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James Cooper outlines the possible effects of European debt crisis contagion on the United States.
So far, Europe's chief problem has been its sovereign debt crisis, which Italy threatens to make evermore explosive. Now the Continent faces a new problem that will greatly complicate the first one. Economists increasingly believe the 17-nation Eurozone is sliding into a recession that will only magnify the troubles of heavily indebted governments and heighten the risk that the U.S. and global economies may be dragged down with it.
Europe now faces a dangerous dilemma. A recession means that budget-deficit projections in the debt- strapped nations, which are currently based on continued growth, are far too optimistic. New shortfalls will create the need for even more austerity measures in order to meet the fiscal targets required in some cases for outside financial support. European policymakers must now choose between fiscal reform and economic growth. The problem is that any lasting solution to the sovereign debt crisis—and the reduced risk for global financial contagion—needs both reform and growth.
