February 18, 2010 Investment Perspectives — Global

Limited spillover to the US. The European sovereign debt crisis may net to slower European growth from an already- tepid starting point. Although the European Council of gov-
ernment leaders has pledged “to take determined and coordi- nated action, if needed, to safeguard financial stability in the euro area as a whole,” that backstop is unlikely to immunize the eurozone economies completely. The crisis likely will tighten financial conditions and promote fiscal austerity, consisting of increased taxes and lower public-sector demand.

And the crisis hits a still-tender euro area economy, which we have expected to advance just 1.2% in 2010. Incoming data showing that growth rose just 0.1% in Q4 09 and a poor start
to Q1 10 underscore the downside risks.

The impact of even dramatically slower growth in Europe would only trim US growth fractionally; Asia is far more important for the US outlook. However, the European sovereign crisis does create a tail risk for US growth and markets: If the crisis spills over into broader risk aversion and a drying up of liquidity — the functional equivalent of the US subprime crisis — the consequences could be more dire. At the least, these unknown risks make us more cautious about risky ass

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