Americans shouldn’t get smug about Europe’s woes

May 5, 2010

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.

Comments

I don’t think Americans want to be smug about a global economic crisis. Our markets are too tied up to that of the rest of the world. It is scary that the European nations are suffering many of the same economic problems the United States is struggling with. I know my job can be affected by events half way around the world!

Posted by DABOmaha | Report as abusive
 

That would be jumping from the frying pan into the fire. Why aren’t people selling off gold ?

Good to see only one number, would be interesting per capita or some other unit.

While all of this is going on, three men escape in the confusion:

The Rupee;
The Rouble;
The Yuan.

If only I had the cash to arbitrage.

Posted by Ghandiolfini | Report as abusive
 

Call out the smug police indeed. Particularly after watching Government Sachs melodrama before the Senate Banking committee. After a few ‘feel good’ press releases, they will be back to the business of raping the US economy over the coals, when they want to…. The bubble break of 2007-08 is not over, not fixed, and we have not felt the final results of this disaster.
Until the hate, recrimination, and demonizing in Washington stops, and meaningful reforms kick in, you’re only going to see repeats of these same past actions.
Welcome to Third World status America, because that’s where we’re headed…

Posted by edgyinchina | Report as abusive
 

I do not think this will result in the U.S. being more lax on increasing debt. Regardless of this news the majority of Americans are just “waking up” to the rampant government spending. We will not be “going back to sleep” anytime soon so to speak. Just the knowledge of the greatness of our debt is enough to keep this idea going for many years.

Posted by JeffMinneapolis | Report as abusive
 

Smug cometh before a fall. It’s also the default setting for Wall Street.

Posted by HBC | Report as abusive
 

This is a sign that we are going to a second round recession. Greece is just the beginning!!!

Posted by kanku | Report as abusive
 

The US needs to think of its economy like an investor would think of its stock holding. Don’t put all your eggs in one basket. The US needs to spread its economic connections, increase export markets, increase energy sources (including homegrown altervative energy and drilling sources), expand its educated work force in different industries, and when we can’t make it ourself outsource to different locations. What the US has done is focused too much on one or two industries, focused too much on one or two export markets, and focused way too much on outsources to india and China. The US needs to expand, especially in exports to our non-traditional trading partners and also in expanding our work force that can work in many DIFFERNT industries and even travel to other nations and work in those environments.

Posted by blahhhhhh | Report as abusive
 

The Greece debt problems have been partially caused by questionable policies of catering to unions and providing early retirement, 14 months of pay, expensive health benefits, etc. Yet the US is quickly heading the same way with Health Care Reform, cardcheck, huge private sector benefits,expensive energy policies, attacks on Wall Street, large tax increases on banks, etc. Insanity is doing what has been proven to be a failure in the past.

Posted by tgviking | Report as abusive
 

Smug. We’re not smug. We know that we are in line for the same problems and the same grief. Greece just happens to be first in line. Congrats to my Greece comrades who are borrowing funny money from the US via the IMF! We may be a little be further down the line but we wont be spared. Many of our states including my good state of Kalifornia are probably further up the line with Greece. In the long run Greece may come out of this better being the first to have to really deal with their issues.

Posted by SteveTO | Report as abusive
 

Soon people will discover there is no future for the state as we know it in a world of rating agencies, hedge funds, and worlwide speculation. We have seen it in the oil crisis two years ago, we see it now in sovereign debt, we will see it tomorrow in other forms of financial attack brought about by the need of the financial sector to maintain high returns in its strive to attract investors’ funds. Gevernments should urgently get wise brfore they end up terminally sorry.

Posted by alderman | Report as abusive
 

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