Will Europe Decouple?
There is simply no rational reason for believing that an American downturn will cause a European downturn. Exports to the U.S. are in fact only about 2% of Euro area GDP. And even that overstates the dependence as it compares apples to pears. Exports are expressed in gross terms while GDP is expressed in value added terms. This is to say, some of the inputs used to produce that exports is imported. I don't have an exact number for how big distortion this creates, but it is nevertheless clear that an apples to apples comparison would show an even smaller dependence.
So, even a dramatic decline in exports to the U.S., say in the magnitude of 25-30% would only reduce Euro area GDP by a few tenths of a percentage point.
A somewhat stronger argument for believing in recoupling rather than comes from financial markets. As is obvious to anyone who follows the U.S. and European stock markets, there is a strong link between them. Whenever one falls, the other usually follows. This link is to a large extent based on the fallacy of a strong connection in the real economy based on trade that I refuted above, but it might to some extent be a self-fulfilling prophecy. But while it is a real factor, it is implausible to be significant enough that irrational stock market sell-offs is sufficient to push the European economy into a recession, especially as most continental European counties have much lower stock market capitalization to GDP ratios than for example the U.K. or the U.S.
However, while the U.S. downturn will not by itself cause a European downturn, that does not necessarily imply that a European downturn will not happen. It probably will not happen, but it might. If it does, however, it will be the result of home grown factors.
More specifically, some parts of Europe have experienced similar stories of excessive credit growth as the United States, and this will likely cause busts in these countries. We have already seen how Ireland has slipped into a recession, and the Baltic states are showing worrying signs of stagflation with double digit inflation and a sharp deceleration in growth. Both Ireland and the Baltic states are by themselves far too small to cause a European wide downturn. More worrisome is that Spain and Britain show signs of potentially slipping into a recession. Spain and Britain have both experienced similar kinds of housing bubbles as America and Ireland, and while there is no evidence yet that either country has slipped into a recession, there is a real possibility that it might happen. And if it did, it would be very serious for the overall European economy. While the German economy looks quite sound and strong as a result of years of free market reforms and austerity, it could have problems adjusting to a possible significant downturn in Spain and Britain.
At this point, there exists a great amount iof uncertainty over how the Spanish and British economies will develop, as well as how the overall European economy will develop. They may or may not slip into a recession. If they do, this will certainly hurt the German economy significantly. However, the point here is that while Europe may perhaps experience a downturn, this will not be a result of the American downturn. Instead it will if it happens be a result of the negative after effects of local bubbles.