Americans shouldn’t get smug about Europe’s woes
The United States is a great distance from Greece and its economy is moving in a better direction. But the subprime crisis showed how fast and how far local financial problems can spread. If the euro zone gets into real trouble, the United States may be a safe-ish haven, but can’t hope to escape unscathed.
American investors got a sampling this week of what further deterioration in the euro zone could taste like. On the good side, investors rushed into perceived harbors – the dollar and Uncle Sam’s own debt. On the bad side, the swoon in prices of American shares and corporate debt indicated the long reach of a foreign crisis.
Looking forward, an encumbered euro zone economy isn’t good news for global growth, an essential ingredient in the still developing U.S. economic recovery. A new European recession would slow demand for American exports, which would be less competitive in any case, thanks to the crisis-strengthened dollar.
Then there is the interconnected global financial system. Few envisioned that lax lending standards for subprime loans would start a chain reaction that ended with a global crisis and recession.
The European Union is trying to keep its problems local, by helping Greece and stamping out brush fires breaking out in Portugal and Spain. But troubles could spread rapidly, especially if European politicians balk at offering aid or some banks begin to buckle under their sovereign debt holdings. In a complex system, the woes might rapidly cross borders and oceans.
The International Monetary Fund’s involvement in the bailout also means that the United States is stretching itself further. As the largest shareholder in the fund, it is effectively lending Greece money when private markets will not.
Of course, the U.S. government benefits from the crisis in one important way – at least for a while. If Europe were sound, investors would probably be more worried about the American fiscal deficit of $1.5 trillion, even if the latest budget news is more positive. Unfortunately, the ease of placing government debt could give policymakers the idea that huge deficits don’t matter. They will, though, a crisis or two from now.