There are some compelling arguments that where the European economy goes the world’s will follow. There are cases that say this is not true. Europe cannot be viewed as a whole, these troubling theories say. Problems in Greece do not mean trouble in Germany or France. These two healthy nations could flee the alliance and revert to their own currencies. That would leave the weaker nations on their own to be savaged by global institutional investors. Borrowing costs for these stragglers would go so high that default would be likely. Some investors and banks would take huge losses. Those may not be enough to cause a new credit crisis.
Some believe Europe is not the important region that it used to be. That is a false view. The EU is still larger than the US in GDP. China, America, and other large exporters would be deeply wounded financially by a slowing in the already weak economies in the region. New austerity measures and taxes might need to be pressed harder in nations which face defaults. Much of the region could be thrown back into deep recession.
The focus of global capital markets has oddly fallen on the debt of two regions. One is the strongest paper in the world–America’s. The other is the paper of the troubled EU countries. Investors are worried that Congress will not raise the debt cap which would put the US into a technical default on its sovereign paper. The other could crush the prospects of some large part of Europe. Europe’s problems are real. America’s are not, at least for the time being. That means the attention of the debt markets will turn to Europe again soon.
The idea of decoupled national economies has been a popular one for some time. It may always have been a hollow theory. It certainly is now. Europe is the large domino at the beginning of a line that could fall. The region has too many financial and trade ties to the rest of the world.
Douglas A. McIntyre
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