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Recession In Europe Would Hit Utah, South Carolina, West Virginia Hardest: Report

Exports United States Europe Crisis

Posted: 11/14/11 07:51 PM ET

As fears grow that Europe will slip into a recession amid growing financial problems, some U.S. states are more at risk of feeling the repercussions on this of the Atlantic.

Utah, South Carolina, West Virginia and other states that heavily rely on exporting commodities would be most harmed by a recession in Europe, according to a new study by Wells Fargo Securities, though all states would be impacted if a recession in Europe became severe.

"We don't think it's enough to pull us into recession, but exports have been one of the lone bright spots in our economy," said Mark Vitner, senior economist at Wells Fargo Securities who co-authored the report.

Exports to Europe make up about 22 percent of all U.S. exports, but that percentage is much higher in certain states, according to Wells Fargo. In Utah, which has an economy that relies on selling gold and silver produced in nearby states, European exports comprise 46 percent of all exports and 5.6 percent of the state's economic output. In South Carolina, an automobile manufacturing hub, European exports make up 4.1 percent of the economy. In West Virginia, a major coal exporter, they comprise 3.9 percent of the economy.

States that depend less on commodities production are less dependent on Europe's economic health. But a recession in Europe could have a ripple effect the world over, slowing demand for U.S. goods from other countries. That could spell trouble for the larger U.S. economy.

Although the top four trade recipients of U.S. exports are outside of Europe, European countries still account for a significant portion of U.S. trade. Eight of the U.S.'s top 30 trade partners, according to the Department of Commerce, are European countries. Still lower demand for exports alone would not necessarily plunge the U.S. into a recession, since exports account for just 11 percent of the U.S. economy, according to the World Bank.

But slow growth in Europe has already restrained U.S. economic growth, according to Vitner. He said U.S. economic growth would have been 2.5 percent in 2012 -- in contrast to Wells Fargo's current prediction of 2.1 percent -- if the European economy was growing at a healthy pace.

And the risk to the U.S. isn't limited to exports.

If European financial institutions start to fail, U.S. banks could be at risk. Though U.S. banks have loaned just $36.2 billion to the five European governments that are greatest risk of default -- Greece, Ireland, Portugal, Spain and Italy -- they have loaned $60.6 billion to banks in those five countries and $275.8 billion to banks in Germany and France, which hold a large amount of troubled European sovereign debt on their books, according to data from the Bank for International Settlements.

American banks also have been selling more insurance on European debt in case of defaults by European governments, banks or businesses, according to Bloomberg News. The guarantees rose 18 percent in the first half of 2011 to $518 billion, according to data from the Bank for International Settlements cited by Bloomberg.

A credit freeze resulting from a financial crisis in Europe could have a larger and more immediate impact on the U.S. economy than the slowdown in European, said Gary Burtless, an economist at the Brookings Institution. For example: A freeze in lending would make the credit arrangements necessary for trade difficult to access, he said, hurting American exports in Europe.

If European financial institutions start to fail, Burtless said, European investors "just [wouldn't] know what their assets look like." And that loss of confidence, he warned, could easily spread to investors in the United States.

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