Don't bet on decoupling: why a U.S. slowdown is bad news for Europe.

• Author: Krauss, Melvyn

The fact that the U.S. economy is slowing is bad news for Europeans no matter what claims are made that Europe's economy has successfully decoupled from that of the United States. Decoupling is a silly idea, based on bad economics--and on some Europeans' reluctance to accept the fact that Europe's short but sweet economic expansion is coming to an end.

Yes, the U.S. market has become less important for European exports, while Asia's trade significance for Europe has grown. So what? Trade is but one of many linkages between the U.S. and European economies that matter. In today's inter-connected global economy, uncertainty about the U.S. 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 Federal Reserve, for example, is aggressively cutting interest rates in the United States to forestall a possible recession. As a consequence, the euro is rising not only against the U.S. dollar--it also is rising against the Asian currencies, whose central banks intervene in the foreign exchange markets to fix the value of their currencies against the dollar.

This damages European exports to both the United States and Asia. Reduced European dependence on the U.S. export market can hardly protect Europe from the effects of the U.S. economic slowdown if the euro appreciates as much against the Asian currencies as against the dollar.

The decoupling argument also assumes that recession in America has no effect on the Asians. This is nonsense. For example, China's commerce ministry recently warned that a slowing U.S. economy would trigger a drop in Chinese exports that would mark a turning point for China's rapid economic growth. Asian income certainly will slow if Asians export less to the United States--and this in turn will reduce Asian imports from Europe.

Thus, the U.S. slowdown affects European exports in two ways. It has an indirect effect on European exports to Asia, which can be sizeable because the U.S. market is so important for Asian exports. And it has a direct impact on European exports to the United States.

Even in the case where the direct effect is small--the decoupling assumption--the U.S. slowdown still can have a substantial net impact on European exports because of its indirect effect on Asian imports from Europe.

Europeans must resist the temptation to think they are...