturers that would be hurt by a wave of cheaper European imports include iron and steel, power tools and other general purpose machinery, jewelry and metal-working machinery.

Finally, there are the industries that would suffer a double whammy because they are affected both by competition and demand: pharmaceuticals, turbines and engines, semiconductors and electronic components, and automobiles.

Interesting that IBISWorld's list of vulnerable industries includes computers and related equipment, which according to conventional knowledge are all being made abroad. As Bueno notes, however, not everything has been offshored to cheap manufacturers in China. In 2012, the U.S. expects to export $21.7bn worth of servers, computers and peripherals, of which nearly 22 percent, or $4.7bn, will be sold to the EU15 countries. Compare that to the $15.1bn of product shipped to the region in 2000, and you see a trend that has gone steadily downward for more than a decade.

It's ironic that we complain to China about the weak yuan, while ignoring a similar situation brewing in Europe. And while the two events are occurring for different reasons - European finance ministers aren't deliberately manipulating their currency - they have the same impact on the health of American industry. What's more, the European dilemma is much tougher to solve, given the many factors that are undermining EU stability, including the absence of political union, lack of labor-force mobility and wide disparity between member economies.

Oddly enough, Bueno is optimistic that Europe will solve its economic woes without breaking up the EU or the eurozone. In the short term, however, if U.S. exports stall due to a stronger dollar, the ailing American economy could find itself even further away from full recovery.

- Robert J. Bowman, SupplyChainBrain

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