Europe is again on the precipice. The most recent Greek rescue, put in place barely six weeks ago, is on the brink of collapse. The crisis of confidence has infected the eurozone’s big countries. The euro’s survival and, indeed, that of the European Union hang in the balance.
While Europe’s economy is now on the sure course to enter recession there are still hopes from economists and analysts alike that somehow the U.S. will avoid following suit. I can tell you one thing for sure – it won’t. The world is now one highly connected web of economic commerce physically, intellectually and monetarily. If one economy slows the net impact of that slowing is immediately felt around the globe. Gone are the days where countries are isolated against foreign disruption.
This was well stated by Desmond Lachman in the WSJ: “If there is any doubt on this score, all one need do is consider the U.S. financial system’s massive exposure to the European banks. In a recent survey, Fitch found that, as of the end of July, the U.S. money-market industry still had direct exposure to European banks of over a trillion dollars—or roughly 45% of money markets’ overall assets. The Bank for International Settlement reports that American banks have loan exposure to German and French banks of more than $1.2 trillion.”
“The sad truth is that Greece is all too likely to default on its $450 billion sovereign debt before the end of the year. This would make it the largest sovereign-debt default on record. Greece’s talks with the International Monetary Fund have stalled as Athens makes clear that further austerity measures would only deepen Greece’s already painful recession.
As recent market pressure on Italy and Spain would suggest, a disorderly Greek default is bound to take Ireland, Portugal, and Spain with it. Officials at the European Central Bank publicly concede that a Greek default would very likely lead to contagion in the European periphery, which could very well trigger a Lehman-style banking crisis in the European core.”
“A Continental debt crisis would not be good for the U.S. economy at the best of times. However, as the recent dismal U.S. jobs numbers underline, these are hardly the best of times for America. The prospect that an already stalling U.S. economy is now to be weaned off the monetary and fiscal steroids to which it has become accustomed over the past two years does not bode well, and an economic shock from Europe is the last thing that the U.S. economy or Mr. Obama now needs.”
In reference to the stalling economy the recent release from the Economic Cycle Research Institute of their weekly leading economic indicator index is now at levels that have normally signaled at the minimum a very slow rate of economic growth but, more often than not, a full economic recession. This past summer in 2010 the leading index dropped into negative territory but a recession was avoided by the introduction of QE 2. With Europe on the brink of a crisis that could well reintroduce the world to another credit freeze – only the coordinated intervention of global stimulus can most likely stave off recession this time around.
The Administration should be taking a look at the economic indicators. As more and more of these indicators, from manufacturing to sentiment, dip into contractionary levels the risks of acting to little, to late, are mounting quickly. If Congress goes into another round of infighting over the introduction of the new stimulus package from the Administration you can call this game over early.